Fitch: Improving liquidity in UAE banking sector should benefit profitability metrics
Fitch Ratings says in a new report that improving liquidity in the UAE banking sector should benefit profitability metrics.
Liquidity and funding pressures eased in the banking sector in 1H17 due to lower lending growth and increased government deposits in the banking system. Improved liquidity is helping to ease bank margins. Asset-quality metrics remain under pressure, particularly from difficulties in the SME sector, although further deterioration is not expected and loan impairment charges should return to more normalised levels. Fitch expects a mild increase in provisioning in anticipation of the implementation of IFRS nine on 1 January 2018, but this should be manageable for all UAE banks.
Loan growth is expected to be in the mid-single digits in 2017 due to pressure on the operating environment from sustained low oil prices. Abu Dhabi government spending is contracting to narrow fiscal deficits, but spending on strategic projects is expected to continue. Dubai's more diversified economy should help support lending growth in the wider UAE. Issuance in 2017 is expected to be stronger than in the previous two years as banks look to extend their maturity profiles and lock in favourable rates.
Despite strong loan growth, UAE banks have maintained adequate capital ratios for their risk profiles, mainly through issuing additional Tier one capital (not included as part of Fitch Core Capital) and improving internal capital generation.