Dubai: The UAE has a wealthy economy with strong fiscal and external positions that supports the fundamentals of its baking sector, according to rating agency Standard & Poor’s.
The COVID-19 pandemic, lower oil prices, and continued pressure on the real estate sector have increased risks for UAE banks with a significant spike in non-performing loans, which S&P expect will increase further once the regulatory forbearance measures are lifted, impacting the profitability for longer.
“Although UAE banks traditionally operate with healthy profitability metrics, low interest rates have negative consequences for bank margins. We therefore expect the banking sector s profitability will remain lower for longer,” said Puneet Tuli, an analyst at S&P.
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Banks in the UAE, the second biggest Arab economy, have a robust enough funding profile to overcome the macroeconomic challenges caused by the Covid-19 pandemic, ratings agency S&P Global said.
“Strong capital buffers and good profitability despite the sharp increase in cost of risk and lower interest rates will help lenders to push through headwinds, the agency said in its latest report on the UAE’s banking sector on Sunday.
“We view the trend in [banking] industry risk in the UAE as stable,” the report said. “Banks should be able to maintain adequate sources of funding and liquidity on higher oil prices.”
Dubai: UAE banks reporting their first quarter results for 2021 starting this week are expected to reflect continued pressure on their profitability, largely due to margin pressures, modest loan growth and slow growth in non-interest income streams.
The aggregate net profit of the top 10 UAE banks declined by about 40 per cent year on year in 2020, on the back of lower operating income and increased provisions, according to data analysed by Alvarez & Marsal (A&M) and KPMG.
A&M expects the operating environment for the UAE’s banking sector to remain less volatile in 2021 compared to last year, although profitability isexpected to remain under stress.
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