(MENAFN - Arab News) The outlook for the banking system of the UAE remains negative, says Moody's Investors Service in a new Banking System Outlook published on Wednesday.
The main drivers of the outlook are asset quality challenges, especially for the Dubai-based banks and low provisioning coverage levels.
Moody's expects problem loan levels to remain elevated, driven by exposures to large, stressed, government-related issuers (GRIs), and legacy corporate impairments, primarily real-estate-related, which are still emerging after failed attempts to restructure earlier in the crisis.
Moody's says that the negative outlook also captures specific structural weaknesses that will continue to undermine system-wide bank performance over the 12-18 month outlook period.
In Moody's view, issues such as limited transparency, sizable related-party exposures and high loan and deposit concentrations will continue to leave UAE banks vulnerable to name-specific credit risks in the near term despite recent guidelines published by the Central Bank of the UAE.
Over the outlook period, the diverging performance in the banking system between the two core cities will continue to grow.
Abu Dhabi benefits from higher public sector spending, while Dubai's prospects will remain overshadowed by real-estate oversupply and the legacy GRI asset-quality challenges, despite its more diversified private sector, which has shown solid signs of recovery.
This UAE's dependence on oil, as well as core sectors of trade, services, global logistics and tourism, continue to make the local economy sensitive to macro risks of weakened growth, global recession and low oil prices.
Accordingly, although it is not Moody's central scenario, a sustained drop in oil prices would reduce public spending and have a marked effect on overall economic confidence.
Despite Moody's projections of modest overall credit growth of 4-7 percent for 2012 and 2013 real GDP growth in the 2-3 percent range for 2012 and 2013, asset quality will remain poor with the ratio of problem loans to gross loans in the 10-12 percent range for 2012, and then declining marginally in 2013.
Moody's view is mainly driven by the persistently high level of exposures to large stressed GRIs and other legacy exposures, despite the recovery in core sectors, which with commercial real estate continue to contribute the bulk of the problem loans.
As such, Moody's expects associated provisioning needs and low lending confidence to continue to subdue bank profitability.
Cautious loan growth and the ongoing provisioning required to cover elevated problem loan levels will be the key constraining factors for profitability. These trends will continue to suppress banks' net profits for 2012 and into 2013, with the ratio of net income to average risk-weighted assets at around 2 percent.
However, among Abu Dhabi banks, Moody's expects that stronger local economic growth and confidence will lead to higher credit growth and profitability compared with Dubai-based banks.