Negative Outlook For UAE Banks Says Moody's

by Lorys Charalambous, Tax-News.com, Cyprus

15 January 2009

A recently published report by ratings agency Moody’s has warned that the fundamental credit outlook for the banking sector of the United Arab Emirates is negative, reflecting growing pressures in the operating environment, which has the potential to weaken the financial fundamentals of UAE banks going forward.

Moody's believes that the UAE banking system will be subject to detrimental credit conditions over the following 12 to 18 months. However, it stressed that the report does not represent a projection of rating upgrades versus downgrades.

Key factors underlying Moody's negative outlook for the UAE banking system include the growing potential for a deterioration in asset quality in light of the property market correction, which began having an impact in the last quarter of 2008. "Moody's is mainly concerned about the loans to 'opportunistic' developers that have been extended over the past four to five years following Dubai's decision to allow freehold ownership for foreigners in 2003," explains John Tofarides, a Moody's Analyst and author of the report.

Other negative factors include: the liquidity constraints observed in the second half of 2008, which Moody's expects to have severe consequences for future asset growth and profitability; the equity price collapse in 2008, which has affected fourth quarter financials (although Moody's expects its effect to stabilise in 2009); and the sharp decline in oil prices and the subsequent oil production cuts, which Moody's predicts will significantly weaken the UAE's fiscal surplus and real economic growth in 2009.

These factors will negatively affect the credit environment over the next 12 to 18 months, in an economy that has recorded an annual growth of over 7% in real terms and more than 17% in nominal terms since 2003. More positively, UAE banks' deposit ratings are underpinned by a high probability of systemic support, in what Moody's characterises as a high-support environment.

Furthermore, Moody's views the UAE banks as having strong financial fundamentals overall, with satisfactory capitalisation levels and fully provided non-performing loans. "High oil revenues over the past five years have served as a catalyst for growth and the accumulation of substantial financial reserves, and the banking sector's strong association with local governments/quasi-government institutions, which are the principal architects and drivers of infrastructure, have helped to boost the franchises of local banks," explains Tofarides.

Recommended