Dubai’s New Property Rules Reduce Risks For UAE Banks

Despite signs of economic improvement, banks are still dealing with asset quality problems from the 2008 crisis, says Fitch

A plan by UAE banks to impose maximum loan to value limits for residential mortgages would help prevent another build up of asset quality issues for lenders, according to Fitch ratings.

Despite signs of improvement in the economy and a recovery in the property sector, banks are still dealing with asset quality problems from the 2008 crisis.

Impaired loans declined to 7.5 per cent on average at the end of the first half this year for the nine largest UAE banks, from 7.8 per cent at the end of 2012.

There is also a strong possibility that non-performing loans in the UAE have peaked.

“The more upbeat operating environment and a return of market confidence in the UAE should prevent any further wide-scale asset-quality deterioration in the short term,” a statement from Fitch ratings said.

However Fitch forecasted some uncertainties in Dubai’s property sector, especially outside the prime areas, that could cause asset quality issues.

“Oversupply in the real estate sector as projects are completed could lead to asset-quality issues, but we expect the medium- to long-term nature of major new projects to reduce this risk,” said Fitch.

Debt restructuring of troubled Dubai government related entities (GREs) are progressing but they could add to the list of impaired loans too, the credit rating agency said.

“In the long term we believe planned regulations to restrict loan concentration to GREs would benefit banks’ credit profiles. Compliance may take time for some banks with high concentrations,” Fitch said.

Despite the asset quality issues, UAE’s banks remain profitable. Fitch ratings said the pre-impairment operating profit is also able to absorb high credit costs incurred by banks.

Fitch ratings also pointed out that banks have built up capital buffers since the 2008 property crisis that gives them some protection against asset quality problems.