Moody's Investors Service expected the asset quality of UAE banks to deteriorate over the next 12 to 18 months, due to the banks' increasing exposure to the weakening real estate and construction sectors. It noted that lending to the two sectors increased from 16% of aggregate loans end-2015 to 20% at end-2018. It attributed the growth in lending to the banks' significant involvement in large real estate projects ahead of Dubai's Expo 2020, large-scale infrastructure projects, and an increased focus on collateralized lending. It noted that banks are also indirectly exposed to the real estate sector through personal loans, as the latter could be extended for the purchase of real estate or have real estate as underlying collateral, as well as through the financing of private and government-related real-estate developers. In parallel, the agency expected declining real estate prices to lower rental prices and rising interest rates to increase financing costs, which would reduce the cash flow of borrowers and, in turn, drive banks to increase their loan-loss reserves. It added that lower property prices will also reduce the value of real estate collateral held by banks against their lending, which will lead them to boost their loan-loss provisioning. However, Moody's considered that the strengthened regulations and tighter underwriting practices will help mitigate risks to the banking sector. It added that UAE banks benefit from high buffers due to strong capital adequacy and solid profitability metrics, as well as a sound provisioning of problem loans, as loan-loss reserves accounted for 104% of the banks' problem loans at end-June 2018.
Source: Moody’s Investors Service