(MENAFN- Khaleej Times) After an exceptional 2014 amid favorable operating conditions, banks in the UAE are "navigating rougher waters", S&P analyst Timucin Engin said.
"We now expect a deceleration in credit and deposit growth in 2015, accompanied by relatively higher credit losses that should limit earnings growth to the mid-single digits," Engin said at a Press briefing following the release of a report on the banking industry.
In the emerging challenging scenario, S&P predicted that banks in the UAE are likely to adopt a more conservative stance toward loans to the private sector and particularly to retail, leading to a relative decline in lending growth. However, it expects lending to government-related projects to remain robust.
S&P also argues that although current oil prices are well below fiscal breakeven for the UAE, the country has the flexibility to digest weak prices over the next two years, given its strong fiscal position. "Therefore, we do not foresee any meaningful change in the investment and spending targets of Dubai's and Abu Dhabi's governments at this stage in the next one to two years."
Engin said the downside risks to our ratings are limited because the banks have substantially improved their funding, asset quality, and capitalisation over the past few years.
In the next two years, S&P expects a slowdown in credit growth and noticeably weaker deposit growth, with renewed but manageable pressure on asset quality.
"All of these factors combined should limit earnings growth for UAE banks in 2015 and 2016, to the mid-single-digits of seven to eight per cent," said Engin.
The five S&P-rated banks in the UAE recorded 21.3 per cent growth in net income in 2014.
Oil prices, which have plummeted in the past six months, are likely to remain relatively weak throughout 2015 and 2016. "Given the role of such a commodity in the economy of this major oil producer, domestic economic growth is likely to slow markedly in 2015 and 2016. We also expect continued volatility on the emirates' equity markets and somewhat of a correction in the residential real estate market after two years of sharp price appreciation-but nothing on the order that led to the Dubai crisis in 2009," the report said.
In the next two years, S&P expects a slowdown in credit growth to seven to eight per cent from 15 per cent for rated banks in 2014, and noticeably weaker deposit growth, "with renewed but manageable pressure on asset quality".
All of these factors combined should limit earnings growth for UAE banks in 2015 and 2016, to the mid-single-digits. "Consequently, banks will be selective in corporate pricing," said the report, said Engin.
"However, the five banks that we rate are operating with strong loan loss reserves, as well as healthy capital, and liquidity and funding profiles. Therefore, we believe they are generally ready to face the challenging period ahead," Engin added.
For the UAE banks S&P rates, earnings growth was 22 per cent in 2014 on the back of 4.5 per cent economic growth. "And as in 2013 and 2012, a drop in credit losses contributed strongly to growth, with the banks continuing to realise large recoveries on their nonperforming exposures."
"Deposit growth in the system remained strong as UAE government and public sector deposits rose in line with healthy oil revenue flows, while the banks further increased their allocations to liquid assets."
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