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The rating agency stated that healthy liquidity, stable funding, and strong capital would balance the softening profitability and degrading asset quality.
Slow credit growth will lead to more borrowing from the government and the public sector both with muted borrowings by the private sector. In a report on the outlook of banking system, the analysts from Moody’s stated that they are expecting an overall credit growth of 4% by 2020, in line with 4.3% in 2018.
The banking sector in the UAE remains the largest in the Arab world. As per the data from UAE Banks Federation, the combined assets of all the banks show a growth of 6.5% to 2.87 trillion dirhams in 2018 as the growth of credit amount extended is 5% to 1.66 trillion dirhams.
As per the statistics from the UAE Central Bank, from January 2019 to July 2019, the savings account balances of the banks in the UAE hit a record of 165.8 billion dirhams. This means there was a nine percent growth of 13.8 billion dirhams against 152 billion dirhams by the end of last year.
With every passing year, the trust of the customers in the banking sector has been growing stronger. According to a survey, because of this, the banking sector in the UAE has grown way above its peers from the developed nations.
The TIS (Trust Index Survey) by the UBF, which was recently released showed that 74% of the respondents had a good trust level in the banking sector of the UAE. The 2017 data showed a 68% trust level, hence, confirming the fact that more customers in the UAE are relying on the banking sector.
In fact, as per a survey, the Emirates enjoys a higher level of trust in the banking sector than in various other developed countries including China, the US, Japan, the UK, Germany, and France.
With the high investments in the hydrocarbon industry and infrastructure projects of the government, the credit demand in the public and government sectors will rise. This, in turn, will boost lending in the UAE.
When it comes to the private sector, irrespective of the huge marketing of personal loan for expats, the credit demand will remain low. This shows constrained disposable incomes and lower business volumes.
Lending to the public and government sector has increased by 8% during the 9 months ending in August 2019, as opposed to 2% for the private sector individuals and corporates.
There will be a rise in the formation of problem loans in the next 12 to 18 months in slow economic growth because corporates face margin compression and low business volumes while the individuals face low wage growth. The problem loans are expected to rise to between 4.8% to 5.3% of the gross loans.
The performance of household loans will keep weakening the high living cost and limited growth of wages negatively impacts the repayment capacity of the borrowers, according to the credit rating agency.
The reduction in the staff throughout the private and government sector companies continue to show an adjustment to the expected low growth in the economy. The household loans took up 20% of the sector-wise lending in June 2019.
The performance of loans to mid-sized companies and small businesses will weaken due to margin compression and lower business volumes.
As a result, the small and middle-sized banks are expected to face challenges related to higher asset quality than large banks, keeping in mind their higher exposure to the small counterparties. The small counterparties are comparatively more vulnerable to slow economic growth.
The demand for credit from the public and government sector has been rising constantly along with the trust of customers in the banking system. This will, therefore, lead to a boost in lending in the UAE.