UAE banks have 'good funding profile' to face Covid-related challenges, S&P says

Banks should be able to maintain adequate sources of funding and liquidity on higher oil prices, ratings agency says

RAKBank and Emirates NBD ATMs at a mall in Abu Dhabi. Most banks in the UAE are expected to achieve profit growth this year despite difficult operating conditions, according to S&P Global. Victor Besa / The NationalShow less

Banks in the UAE, the second biggest Arab economy, have a robust enough funding profile to overcome the macroeconomic challenges caused by the Covid-19 pandemic, ratings agency S&P Global said.

“Strong capital buffers and good profitability despite the sharp increase in cost of risk and lower interest rates" will help lenders to push through headwinds, the agency said in its latest report on the UAE’s banking sector on Sunday.

“We view the trend in [banking] industry risk in the UAE as stable,” the report said. “Banks should be able to maintain adequate sources of funding and liquidity on higher oil prices.”

The UAE’s strong fiscal and external positions, and the strength of the government's net asset position, have helped the banking sector by counteracting the negative impact of lower oil prices on economic growth since late 2015.

However, the pandemic, which pushed the global economy into its worst recession since the 1930s, presents some challenges for UAE lenders.

Interest margins will stabilise at lower levels, mirroring rates globally and locally, but “we expect most banks to show positive results in 2021”, S&P Global said.

Cost reduction initiatives will continue to be on the top of banks' agendas this year. Relocating staff to lower-cost areas and “leveraging opportunities offered by digitalisation" will be part of their action plans.

Despite the pandemic impacting real estate, construction, hospitality and consumer-related businesses, stimulus measures of more than Dh388 billion at federal and local level to support economic growth are already showing results with liquidity in the banking system back to pre-pandemic levels, the Central Bank of the UAE said last month.

The Targeted Economic Support Scheme, a Dh50 billion facility providing zero cost funding to banks to provide liquidity to the economy, has also been extended until the end of the year.

The CBUAE's support package was timely and reporting requirements by authorities “have reinforced oversight and transparency".

"We expect banks to continue displaying transparency in the recognition and disclosure of problematic assets,” S&P said.

“We do not expect any major changes in system-wide dynamics or the competitive landscape in 2021.”

In terms of loan book expansion, the ratings agency expects 2021 gross lending growth to accelerate slightly, helped by the Dubai Expo 2020 event in October and borrowing by the government and government-related entities.

Corporate borrowing is expected to increase slightly as some deferred capital expenditure in 2020 might happen in 2021, along with the refinancing of existing debt.

“We expect private sector leverage at 90-100 per cent of nominal gross domestic product over the next few years,” S&P said.