Cap­i­tal­i­sa­tion of UAE banks likely to re­main high, says S&P's

The Pak Banker - - FRONT PAGE - DUBAI -AP

The over­all per­for­mance in the UAE's bank­ing in­dus­try has been im­prov­ing, and this is ex­pected to pick up fur­ther in 2018.

The UAE bank­ing sec­tor's per­for­mance will see a sta­bil­i­sa­tion as the econ­omy also does so with the re­cov­ery in crude prices and strong cap­i­tal­i­sa­tion of fi­nan­cial in­sti­tu­tions, ac­cord­ing to in­dus­try an­a­lysts. "We think that 2018 will be marked by a sta­bil­i­sa­tion of the per­for­mance of UAE banks as the econ­omy sta­bilises.

We think that growth will re­main muted as eco­nomic growth re­mains be­low the era where oil prices were at triple- dig­its/ record highs. On as­set qual­ity, we are of the view that most of the de­te­ri­o­ra­tion would have been al­ready taken into ac­count by the be­gin­ning of 2018," says Mo­hamed Da­mak, se­nior di­rec­tor and global head of Is­lamic fi­nance at Stan­dard & Poor's.

"The main sec­tor to watch would be the real es­tate sec­tor as prices con­tinue their de­cline al­though we are far from be­ing in a 2007 sce­nario as the drop in price was con­trolled to a large ex­tent," says Da­mak. M. R. Raghu, manag­ing di­rec­tor of Mar­more Mena In­tel­li­gence, says the per­for­mance of the UAE's bank­ing sec­tor sta­bilised marginally in 2017 com­pared to 2016, which can be at­trib­uted to growth in the nonoil econ­omy, im­proved liq­uid­ity and sta­ble fund­ing con­di­tions.

How­ever, loan per­for­mance is ex­pected to soften mod­estly in 2018 due to slug­gish eco­nomic growth in 2017. Also, a mod­er­ate in­crease in non- per­form­ing loans can be wit­nessed as weaker eco­nomic growth and pub­lic- sec­tor spend­ing in 2017 pres­sure the fi­nances of bor­row­ers.

S& P's Da­mak ex­pects that the cap­i­tal­i­sa­tion of UAE banks, which is viewed as strong, is ex­pected to re­main at the same lev­els.

He noted that merg­ers would re­main the ex­cep­tion rather than the norm due to the own­er­ship struc­tures of UAE banks.

Yet con­sol­i­da­tion would make sense due to the over­banked na­ture of the UAE bank­ing sys­tem, which leads to sig­nif­i­cant price com­pe­ti­tion. Stu­art Scoular, part­ner with Price­Wa­ter­house­Coop­ers in the Mid­dle East, says over­all in­dus­try per­for­mance has been slightly im­prov­ing with small growth in mar­gins com­ing from in­ter­est rates. He said cost- to- in­come ra­tio is im­prov­ing and over­all see­ing small in­crease in liq­uid­ity. He reaf­firmed that the in­dus­try is over­banked in the UAE.

"If you look at UAE pop­u­la­tion, it is a cer­tain con­clu­sion that the in­dus­try is suf­fer­ing from over­bank­ing. Hence, there is an op­por­tu­nity for bank con­sol­i­da­tion and we do see that hap­pen­ing in com­ing years," Scoular said.

Mik Kabeya, an an­a­lyst at Moody's In­vestors Ser­vice, added: "The UAE bank­ing sys­tem would see ro­bust credit growth un­der­pinned by strong cap­i­tal­i­sa­tion, sta­ble fund­ing and liq­uid­ity con­di­tions."

Ac­cord­ing to Da­mak, most of the VAT im­ple­men­ta­tion im­pact will be passed to cus­tomers and that could re­sult in an in­crease in the cost of bank­ing ser­vices in the UAE. Raghu says the lack of pre­pared­ness of busi­nesses in terms of VAT im­ple­men­ta­tion is con­sis­tent across dif­fer­ent in­dus­tries and busi­nesses - in­clud­ing banks.

"Ide­ally, it would take six months for banks to be com­pletely ready, once de­tailed com­pli­ance re­quire­ment are pro­vided. The big­gest im­pact on banks would be that VAT is likely to be an ir­recov­er­able cost, neg­a­tively af­fect­ing mar­gins for the bank­ing sec­tor. Ma­jor­ity of the ser­vices pro­vided by the banks would be ex­empt from VAT and banks that pro­vide both tax­able and VAT ex­empt ser­vices would be re­quired to cal­cu­late how much VAT it is en­ti­tled to re­cover," he added.

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