Banks can absorb credit losses: Moody’s

The UAE banks have enough capital level to absorb the credit losses even under adverse case scenarios, Moody's Investors Service said on Thursday.

Shareholder's equity is also relatively high on a global basis at around 12.6 per cent of total assets. The UAE banks have increased their capital over the past two years, and the system average Tier 1 for year-end 2010 was 14.3 per cent.

Moody's also considered UAE banks' liquidity metrics to have significantly improved, a trend that has been reinforced by progress in liquidity risk management at many UAE banks. Although profitability is recovering, it remains constrained by cautious loan growth and the ongoing provisioning that is required to cover problem loans. These trends will continue to dampen banks' net profits for 2011 and into 2012.

Overall, the rating agency expects bank lending growth to remain subdued over the remainder of 2011 at around 3-5 per cent, compared with 25 per cent in pre-crisis times. Among the UAE banks, Moody's expects stronger economic growth to generate higher lending growth by Abu Dhabi-based lender.

However, Moody's maintained its negative outlook on the banking system because of the ongoing trends of corporate deleveraging, asset quality challenges and the subdued profitability of UAE banks in the wake of continued provisioning needs.

"Moody's negative outlook on the UAE banking system is mainly driven by the legacy asset quality challenges related to the ongoing restructuring of some large government-related borrowers," said Khalid Howladar, Vice President -- Senior Credit Officer at Moody's. "Limited transparency, sizeable related-party exposures and high loan and deposit concentrations will also continue to render many banks vulnerable to name-specific risks," Howladar adds.

Additionally, on a more macro level, the UAE's dependence on oil revenues and core sectors of trade, services, global logistics and tourism render the local economy more sensitive to global risk scenarios of weakened growth and recession.

Government spending will continue to benefit banks over the outlook horizon, particularly in Abu Dhabi, whose oil-based wealth helps support the federation.

The rating agency expects work-outs of large distressed GRI exposures to continue pushing up system-wide non-performing loans, which are likely to peak at around 13-15 per cent in Dubai next year and around 8-10 per cent in Abu Dhabi this year. Moody's view of bank asset quality also incorporates the depressed state of the real estate sector. The government continues to provide extensive financial support to the large GRIs that dominate the real estate sector, thereby ultimately helping to moderate real-estate-related bank losses.

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