UAE’s strong economy supports banking sector outlook

UAE’s strong economy supports banking sector outlook

Dubai: The UAE has a wealthy economy with strong fiscal and external positions that supports the fundamentals of its baking sector, according to rating agency Standard & Poor's. The COVID-19 pandemic, lower oil prices, and continued pressure on the real estate sector have increased risks for UAE banks with a significant spike in non-performing loans, which S&P expect will increase further once the regulatory forbearance measures are lifted, impacting the profitability for longer. "Although UAE banks traditionally operate with healthy profitability metrics, low interest rates have negative consequences for bank margins. We therefore expect the banking sector's profitability will remain lower for longer," said Puneet Tuli, an analyst at S&P. After the pandemic started, the UAE Central Bank (CBUAE) implemented a Targeted Economic Support Scheme (TESS), which helped ease the pressure on corporate issuers and small and midsize enterprises. However, the scheme did not reduce credit risk on the banking system's balance sheet. The scheme included a provision that allows banks not to classify deferred exposures as Stage 2 and Stage 3 [under the IFRS 9]. Rather, banks have classified deferrals into two groups: Group 1 (exposures to clients that are temporarily and mildly impacted); and Group 2 (exposures to