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29 March 2024

UAE banks stand to gain from Dubai's property cooling measures: Fitch

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By Staff

The doubling of property registration fees in Dubai to limit speculative buying, reinforced by planned caps for mortgage lending, could help contain property risk for UAE banks as the real estate sector recovers, Fitch Ratings has said in a report today.

The ratings agency lauds the measures taken by the UAE Central Bank to ensure that banks in the country have enough capital to fall back on when required. “In addition, the banks have already built up capital buffers since the 2008 property crisis that give them some protection against asset-quality problems,” Fitch said.

The new 4 per cent fee effective from October 6, 2013, should help property prices recover at more sustainable levels in Dubai, the agency maintains.

Some estimates suggest that real estate prices in prime areas in the emirate have risen by up to 30 per cent in 2013 to date, after falling by over 60 per cent from their 2008 peak. The higher fees go some way towards helping to prevent excessive speculation, particularly where a high proportion of purchases and sales are purely cash driven.

From a credit perspective, the UAE Central Bank’s plans to impose maximum loan-to-value limits for residential mortgages that are being finalised would do more to prevent another build-up of asset-quality problems for banks.

Despite the improving economy, signs of a real estate recovery in Dubai and property prices generally rising across the UAE, the banks are still dealing with asset-quality problems from the 2008 crisis, says Fitch, although the asset-quality is definitely improving.

Impaired loans slightly declined to 7.5 per cent on average at end-H1 2013 for the largest nine UAE banks, from 7.8 per cent at end-2012, and largely consist of exposure to real estate and government-related entities (GREs).

“It is likely that non-performing loans have peaked,” Fitch said in its report, adding that “the more upbeat operating environment and a return of market confidence in the UAE should prevent any further wide-scale asset-quality deterioration in the short term.”

Nevertheless, the ratings agency maintains that there remain some uncertainties for the property sector in Dubai, particularly outside prime areas. “Oversupply in the real estate sector as projects are completed could lead to asset-quality issues, but we expect the medium- to long-term nature of major new projects to reduce this risk,” it noted.

Debt restructuring of troubled Dubai-based GREs is progressing, but further actions cannot be ruled out, so this could add to impaired loans, the agency said.

However, it added that, “in the long term, we believe planned regulations to restrict loan concentration to GREs would benefit banks; credit profiles. Compliance may take time for some banks with high concentrations.”

Overall, UAE banks remain profitable, despite the asset-quality issues. “We believe that pre-impairment operating profit is able to absorb high credit costs. Fitch core capital ratios have also strengthened, to 13.8 per cent on average for the nine largest banks at end-H1 2013, well above the end-2008 level of 10.7 per cent. This provides a solid cushion against asset-quality deterioration.”