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25 March 2020

Fitch expects an increase in M&A among UAE banks if COVID-19 persists

Smaller lenders are generally more vulnerable as they have weaker franchises, thinner capital buffers, and lower revenue generation and diversification

COVID-19-related fallout is threatening several sectors and events that are critical to the UAE economy/Bloomberg

by Kudakwashe Muzoriwa

Fitch Ratings said that UAE banks’ credit profiles face deterioration due to the economic effects of the COVID-19 and the slump in oil prices, and if coronavirus challenges persist, a wave of mergers and acquisitions could follow, particularly among banks with weaker franchises.

The rating agency stated that capital and liquidity buffers should protect viability ratings in the short term, but if operating conditions remain difficult for a prolonged period, downgrades are likely, especially for banks with weaker capital buffers.

COVID-19-related fallout is threatening several sectors and events that are critical to the UAE economy, including tourism and hospitality, real estate and construction, retail and wholesale trade, and transportation, including the much-anticipated Expo 2020 Dubai later this year.

The impact of COVID-19 is projected to weaken banks’ asset quality due to deteriorating business conditions in retail and wholesale trade, and the real estate and construction sectors—which represented 29 per cent of total bank lending at the end of 2019.

The government stimulus package could provide some relief but will delay the recognition of impaired loans and will understate the real level of problem loans.

Fitch said that the recent measures by the Central Bank of the UAE to increase maximum loan-to-value ratios and to allow real estate lending up to 30 per cent of total loans may increase banks' asset quality vulnerability to falling real estate prices.

Additionally, lower cash-flow generation by corporates as a result of subdued economic conditions will lead to further loan restructuring and banks with already low reserve coverage of problem loans are the most vulnerable to rising.

According to EY, Expo 2020 Dubai will boost the economy equivalent to 1.5 per cent of GD. Tressures on banks’ asset quality will increase if Dubai Expo 2020 is severely disrupted.

However, the central bank’s proposed AED 50 billion liquidity injections at zero per cent will limit the effects of rising funding costs on banks and help maintain liquidity should the government and government-related entities start withdrawing their deposits.

Moreover, government and GRE deposits equate to 29 per cent of total deposits at YE 2019. We do not expect government and GRE deposit withdrawals to be significant.

RELATED STORIES: Fitch COVID-19 Central Bank of the UAE Expo 2020 Dubai





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