The local banks in the UAE are well capitalised and banking sector in the country will remain on its slow road to recovery heading into next year, according to a latest forecast.
The business environment and infrastructure is very favourable and regulators are well regarded, Business Monitor International (BMI) said in its new report on commercial banking in the UAE.
Citing opportunities for banking sector in the country the report said: “Lending to the government, a segment that has largely been closed to the foreign banks, has been exploding. It should continue to grow, if at a more measured pace. At some stage, the privatisation of former state-owned enterprises should resume. This should provide opportunities for both commercial banks and investment banking Affiliates”.
The report expressed concern over the impact on the banks of the downturn in the UAE property markets. “A weak real estate market and ongoing concerns surrounding Dubai’s debt overhang will constrain a more pronounced improvement in banks’ balance sheets, and we expect the sector to underperform its regional peers over the coming 18 months,” BMI said.
Looking at recently released data from the central bank in addition to first quarter financial statements from some of the country’s largest lenders, it is apparent that the UAE’s banking sector continues to trudge along on its slow road to recovery, it said, adding: “The most noticeable development in the industry over the past three months has been the marked improvement in underlying liquidity conditions, which has been driven in large measure by a fundamental reappraisal of risk sentiment that has solidified the economy’s reputation as a ‘safe haven’ in a volatile region”.
The report said in particular, widespread public unrest on the streets of Manama has undermined Bahrain’s reputation as a stable banking hub in the Middle East, which has led to a pronounced shift in deposits into the UAE’s banking sector.
Indeed, through April the total stock of deposits in the industry increased by 16.4 per cent year-on-year, marking the fastest rate of expansion since September 2009, and a noticeable improvement upon the 6.8 per cent rate of growth posted in December last year, it added.
The broader improvement in liquidity conditions is apparent in the ongoing decline in the Emirates three-month Interbank Offered Rate, which had fallen to a multi-year low of 1.54 per cent by early July.
“Regardless of this slightly more sanguine outlook on the domestic operating environment however, banks remain relatively risk averse in our opinion, and have hitherto failed to begin ramping up lending,” BMI said.
In the first four months of the year, the total stock of loans in the economy increased by only 3.2 per cent y-o-y, well below rates of credit growth seen in Saudi Arabia or Qatar.
“Our relatively bleak outlook on new loan growth over the coming 18 months underpins our view that activity in the private non-hydrocarbon sector will remain weak, regardless of the country’s improved risk profile since the start of the year,” the report said.
“Our outlook on banking sectors throughout the Middle East and North Africa (MENA) has broadly improved since our last quarterly update, although we stress that in many cases, a degree of caution is still warranted,” BMI said.
Banks operating in economies that are benefiting from large-scale infrastructure spending and improved reputations as ‘safe havens’ in a volatile region will outperform heading into 2012.
While the ongoing shift into government treasuries amid the regional political crisis could help bolster asset growth, it could also see new credit growth to the private sector start to slow in some cases.