UAE banks’ loan losses likely to rise: Moody’s

dubai — Loan losses of the UAE banks will surge in the next one year due their exposure to falling real estate prices and rise in interest rates, according to Moody’s new report released on Tuesday.

“We expect loan losses at UAE banks to rise over the next 12 to 18 months as falling real estate prices and rising interest rates reduce the cash flow of borrowers. Increased bank lending to the sector has coincided with a decline in real estate prices owing to high supply and weak demand. However, tighter regulation on real estate exposures since the 2008 financial crisis will help to moderate the risks, and the strong capital and profitability of UAE banks provide good loss absorption buffers,” said Mik Kabeya, assistant vice-president at Moody’s.

Data from Reidin showed that residential property prices in Dubai and Abu Dhabi are estimated to have fallen by around 23 per cent and 18 per cent, respectively, since their peak mid-2014.

Moody’s sees higher exposure to real estate will weaken loan quality. “We expect financing costs to increase for borrowers as local interest rates increase in tandem with US interest rates, due to the exchange rate peg. In addition, a decline in the value of banks’ real estate collateral will push them to increase their loanloss provisioning’,” Kabeya said.

According to Moody’s, direct lending to the construction and real estate sector increased to 20 per cent of total loans by at the end of 2018, from 16 per cent at the end of 2015. According to the UAE Central Bank’s 2018 fourth-quarter report released on Monday, the Financial Soundness Indicators (FSIs) point that overall soundness of the UAE banking system remains positive.

The UAE banking system is the largest in terms of assets in the Mena region. As of December 2018, the outstanding amount of assets stood at Dh2.878 trillion.