GulfBase Live Support
28/02/2017 16:41 AST
A slowdown in Islamic financing growth in the UAE will reveal a deterioration in banks' asset quality as portfolios season more quickly, according to Fitch Ratings.
This will start to become evident as banks report their 2016 results. Financing growth slowed in 2016 and a continuing slowdown in 2017 is expected, leading to faster seasoning of banks' portfolios and higher impaired financing ratios. Rapid growth in the sector in recent years has artificially improved asset quality metrics as impaired financing ratios are typically lower in the early years of financing arrangements.
Demand for Islamic financing in the UAE has grown rapidly with increasing customer awareness and wider adoption of Shari'ah products, especially among retail customers. Islamic banks tend to be newer than conventional banks, with smaller franchises, and are growing faster than conventional banks to gain market share. However, growth is now slowing, reflecting lower GDP growth and tighter liquidity–ultimately a consequence of lower oil prices. Growth of Islamic bank financing in 2016 was expected to have been significantly lower than in 2015, although still higher than that of conventional bank lending.
UAE Islamic banks typically have higher impaired financing ratios and impairment charges than conventional banks as they have had looser underwriting standards and attracted riskier customers while building their market share. Their weaker asset quality historically also reflected their proportionally larger exposure to the 2008 fall in UAE real estate prices, and still also reflects their greater focus on retail financing, which carries higher impairment charges.
Newer Islamic banks with smaller franchises are likely to be affected first by the slowdown. Those that have been established for longer are likely to be affected later, and to a lesser degree, given their stronger franchises.
Asset quality has improved for Islamic and conventional banks in the UAE since the financial crisis. The Islamic banks' average impaired financing ratio was six per cent at end-1H16, significantly improved from 11.5 per cent at end-2012. But deterioration due to portfolio seasoning has started in some corporate segments, particularly SMEs, and this is expected to filter down to other segments, including retail. The banks that suffered the most during the crisis are still benefiting from some recovery and this may offset any deterioration in asset quality metrics in the short term.
Since 1H15, liquidity conditions have tightened, reflected in a higher cost of funding and some government deposit withdrawals from Abu Dhabi banks. Although liquidity conditions have now stabilised, deposit growth has weakened, slightly pushing up average financing-to-deposit ratios for Islamic banks. Significant deterioration in profitability is unlikely, despite pressure from lower GDP growth and costlier funding, as most banks have been successfully repricing their financing books. Additionally, earnings should benefit from expected interest rate rises, given Islamic banks' high levels of non-remunerated deposits.
Fitch’s rating outlooks for UAE Islamic banks are therefore stable but the sector is more vulnerable than conventional banks to a cyclical downturn, given the higher proportion of retail financing, including residential mortgages, and typically looser underwriting standards. The share of total bank gross financing held by the six largest Islamic banks and the Islamic windows of conventional banks was around 26 per cent at end-1H16.
Fitch Rating
Ticker | Price | Volume |
---|---|---|
SABIC | 114.77 | 5,915,941 |
05/04/2018
Saudi Arabia's Public Investment Fund (PIF) has signed an agreement with Six Flags to develop and design an amusement park in Riyadh. Six Flags, the world’s leading international amusement park compa
Arab News
05/04/2018
In an exclusive interview with Arab News, Turki Mohammed Al-Shehri explains how an expanding renewables industry will boost employment as well as pave the way for a greener future.
A massiv
Arab News
05/04/2018
Dubai’s residential property market continued to soften in the first three months of this year, in line with analysts’ forecasts, with rental values recording a more pronounced fall than sales prices
The National
05/04/2018
Buoyed by a strong oil price of $70 per barrel, Saudi Arabia’s Tadawul shot up by over 6 per cent in March 2018, according to Kuwait Financial Centre’s (Markaz’s) recently released Monthly Markets Re
Times of Oman
05/04/2018
Qatar banks’ combined credit facilities to real estate sector rose by QR17bn to QR147.7bn in 2017. The banks’ credit to various sectors stood at QR911bn at the end of 2017, up from QR839bn recorded i
The Peninsula