Banks in the UAE are expected to remain resilient despite tougher operating conditions this year, as Abu Dhabi’s fiscal stimulus helps propel the emirate’s economy and Expo 2020 boosts tourism activity in Dubai, according to S&P Global Ratings.
Despite pressure on margins, the rating agency expects a “mid-single-digit net lending expansion in 2020”, S&P said in its latest report on banks it rates in the country. Lending growth in the country slowed slightly to 4.5 per cent on annualised basis in the first nine months of 2019, but the ratings agency expects a pick-up to 5 or 6 per cent in this year.
“In 2020, we expect the UAE economy will expand at a slightly higher pace compared with 2019, thanks to Abu Dhabi's $13.6 billion (Dh50bn) stimulus package,” S&P credit analyst Puneet Tuli wrote in the report released on Monday. “The Dubai government's planned investments for the 2020 World Expo …. should prop-up investments in the non-oil economy and increase tourism-related activities.”
A more resilient financial performance will allow rated UAE lenders to maintain "stable credit profiles in 2020”, barring any unexpected increase in geopolitical risk or a major fall in oil prices, S&P said. It added that its base-case scenario does not include a full-fledged direct military confrontation between Iran and the US. The two nations came head-to-head last month after the US killed a top Iranian military commander in Iraq. Iran struck a military base in Iraq in retaliation, but this did not result in US casualties.
Analysts expect operating conditions in the UAE, the biggest banking market in the GCC, and the rest of Gulf to improve this year. Governments in the region have shifted focus from austerity in the wake of a three-year oil slump that began in 2014 to spending. Abu Dhabi rolled out Ghadan 21 in September 2018, a Dh50bn stimulus package to accelerate non-oil economic growth in the emirate.
Dubai, the commercial and trading hub of the Middle East, unveiled a record expansionary budget for 2020 as spending increased to complete Expo 2020-related projects. The six month-long global trade fair starts in October and is expected to bring about 25 million visitors to the emirate.
Banks will likely face “manageable asset-quality deterioration” through risks associated with geopolitics and a weakness in the real estate market.
However, strong capital positions will continue to provide a solid buffer against these risks, S&P said.
S&P’s average long-term rating on UAE banks was 'A' at the end of last year, which is a notch higher than at the end of 2018.
“All our bank ratings in the UAE have a stable outlook, meaning that we do not expect any changes in 2020,” S&P noted.
