08/11/2018 08:44 AST

UAE banks are forecast to maintain strong capital and profitability as credit growth picks up and government spending boosts economic expansion, Moody’s Investors Service said in a report.

“A combination of rising oil production, government infrastructure spending in Dubai, as well as Abu Dhabi's fiscal stimulus package will bolster economic growth,” the rating agency said. “The recovering economy will stimulate credit growth.”

The rating agency is projecting gross domestic product growth of 2.2 per cent for this year and 2.9 per cent in 2019, up from 0.8 per cent expansion in 2017.

Moody’s forecasts are conservative compared to those of the UAE Central Bank, which expects growth to reach 2.8 per cent this year and 4.2 per cent next year, the governor said on Tuesday. The central bank is bullish because of higher oil prices and production coupled with robust non-oil sector growth thanks to government initiatives, Mubarak Al Mansoori, the central bank's governor, said.

The UAE’s banking sector is also expanding with credit growth to the private sector rising 6.5 per cent in the first nine months of this year, Mr Al Mansoori said.

"Loan performance will progressively stabilise, as the recovering economy and the resilience of large borrowers will offset ongoing problem loan formation among small and mid-sized businesses and individual borrowers," said Mik Kabeya, assistant vice president at Moody's.

The UAE government has implemented a raft of measures to propel growth, create jobs and continue to diversify the economy away from oil income. It has issued a new foreign direct investment law to woo capital, a debt law to boost liquidity in financial markets, and a new law governing the central bank and financial institutions to bolster the banking sector among other legislation.

Abu Dhabi also announced in June plans for Dh50 billion stimulus programme to be spent over three years, while Dubai is boosting spending in the run-up to Expo 2020.

The banking sector continues to attract inflows in the form of non-resident deposits, which rose to a two-year high of Dh205.4 billion at the end of September and accounted for 11.8 per cent of total deposits in the UAE, central bank data show.

“Strong capital levels provide a large, loss-absorbing buffer for the UAE's banks,” the rating agency said. The banking sector also will continue to remain profitable despite higher interest rates as the country mimics US Federal Reserve actions due to the dirham’s peg to the US dollar.

“Profitability will improve slightly as rising interest rates support net interest margins,” Moody’s said. “As banks raise their lending rates, their higher loan yields will moderately outweigh the higher rates they will need to pay on deposits. In addition operating expenses will remain broadly stable, and loan-loss provisioning will gradually stabilise as the economy recovers.”

Meanwhile, government deposits in UAE-based banks hit an all-time-high of Dh286 billion by the end of September, up by Dh74bn in the first nine months of the year, according to the latest central bank statistics.

The uptick in deposits is in large part thanks to rising oil prices, which grew 35 per cent during the past 12 months, boosting the total assets of the banking sector.

"UAE banks will remain primarily deposit-funded, with only a moderate need to turn to confidence-sensitive capital markets," said the Moody’s analyst. “UAE banks have sufficient liquidity headroom to accommodate a pick-up in credit growth.”


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