Moody’s keeps outlook rating for UAE banks at stable

Abundant cash reserves and committed government spending will protect the UAE economy from the impact of a weakening oil price, a top credit agency said yesterday

Moody’s Investors Service said it is still upbeat about the prospects of UAE banks because bad loans are declining as the country’s economy booms.

Moody’s said it was not too concerned about declining oil prices having a big impact on GDP growth this year and the next because the large amount of cash reserves the country has built up. It estimates the economy will grow about 4 per cent this year and 2015. As a result, it has maintained its credit outlook for UAE banks at stable for the next 12 to 18 months.

“The outlook reflects our expectation of continued improvements in the operating environment, driven by high government spending, despite recent oil declines, and continued recovery in core economic sectors, particularly in Dubai,” analysts led by Nitish Bhojnagarwala, wrote in the report.

“As a result of these improvements we expect that problem loans will decline further, profitability will increase modestly and that high liquidity and capital buffers will be maintained. These positive developments will remain balanced against downside risks of further declines in oil prices and high lending concentrations.”

Banks in the UAE have been prime beneficiaries of a revival in which the economy grew by more than 4 per cent last year as interest rates reached new lows, credit growth rebounded and the amount of money set aside by lenders to cover bad debt fell.

At the same time, the banks’ competition for retail customers has become especially fierce in a country where more than 50 banks, not all of them catering to individual clients, serve a population of 9 million. That has put some pressure on profit margins, although overall banks have been reporting record rates of profit in recent quarters.

Moody’s said that by the end of next year it expects the ratio of bad loans to overall loans to decline to 7 per cent from about 9 per cent at the end of last year. At the same time, it expects loan growth of between 7 and 10 per cent by the end of 2015.

“Overall we expect easing problem loan levels to drive lower loan-loss provisions, which, when coupled with asset growth, will support a modest increase of UAE banks’ return on assets to around 2 per cent over the outlook period, up from around 1.8 per cent for the year 2013,” the report said.

On the question of oil, most analysts, including Moody’s and banks such as Standard Chartered, expect that even if oil prices do not bounce back, Arabian Gulf states have big enough cash reserves to get through a period of lower energy prices. Crude oil prices have dropped about 30 per cent from the summer because of forecasts of weakening demand and increasing supply.

“Although the risk of oil prices remaining well below the UAE’s fiscal break-even price of $84 for a sustained period would dampen confidence, future spending plans and economic growth, we expect average oil prices to remain in the $80 to $85 a barrel over 2015,” Moody’s said.

“We also consider that the government maintains ample financial resources, approximately $508 billion in reserves and sovereign wealth funds compared to GDP of $396bn, to support counter-cyclical measures over the outlook horizon.”

mkassem@thenational.ae

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