Total lending by 51 local and foreign lenders operating in the UAE increased 4.2 per cent during the first 11 months of 2011 compared to 1.3 per cent drop recorded for the same period in the previous year, data issued by Central Bank showed.
The increase is the fastest-paced in three years, as lending appetite has been low ever since the 2008 global fiscal distress.
However, according to Timucin Engin, Associate Director at Standard & Poor's, the growth outlook for the system is limited, given the existing challenges in funding and asset quality.
"Although the funding profile of the banks in the UAE has improved considerably since the 2008 crisis, the loans to deposits ratio of the system remains stretched and the overall funding conditions are not necessarily accommodating for a strong credit growth," Timucin says.
Efforts on increasing deposits have been emphasised for the past three years due to the deteriorating net loans to customers, reaching as high as 105 per cent in April 2010. During the first 11 months of 2011 deposits increased with 0.4 per cent, lagging behind the lending growth.
In its Banking Industry Country Risk Assessment (BICRA) report on the United Arab Emirates, published on November 9, 2011, Standard and Poor's pointed out that although UAE’s banks have adopted a more cautious underwriting stance since the beginning of the crisis, credit exposures undertaken before the crisis are hampering their credit profiles. Relatively large sector and borrower lending concentrations, high exposure to real estate and construction, and uncertainty surrounding exposure to some government related entities (GRE’s) are also weighing on their credit profiles. Offsetting factors include the UAE banking system’s strong capital base and low private sector debt relative to its high national wealth.
There is a substantial amount of restructured / renegotiated loans on the balance sheets of certain UAE banks, explains Timucin. "The performance of these restructured loans will be an important factor in their future asset quality as well as their exposures to certain government-related entities."
Specific provisions for non-performing loans over the first 11 months in 2011 increased 20.1 per cent. Standard & Poor’s expects provision levels to remain high in 2012.
Overall, the bulk of any credit growth will be predominantly generated by the Abu Dhabi banks as they are operating with stronger balance sheets and healthier asset quality metrics, Standard & Poor’s forecast in its study.