Moody's maintains stable outlook on UAE's banking system on economic resilience, solid bank financial fundamentals

Moody's Investors Service (Moody's) has kept its outlook for the United Arab Emirates (UAE)'s banking system at stable reflecting economic resilience, strong capitalisation, stable funding and liquidity conditions.

The report, "Banking System Outlook - United Arab Emirates: Economic resilience and solid bank financial fundamentals drive our stable outlook," is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"Faster economic growth in 2018 will support the banking system's credit growth, and we forecast credit growth of around 5% in 2018, after a forecast lower growth of around 2% in 2017, from 5.8% in 2016 and 8.0% in 2015" said Mik Kabeya, analyst at Moody's.

Loan performance will soften modestly following sluggish economic growth this year. Problem loans will edge higher, reaching 5.5%-6.0% of gross loans by 2018, from 5.3% in June 2017. High concentrations of loans to government-related institutions and to a volatile real-estate sector pose downside risks to loan quality.

Capital levels will remain strong over the next 12 to 18 months for the UAE's banks, with system-wide tangible common equity at between 14% and 16% of risk-weighted assets. This resilience, which reflects banks' internal capital generation and lower growth in risk-weighted assets, provides a substantial cushion against softening loan performance.

"Stabilising oil prices and international bond issuances will continue to support funding and liquidity conditions in the country, following a tightening during 2016 amid oil price weakness" said Mik Kabeya. UAE banks will remain primarily deposit-funded, with a fair recourse to more volatile market funding.

Moody's expects profitability to remain strong, with a net income measuring around 1.5% - 1.7% of tangible banking assets over the next 12 to 18 months. Thinner margins will be balanced by lower operating expenses and stabilising provision charges.