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UAE banks have low NPLs, high fiscal surplus, but liquidity a concern

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Nonperforming loan (NPL) ratios increased only 20 basis points (bps) for the top 45 GCC banks between year-end 2020 and June 30, 2021. Here is their story in the UAE

Average oil prices of $75 per barrel in 2021 helped amortize the impact on banks UAE’s NPL ratio stood at an all-time high of 7.7% in Sep 2020 Short to medium-term liquidity is the most important concern for the UAE's banking sector

UAE banks enjoying low NPLs, high fiscal surplus, but liquidity crunch forthcoming

S&P Global Ratings believes banks in the GCC have demonstrated resilience to the COVID-19-related economic shock and last year’s sharp decline in oil prices. Liquidity injections and regulatory forbearance measures helped cushion regional banks from wider uncertainty and masked the true hit to their asset quality indicators.

However, a gradual recovery in private sector economic activity, supportive public sector demand for credit, and higher oil prices, assuming an average of $75 per barrel in 2021, have also helped amortize the impact on banks.

In turn, nonperforming loan (NPL) ratios increased only 20 basis points (bps) for the top 45 GCC banks between year-end 2020 and June 30, 2021.

S&P Global expects the NPL ratio to rise in the next 12-24 months without exceeding 5%-6%, compared with 3.8% on June 30, 2021, as forbearance measures are gradually withdrawn. However, GCC economies are expected to expand at an unweighted average of 1.8% in 2021 and 4% in 2022, in part facilitated by increased credit growth.  

After an improvement in the first half of 2021, S&P Global expects GCC banks’ profitability to stabilize in 2021-2022.  

According to S&P Global, GCC banks’ lending growth accelerated slightly in H1 2021 to an annualized 8.4%, compared with 6.6% in 2020 Lending growth in the UAE remained muted at about 0.6% but an acceleration in lending in H2 2021 is expected as UAE economic sentiment continues to improve, especially with the start of Expo 2020.

UAE’s NPL ratio stood at an all-time high of 7.7 % in Sept. 2020.  

“The UAE has adequate provisioning of 120%, higher than emerging market peers,” said Mohammad Hawa, a research analyst with Credit Suisse.

The UAE has a high fiscal surplus at 13% of GDP, low public debt at 10% of GDP, and a high current account surplus of about 20% of GDP.

With UAE banks having an average loan to deposit ratio of 115% and 20.9 billion dirhams ($5.7 bn) of maturing 2009-10 medium-term notes, short to medium-term liquidity is the most important concern for the UAE’s banking sector.

Credit Suisse estimates a short-term funding deficit of 52.3 billion dirhams ($14.25 bn) for UAE banks. However, further government intervention can bridge this gap.

“Contrary to prevailing fears, we believe public-sector finances in the UAE are in relatively good shape and that the government’s ability and willingness to help should prevent significant balance sheet deleveraging and very high NPL levels,” Credit Suisse said in a recent report.

Kamco Invest, an investment bank, reported that GCC banks continued to post robust growth in lending activity as economic recovery gathered pace during the second quarter resulting in record-high loan books of $1.68 trillion.

Gross loans of listed banks in the GCC at the end of Q2 jumped 4.6% quarter-on-quarter (qoq) and 7.1% yoy, Kamco Invest said in its GCC Banking Report.

Total bank revenue for GCC banks increased by 3.5% qoq during Q2-2021, mainly led by higher net interest income.