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Asset quality risks threaten UAE banks’ viability ratings

Asset Quality

A specialized international report revealed that asset quality risks threaten the UAE banks viability ratings.

Fitch credit rating agency said the escalating risks of deteriorating asset quality is the main threat to the viability ratings of UAE banks in 2021-2022, amid the continuing repercussions of the Coronavirus.

UAE banks asset quality

Fitch said in a report that the asset quality of the UAE banks will weaken, as borrowers face pressures from the ongoing economic turmoil linked to the pandemic and lower oil prices.

UAE banks are facing high levels of costs and low revenues, in light of the double blow to the economy due to COVID-19 repercussions and the low oil prices.

With a total of 48 banks operating in the UAE, 22 are local banks and 26 are foreign banks, serving more than 9.5 million citizens and residents.

Fitch expected liquidity to remain intact, and said that the banks’ capital reserves were sufficient to meet the risks.

The agency added that the default long-term valuations of exporters in the UAE, which are driven by sovereign or institutional support, are based on a stable outlook.

Measures of asset quality deteriorated moderately by the end of the third quarter of 2020,Fitch said.

Catastrophic expectations

Fitch expects an increase in potential bad loans in 2021-2022 after the end of the borrower’s support and affordability measures at the end of June 2021.

The agency also expected an increase in restructured loans to key sectors including real estate, construction, trade and manufacturing.

Fitch said this represents a major risk to asset quality, as loans to these sectors represent about 33% of sector loans at the end of the third quarter of 2020.

Retail loans (19% percent of total banking sector loans) are also facing pressure in the weaker labor market, Fitch said.

And specialists in economic affairs had previously predicted that growth in the UAE would decline to only 2.2% this year.

Specialists believe that the growth rates in the UAE economy have contracted month after month, and recent expectations were for levels of 2.7% before falling to levels of 2.2.

Expectations indicate that the total output of the UAE shrank 6.6% last year, compared to an expected decline of 6% issued in October. It is expected to grow 3.5% in 2022.

Keep reading: Several Crises Forcing UAE Economy To Decline

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