14
ANNUAL REPORT 2015
BANKING & MONETARY DEVELOPMENTS
Stable Outlook
. The ratings agency believes UAE
banks' credit profiles will broadly remain resilient
despite an economic slowdown driven by low
oil prices.
Return on assets is likely to remain at around
two per cent, while profitability should remain
stable, supported by solid margins, stable
operating costs and provisioning charges.
Moody’s also noted that capital buffers are
solid and expects them to improve further, with
tangible common equity expected to reach
around 15 per cent of risk-weighted assets in
2016, up from around 13.8 per cent in 2015.
However, in line with tightening liquidity across
the GCC region as a result of lower oil prices,
liquidity metrics for UAE banks may decline for the
first time since the 2008 crisis. Liquid assets are
expected to decline to a still solid 25 per cent in
2015 from a peak of around 30 per cent of total
assets in December 2014.
The softening economy will affect operating
conditions and result in subdued credit growth.
Moody’s predicts credit growth to slow down to
three to five per cent annually for 2015 and 2016
from around nine per cent for 2014. Asset quality
should remain stable, with impairments at around
five per cent of total loans for 2016.
Although funding costs are increasing,
Moody’s expects that it will largely be offset by
rising corporate yields, as US-linked interest rates
increase and the ratings agency expects highly
competitive lending pressures to ease into 2016.
Deposit growth decelerated sharply in 2015,
a factor that will continue into 2016 to two to
four per cent from 10 per cent in 2014. This has
resulted in banks raising funds through bonds
and Sukuk issuance to support growth.
Moody’s forecasts real GDP growth of around
3.1 and 3.2 per cent for 2015 and 2016, down
from 4.6 per cent in 2014, stating that the UAE
economy remains the most diversified in the
region with continued public-sector spending
by the Emirate of Abu Dhabi complementing
continued growth in Dubai's diversified private
sector, specifically in trade and transport.
Nevertheless, the impact of prolonged low
oil prices on the UAE's economy will slow credit
growth to three to five per cent on an annual basis,
down from around nine per cent in 2014. Moody’s
cautions that intensification of geopolitical
tensions in the region and the prospect of a more
protracted period of low oil prices would dampen
confidence, future spending and economic growth.
Credit
An easing in the appetite for credit was evident
through almost all sectors of the economy as
2015 progressed and the oil price continued
to fall. At the same time, and especially
through the latter part of the year, there was
a tightening of credit standards. This reflected
a reduced willingness to extend business
loans and a rising degree of risk aversion.
Collateralisation requirements and premiums
charged on riskier loans tightened through the
year as did conditions on the maximum size of
credit lines and spreads over the cost of funds.
An improvement in the quality of the loan
portfolio of banks, ascribed by some as partly
due to expanding operations of Al Etihad
Credit Bureau, may be seen in the fall in the
ratio of NPLs from a peak of seven per cent at
end-2014 to 6.3 per cent at end-2015. Over
the first half of 2015 bank specific provisions
for NPLs dropped from the peak recorded
in November 2014 of AED 91.1 billion
but increased marginally in the second
half of 2015.
The Central Bank of United Arab Emirates’
Credit Sentiment Survey
highlighted a down-
tick in credit appetite towards the end of the
year. This contraction in Q4 2015 followed
several quarters of robust lending growth but
concerns that Iran may oversupply the market
with oil, further undermining the price, and
