Moody’s maintains negative outlook on UAE banking

Moody's Investors Service is maintaining its negative outlook on the banking system of the United Arab Emirates because of the ongoing trends of corporate deleveraging, asset quality challenges and the subdued profitability of UAE banks in the wake of continued provisioning needs.
The decision was mainly driven “by the legacy asset quality challenges related to the ongoing restructuring of some large government-related borrowers," said Khalid Howladar, author of this report.
"Limited transparency, sizeable related-party exposures and high loan and deposit concentrations will also continue to render many UAE banks vulnerable to name-specific risks," Howladar added. Additionally, on a more macro level, the UAE's dependence on oil revenues and core sectors of trade, services, global logistics and tourism render the local economy more sensitive to global risk scenarios of weakened growth and recession.
Government spending will continue to benefit banks over the outlook horizon, particularly in the largest emirate of Abu Dhabi, whose oil-based wealth helps support the federation; however, real estate oversupply and weaker business confidence will dampen the speed of recovery in Dubai.
"The orderly conclusion in June 2011 of the US$ 25 bln Dubai World corporate debt restructuring has been a critical step forward for banks' asset quality and the economy," Howladar explained. However, there remains some uncertainty surrounding the ongoing restructuring discussions about the US$ 10 bln distressed debt of Dubai Holding entities, another important domestic government-related issuer (GRI) and driver of banks' non-performing loans (NPLs). Several more, albeit smaller, GRIs are also due to refinance over the course of 2012.
Moody's view of bank asset quality also incorporates the depressed state of the real estate sector. The government continues to provide extensive financial support to the large GRIs that dominate the sector, thereby ultimately helping to moderate real-estate-related bank losses.
On the positive side, UAE banks have increased their capital over the past two years, and the system average Tier 1 for year-end 2010 was 14.3%. Shareholder's equity is also relatively high on a global basis at around 12.6% of total assets. Moody's scenario analysis of system capital levels indicates that rated UAE banks are adequately positioned to absorb the credit losses under both the rating agency's central and adverse case scenarios.
Overall, the rating agency expects bank lending growth to remain subdued over the remainder of 2011 at around 3-5%, compared with 25% in pre-crisis times. Among Abu Dhabi banks, Moody's expects stronger economic growth to generate higher lending growth compared with Dubai banks.