The outlook for the UAE’s banking sector is optimistic for 2021 after the government introduced new measures to stimulate the economy, according to Bank of America.
“While the backdrop remains cautious we see a number of factors that provide material upside risks to earnings via a more optimistic economic outlook,” Bank of America said in a report on Thursday.
The lender expects stronger loan growth and lower provisioning costs for the UAE’s banks next year as the economy recovers from the coronavirus pandemic and the government introduces new regulations including 100 per cent foreign ownership of businesses, expansion of the 10-year golden visa scheme and the granting of five-year visas for wealthy foreign retirees.
Other developments including the normalisation of relations with Israel, the extension of the Targeted Economic Support Scheme (Tess) to the end of June 2021 and government plans to vaccinate the population against Covid-19 will also have a positive impact on the banking sector, it said.
The government's decision to allow 100 per cent foreign ownership of businesses will pave the way for significant foreign direct investment, while the 10-year visa and retirement visa schemes will help the country to combat population decline, the bank said.
The UAE government overhauled its commercial companies' law last month and annulled the requirement for onshore companies to have an Emirati shareholder to attract foreign capital into the country. It also widened its 10-year "golden" visa system to attract foreign professionals and to encourage them to settle for longer.
Foreign investment is set to surge by 35 per cent following changes to the commercial companies law, Sami Al Qamzi, director general of Dubai Economy, said earlier this month. The UAE is also aiming to increase the number of businesses operating in the country from 300,000 currently to 1 million in the next decade on the back of changes to the law, according to the Ministry of Economy.
“The announcement of diplomatic relations with Israel, which we see combatting geopolitical risks in the region as well as spurring further economic activity,” the bank said.
The UAE and Israel normalised relations after signing the Abraham Accord in September. The two countries have since signed a series of deals to foster co-operation in sectors ranging from aviation to finance.
The extension of the Dh50 billion Tess loan deferral programme will reduce "risks of a spike in asset quality deterioration", Bank of America said.
The Tess scheme was launched in March to support the UAE’s economy through the pandemic, offering zero-cost collateral funding to banks as a way of keeping lending flowing to the broader economy. It was part of an initial package of relief measures worth Dh100bn that also involved relaxing banks' liquidity and capital requirements.
The news about the Covid-19 vaccine developments is “particularly pertinent to the UAE” and will help in the revival of the tourism sector to boost the economy, it said.
“We believe the vaccine provides a realistic chance that the travel and tourism sector, including attendance at the Expo, and trade could rebound more strongly than currently anticipated.”
Dubai is planning to inoculate 70 per cent of its population with the Covid-19 vaccine produced by Pfizer and BioNTech by the end of 2021, Reuters reported, quoting an official from the emirate’s health department.
Dubai-based banks including Emirates NBD and Dubai Islamic Bank are set to benefit more than their counterparts in Abu Dhabi due to the revival of the economy, Bank of America said.
“The current backdrop of economic uncertainty has seen ENBD management pursuing a path of conservative but prudent provisioning. This policy has culminated in one of the best provisioned banks in the region.”
Dubai Islamic Bank will gain from the acquisition of Noor Bank and a decision to increase its foreign ownership limit to 40 per cent from 25 per cent, it said.
Banks in Saudi Arabia are expected to post strong loan growth in 2021, underpinned by “continued strong growth in the mortgage market" and the awarding of major government contracts associated with long-awaited mega projects, it added.
The UAE's economy is projected to grow 2.5 per cent in 2021, according to the Central Bank of the UAE. Saudi Arabia is forecasting growth of 3.2 per cent next year.
The merger agreement between Samba and NCB in Saudi Arabia "harbours strong strategic rationale ... with the potential to create significant shareholder value via cost and revenue synergies," Bank of America said.