UAE-based banks are increasingly at risk from their asset quality deteriorating as the country’s domestic real estate weakens, with prices now more than 20 percent below their 2014 peak, Fitch Ratings said on Tuesday.
The ratings agency noted in a report that asset quality is the main driver of their viability ratings (VR) of UAE banks, which currently average ‘bbb-’. However, the agency added that VRs are not currently under threat as the rating incorporates an allowance for some asset quality deterioration.
Fitch defines its VRs as a measure of the intrinsic creditworthiness of a financial institution. They reflect the agency’s opinion on the likelihood that an organization will fail.
The real estate market has experienced a prolonged period of decline since early 2015, due mainly to oversupply and weaker consumer sentiment from lower oil prices and a less supportive economic environment, said Fitch.
“Banks have not fully recovered from the real estate crisis that hit Dubai in 2010,” added the agency.
“UAE banks’ Stage 2 and Stage 3 loans are already high, averaging 15-20 percent of gross loans together, and are likely to increase. Smaller banks are more vulnerable to deterioration in credit conditions due to thinner capital buffers and lower revenue generation.”
Real estate and construction accounted for around 20 percent of the banking sector’s gross loans at end of Q1 2019, according to UAE central bank data, although Fitch added that the true exposure is higher as that data excludes retail mortgage lending and investment companies financing development.
UAE bank assets under pressure by weakening property sector: Fitch