Moody's Investor Service, the ratings agency, had announced the upgrade of the banking system of the United Arab Emirates. The rating was upgraded from negative to stable because of a recovery in the local real estate as well as the curbing of the volume of problematic loans.
In a report circulated on Wednesday, Moody's had anticipated the real gross domestic product (GDP) in the UAE to increase by 3.6% for 2013 and 3.7% for 2014. This was supported by the increasing public financing of projects in Abu Dhabi as well as a recovery in Dubai's private sector after the recent global financial crisis.
The ratings firm further said these factors put together would be able to support the growth of credit in the banking sector at a projected increase between 7% and 10% in 2014.
Moody's also highlighted that the improvements in UAE's operating environment would result in a reduction in the bad debts to gross loans at a ratio of between 8% and 9%. This was a decrease from 10.5% reported at the end of 2012. In June 2013, the loan loss coverage levels were pegged at 53%. However, Moody's in anticipation said this measure would improve as the bad debt levels would decline.
It was also observed by the ratings firm that the asset quality is improving and this would result in decreasing loan-loss provision requirements. This would then support an increase in the net income of the sector, projected to be 2.5% of risk-weighted assets by the end of 2014. This was compared to just 2% at the end of 2012.
The remaining issue is top-line profitability, as the sector would continue to face pressure due to the low levels of the prevailing interest rate as well as the increased competition in the business environment. This was the observation by the investor services firm as to the immediate future in the UAE.
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