Moody's Investors Service's outlook for UAE banking system remains stable, reflecting the rating agency's view that resilient capital and liquidity buffers will help to protect banks' credit profiles despite the continued economic slowdown.

 The outlook expresses Moody's expectation of how bank creditworthiness will evolve in the UAE over the next 12-18 months, the service explained in its report entitled "Banking System Outlook -- United Arab Emirates: Resilient Buffers Drive Stable Outlook Despite Continued Economic Slowdown".

"The solid profitability and capital of the UAE banks will provide protection against rising problem loans," said Nitish Bhojnagarwala, assistant vice president -- Analyst at Moody's. "At the same time, sufficient liquidity will cushion against reduced flows of government deposits as lower oil prices impact government revenues."

Moody's expects real GDP growth of around 2.5 per cent and 1.9 per cent for 2016 and 2017, down from 3.2 per cent in 2015. This economic slowdown will lead to modest increases in new problem loan formation, particularly in the overleveraged small and mid-sized company (SME) and retail (loans to individuals) segments.

"We expect problem loans to increase modestly to around 5.5 per cent of total loans by mid-2017 following a period of strong recovery, which drove delinquencies down from the 2011 peak of 10.6 per cent to around 5 per cent currently," explained Bhojnagarwala.

Profitability, though, will remain strong, with Moody's expecting a broadly stable return on assets at around 1.7 per cent over the outlook horizon.

Although funding costs and provisioning costs will likely increase, the rating agency expects them to be offset by rising corporate yields combined with loan growth (subdued at 3 per cent-5 per cent) and modest efficiency gains.

Additionally, capital buffers are likely to improve and Moody's expects tangible common equity (TCE) to increase modestly to around 15 per cent of risk weighted assets (RWAs) by 2017, up from 14.3 per cent as of December 2015. In addition, loan-loss reserves were a solid 94 per cent of problem loans as of June 2016, the rating agency expects this level of coverage to continue.

"The reliance on market funding for UAE banks' is expected to increase as deposit growth continues to decelerate" added Bhojnagarwala. "However, the liquidity buffers remain strong, despite a modest decline, with liquid assets expected to remain around 25 per cent of total assets".

Finally, government support for UAE banks will likely remain high, says Moody's, reflecting the government's continued willingness and its strong capacity to provide financial support if the need arises, despite fiscal pressure from falling oil revenues. – TradeArabia News Service