The U.A.E. banking system credit growth was about 4% in the first five months of 2014 and international ratings agency Standard & Poor's expects around 8–9% credit growth for the sector in 2014-2015, in line with healthy economic.
At year-end 2012, the U.A.E. regulator tightened limits on lending to government-related entities (GREs) and local governments. Given that GREs are important borrowers in the U.A.E. market, S&P expects that the tighter limits will restrict banks from growing their local loan books meaningfully above 10% over the next two years, S&P said in a new report published yesterday, titled "Economic Recovery Spurs Solid Growth for Gulf Banks."
It expects certain Dubai-based banks to grow faster than their peers in Abu Dhabi as the former were fairly inactive in lending in 2009–2012. Since 2013, banks in Dubai have again focused on lending as most of them have significantly improved their asset quality and funding profiles.
GCC banks growth
Assets of the GCC banks are expected to reach US$2 trillion by the end of 2015 compared to US$1.7 trillion by the end of 2013, said Standard & Poor's Ratings Services in a new report published yesterday, titled "Economic Recovery Spurs Solid Growth for Gulf Banks."
Gulf banks have shown healthy earnings growth over the last year and a half despite historically low interest rates, it said.
The ratings agency anticipated strong real GDP growth from most GCC countries in 2014-2015 with overall domestic credit growing by about 10 per cent.
"Banks in Gulf Cooperation Council (GCC) countries have experienced lower net interest margins, but improving asset quality and falling credit losses have generally offset this. We believe declining credit losses will continue to support GCC banks' earnings throughout 2014, although we expect this effect to be less visible in 2015,” said Standard & Poor's analyst Timucin Engin.
"Prospects for economic growth in the Gulf region remain healthy for the next few years. We expect most Gulf banks to continue to benefit from robust corporate activity and consumer consumption over the next 18–24 months. The many infrastructure projects planned in the Gulf should translate into sustained streams of corporate lending," he said.
Over the past three years, strong liquidity flows into the Gulf's deposit markets have supported the region's banks-- which traditionally rely on local deposits for the bulk of their funding - and S&P expects this to continue. Regional sovereigns and their affiliated entities are key depositors in the local markets, and their fiscal positions should continue to be bolstered by strong oil prices.
"We believe the banks in the region are well-positioned to comply with the incoming Basel III rules. Most banks already have significant levels of high-quality capital, as their reported Tier I ratios indicate. In addition, given their strong earnings generation, Gulf banks can boost their capital if needed by minimising dividend pay-outs,” S&P's Engin said.
"Our rating actions in 2014 have largely reflected the generally positive backdrop in the Gulf region, and our rating outlooks largely reflect the ongoing recovery in the GCC banking system. Of our 27 public ratings, seven have positive outlooks, and only three have negative outlooks,” he added.