The UAE banking sector remains to be in restoration stage, put up the 2008-09 actual property disaster in Dubai. Nevertheless, the monetary efficiency of the banks has stabilised particularly over the previous couple of years. The UAE banks, significantly Dubai primarily based banks, are going through asset high quality challenges, as mirrored of their excessive proportion of non-performing loans and low degree of provisions. However, Abu Dhabi primarily based banks seem comparatively much less challenged from these points attributable to their comparatively decrease publicity to actual property and better publicity to grease primarily based industries, which did nicely amid beneficial oil worth atmosphere.
The important thing issues associated to the UAE banks embrace i) focus in loans and deposits, ii) excessive proportion of associated get together exposures, iii) restricted knowledge transparency/availability, and iv) stiff trade competitors. Furthermore, the efficiency of the UAE banks has been constrained by the nonetheless recovering actual property and building sectors. Though the banks preserve a robust presence of their native markets, the banking sector has restricted diversification and shows focus when it comes to geographies, merchandise, and prospects.
That mentioned, a lot of the UAE primarily based banks profit from robust possession construction backed by native governments. As well as, most of those banks are within the technique of restructuring their drawback loans. The financial system of Dubai has proven encouraging development up to now two years. All key sectors of the financial system together with actual property, commerce, tourism, and providers have proven a substantial enchancment. The improved efficiency of the core sectors would end in re-classification of a few of non-performing loans as performing loans, which would scale back stress on the banking sector within the medium time period.
Latest political unrest in some international locations within the MENA area has benefited UAE, owing to its secure haven standing within the area. Dubai has strengthened its place as a regional monetary hub and has develop into a key channel for funding throughout the MENA area. This has straight helped native banks. The important thing traits of the UAE banking sector are as follows.
i) Sturdy hyperlinks to native governments: The UAE banking sector has been strongly dominated by the governments of Abu Dhabi and Dubai. The ruling households are additionally actively concerned by way of their investments within the nation, usually by way of their holding corporations. The federal government’s important involvement within the UAE banking system proved helpful through the international monetary disaster. The authorities responded shortly when wanted and supported native banks in 2008 and early 2009. The UAE Central Financial institution has offered liquidity help in addition to deposits to banks up to now to alleviate funding stress. Markets anticipate a steady help to the UAE banks from native governments in future, if wanted.
ii) Sturdy capitalization: The UAE banking sector reveals a really robust degree of capitalization. Its capital ranges are supported by constant profitability, robust earnings retention, and fairness injections from the federal government in instances of want. Complete capital adequacy ratio of the sector has exceeded 20% over the previous three years, the best within the Gulf Cooperation Council international locations. Nevertheless, the excessive capital ranges are additionally justified by some banks’ excessive share of non-performing loans, which requires the next degree of capital than the common.
iii) Weak asset high quality: The UAE banks are challenged by weak asset high quality. Many of the banks primarily based in Dubai have proven very excessive degree of non-performing loans and inadequate provisions. Moody’s expects non-performing loans of the UAE banks to stay in 10%-12% vary in 2013. The company additionally acknowledged that regardless of restoration in core industries, the non performing loans are unlikely to cut back quickly within the medium time period attributable to banks’ giant publicity to distressed debtors, particularly in the actual property trade.
iv) Dependence on oil costs and international macro-economic situations: The efficiency of the UAE financial system, particularly Abu Dhabi, largely is determined by oil costs. Any sudden fall in oil costs might end in decrease public spending by the Abu Dhabi authorities. This might impression the efficiency of Abu Dhabi primarily based banks, which have largely been concerned in financing authorities directed initiatives. Additionally, within the occasion of a pointy decline in oil costs, the ensuing financial downturn might additional impression lending actions of the banks. However, Dubai largely derives its development from actual property, commerce, tourism, and providers trade. The efficiency of most of those sectors is linked to international financial system. Any deterioration in international macroeconomic atmosphere would straight impression Dubai’s financial system and its banking sector.
v) Restricted credit score differentiation: It’s exhausting to distinguish between UAE banks simply by their credit score metrics. Most of those banks are intently linked to native governments. The variations in asset high quality and franchise worth are the one major distinguishing components for the banks within the nation.
vi) Excessive competitors: The UAE is an overbanked area. There are 51 banks at present working within the UAE. This has resulted in stiff trade competitors and has pressurized web curiosity margins of the banks.