The banking system in the UAE was remarkably resilient in the face of multiple challenges throughout 2016 – be it low crude prices, contraction of government investment or unpredictable global political events. UAE banks continue to be well-capitalised and profitable, backed by high asset quality. The New Year, therefore, is unlikely to spring any unpleasant surprises as far as the banking sector goes.
Banks have been operating in an environment of slow growth. According to the International Monetary Fund (IMF) estimates, growth in the UAE is likely to slow down to 2.2 per cent in 2016, down from four per cent last year, with the oil sector slated to grow at 1.2 per cent and non-oil gross domestic product projected to do better by 2.7 per cent year on year.
In this scenario, the UAE banking system continued to perform reasonably well. It was able to offset reduction in government deposits by consolidating the retail banking sector. Significantly, until the third quarter of this year, domestic credit grew at 5.8 per cent year on year, mainly sustained by growth in private sector credit at 6.2 per cent and government assets at 4.6 per cent.
The ratio of non-performing loans increased only slightly from 6.3 per cent at the end of Q4 2015 to 6.4 per cent at the end of Q1 2016. Fortunately, this remains well below the peak level of seven per cent in Q4 2014.
UAE banks also boast an enviable capital adequacy ratio of 18.6 per cent by Q3 2016, far above the required 12 per cent.
Financial stability indicators also indicate stability; there was stronger growth in loans compared to deposits. The loan-to-deposit ratio was 103.4 in Q3 2016, against 100.9 up to Q4 2015, while the lending to stable resources ratio hit 88.2 per cent by Q3 2016, suggesting that banks have sufficient stable resources.
Rating agency S&P has noted that the UAE economy remains strong and diverse, where private sector debt is low and income levels high. The overall regulatory framework has improved over the past few years, but high credit risk continues to be an area of concern. The economic outlook, however, has been affected by volatility and weakness in the domestic equity and real estate markets, which is why banks are likely to be anchored at BBB- rating.
Outlook for 2017
The impact of global events such as Brexit, hiking of benchmark interest rates by the US Federal Reserve, change of presidential guard in the US and regional conflict in the Middle East may throw its shadow well into 2017.
The eurozone remains shaky, what with nations struggling with trade disruption, refugee influx and the banking system weighed down by beleaguered Italian and Portuguese institutions. A negative interest rate policy will continue to dominate advanced economies, a decision that hurts them in the long run. International banks in the West also tend to remain preoccupied with implementation of Basel III and IFRS standards, often missing the larger picture.
In comparison, GCC countries and the UAE have fared better and are more focused in their subsidy targets. The government is following a policy of fiscal consolidation and if this continues, it will shore up momentum and GDP growth may hit 2.4 per cent in 2017. However, with about $80.5 billion debt maturing in 2016-18 (as per the IMF), both Dubai and Abu Dhabi face short-term rollover risks. This may put pressure on liquidity, leading to increased funding costs.
Two new laws will have a positive impact on banks and on the overall economy from the New Year. The New UAE Commercial Companies Law, introduced in July 2015, will slowly become more functional. This law is aimed at enhancing corporate governance, protection of shareholder rights and promoting social responsibility within companies.
Additionally, the new bankruptcy law, decreed in 2016, will also have wide ramifications for companies and banks. It will provide a comprehensive legal framework to prevent distressed companies from collapsing. Insolvent companies will be able to avoid liquidation through financial re-organisation, pre-emptive settlement or financial restructuring. This will come as a big support for the SME sector.
Thus, a combination of proactive regulations and state interventions will once again maintain stability within the UAE banking system and in the wider economy, enabling the country to maintain growth in a diversified manner.