Banks in the United Arab Emirates will continue to shore up liquidity and de-leverage, Goldman Sachs said as it downgraded three banks in the region following strong share price performance.

Goldman downgraded Abu Dhabi Commercial Bank to "sell" from "buy," Dubai Islamic Bank to "sell" from "neutral," and Emirates NBD Bank to "neutral" from "buy."    

The brokerage also cut its share price target on the UAE banks by 10 percent on average, mainly to account for an expected negative impact from tighter consumer finance regulation.

Goldman said these banks are shoring up liquidity as there is limited access to attractively priced wholesale funds and uncertainty lingers over credit quality mainly linked to Dubai's troubled real estate sector.

In the absence of incremental government funds, customer deposit formation remains subdued, preventing a more visible fall in the cost of funding and thus capping credit supply, Goldman said in a note.

Overall, Goldman said it favours Abu Dhabi banks to Dubai banks as it expects the former to benefit from stronger deposit formation, resulting in higher asset growth and relatively resilient net interest margins.

Shares of Emirates NBD shed 4 percent to trade at 4.38 dirhams while those of ADCB were trading down 3 percent at 3.18 dirhams by 0858 GMT on Monday. - Reuters