RAM Ratings expects lending growth of UAE banks to slow to 6%-7%

Published on 12 March 2015

RAM Ratings expects loan growth of the UAE banking sector to moderate to 6%-7% from 8.0% in 2014, if oil prices remain at current low levels. “The second restructuring of Dubai World debt, coupled with the completion of Dubai Group’s restructuring last year, has removed some near-term uncertainties for UAE banks,” notes Sophia Lee, RAM’s Co-Head of Financial Institution Ratings. Nonetheless, we remain cognisant of the fact that persistently low oil prices will affect sentiment, especially in the real-estate and equity markets, which could in turn lead to asset-quality issues. In the event of a credit downturn, UAE banks will be well buffered by sound loan-loss coverage as well as robust pre-provision earnings and capitalisation. The tier-1 capital ratio of UAE banks stood at 16.2% as at end-December 2014.

RAM has rated National Bank of Abu Dhabi (NBAD), Abu Dhabi Commercial Bank (ADCB) and Abu Dhabi Islamic Bank at AAA on the Malaysian national scale in relation to their ringgit senior bond/sukuk. “These ratings incorporate strong government support, reflecting the sovereign’s highly interventionist nature and strong financial clout,” Lee highlights. The UAE government’s vast sovereign wealth funds will cushion the impact of lower oil revenue. Our view of solid government support is also supported by the shareholding structure of these UAE banks, which feature substantial government/ruling-family ownership.

The 6 major UAE banks (Emirates NBD, NBAD, First Gulf Bank, ADCB, Dubai Islamic Bank and Union National Bank) – which collectively account for more than 60% of the industry’s assets – had seen strengthened asset quality amid positive economic conditions last year. The collective gross impaired-loan (GIL) ratio of these banks had improved to 4.7% as at end-December 2014 from 7.2% a year earlier. The GIL coverage ratio of the 6 banks had also been boosted to more than 100% as at the same date (end-December 2013: below 80%).

The aggregate pre-tax profit of the 6 major banks jumped 20% y-o-y in FY Dec 2013 and a further 28% in FY Dec 2014, leading to an average ROA of 2.0% for the same period (FY Dec 2013: 1.7%). In addition, the banking system’s liquidity profile had improved, with the loan-to-deposit ratio easing further to 90% as at end-December 2014 (end-December 2013: 92%) – significantly lower than pre-global financial crisis levels of above 100%.

Click here to download our Standpoint Commentary on the UAE Banking System – Still-steady Fundamentals Despite Slower Growth.

Media contact
Lim Yu Cheng
(603) 7628 1188
yucheng@ram.com.my