x Abu Dhabi, UAEFriday 28 July 2017

Outlook of UAE banks 'negative'

The fundamental credit outlook for the UAE banking sector is negative, says the debt rating firm.

Moody's, the credit ratings agency, yesterday issued its first negative outlook on UAE banks since its began reviewing them a decade ago. Analysts are concerned that loans to small-scale private developers may pose the single largest threat to the health of the banks, which may suffer in a prolonged property market correction. "A lot of these developers have been involved in speculative financing, they were selling off-plan... and I see some of them going bust," said John Tofarides, a Moody's analyst, in his report. The global credit crunch, a collapse in equities and lower oil prices are also putting the brakes on what was until recently a booming economy, he said. But some economists, including Raj Madha, an analyst at EFG-Hermes, said the banks' exposure to the property market was safe because the bulk of their loans had gone to top-tier developers who were either explicitly or inexplicitly state-backed. Mr Tofarides said such state backing may not be as secure as widely believed. "The true asset quality will be tested in case of a serious (property market) downturn," he said. Although bank loans to developers and contractors are capped at 20 per cent, the rule is not enforced, according to Sofia el Boury, an analyst at Shuaa Capital. Islamic Shariah-compliant banks are exempt from this rule and are likely to have a higher exposure to the property market. In November, the Government announced the merger of the two largest home finance companies, Amlak and Tamweel, after Amlak stopped writing new business. The two banks were then subsumed into the Emirates Development Bank, which is majority owned by the Federal Government. Adel Lootah, the director of the Dubai Property Society, said some of the smaller developers - those with projects worth about Dh200 million (US$54m) - may go into liquidation in the near future. Developers faced default rates of up to 40 per cent among buyers of off-plan, uncompleted projects. Residential property prices in Dubai dropped 8 per cent in the fourth quarter of last year, the first quarterly decline since foreign ownership became legal in 2002, according to the consultancy, Colliers International. The number of sales dropped by almost half in that period. Earlier this month, Dubai's Real Estate Regulatory Authority (RERA) said it would soon start ranking property developers in Dubai by their financial stability and market experience. Developers will also be required to register off-plan projects to fully own the land first. Mr Tofarides said a thorough analysis of the quality of banks' assets was made difficult because of "insufficient data" the banks provided on their property exposure. "The disclosures of the banks' balance sheets are not up to international standards," he said. State-owned or controlled banks often did not report their full lending to the public sector, Mr Tofarides added. However, Moody's said UAE banks had strong fundamentals, with satisfactory capitalisation levels and fully provided non-performing loans. uharnischfeger@thenational.ae