UAE banking system resilient to global, regional challenges




The UAE’s financial system remained strong in 2018. It weathered a host of global macro financial risks centred around the pace of policy tightening in the US, unresolved trade tensions between the US and China, the potential volatility around Brexit, elevated private and public sector debt in several countries, fluctuations in the commodity prices and heightened geopolitical risks in the region, according to the latest Financial Stability Report from the Central Bank of UAE (CBUAE).


The UAE banking system remained resilient in 2018, weathering these risks. Nevertheless, banks need to remain vigilant to counter potential risks, ensuring that necessary prudential and risk mitigation actions are in place, the CBUAE said in the report. The objective of the 2018 stress test was to assess the overall strength individual banks and the UAE banking system to a common set of adverse shocks.


The focus of the stress test was to explore potential systemic risks from hypothetical adverse scenarios in the real estate market, sustained decline in oil prices and rising interest rates environment to simulate their impact on the UAE banking sector. The coverage of stress tests was also broadened in this exercise by including both UAE national banks and selected large foreign banks covering more than 90 per cent of total banking sector assets.


In addition to credit and market risks, the 2018 stress test also assessed the potential funding/liquidity risk impact from rising interest rates on banks’ net interest income. The stress test evaluated the resilience of individual banks and the banking sector as a whole under a common macroeconomic baseline and adverse scenarios. The baseline scenario is built based on the CBUAE economic growth forecast over the next three years, whereas the adverse scenario reflects stressed economic and financial conditions, addressing potential threats to financial stability in the UAE such as significant downward repricing risk of UAE real estate assets; persistent decline in the oil price; and rising funding costs in the banking sector with the potential spillover to the real economy.



To reflect each of the risks, the shocks in the adverse scenario were calibrated. The stress test was also extended to cover liquidity risk of five largest banks including all four designated domestic systemically important banks. The liquidity risk impact was measured through Basel III liquidity coverage ratio (covering a 30-day stress period) and extended to covering a 60-day stress period. The average large banks’ LCR decreased from 140 per cent (30 days) to 126 per cent. The drop was driven by a significant increase of cash outflow after 30 days. Test results showed at individual bank level, all five large banks were able to maintain 30 days LCR well above 100 per cent.


Test results showed the overall financial performance of the banking system improved during 2018, with an increase in net interest income, decrease in operating expenses and improved operating efficiency. Aggregate banking system net profits grew 9.8 per cent and the cost-to-income ratio improved to 35.9 per cent in 2018. The overall Return on Assets (ROA) remained at 1.5 per cent in 2018 as bank assets expanded broadly in line with net profits.


The effects of improved credit growth and rising interest rates environment during the year resulted in higher interest income on loans and investments compared to interest expenses.

However, as other operating income declined by 14 per cent during 2018, the resulting total operating income of the UAE banking system remained relatively stable increasing by 1.2 per cent compared to the previous year.


The operating efficiency of the UAE banking system improved as reflected in the cost-to-income ratio. The overall cost-to-income ratio decreased to 35.9 per cent in 2018, compared to 39.1 per cent in 2017. The central bank report showed non-performing loans (NPL) ratio of the UAE banking system edged higher to 5.6 per cent in 2018 from 5.3 per cent in the previous year.

The NPL ratio of UAE national banks was lower than the banking system as a whole at 4.6 per cent compared to 4.4 per cent in 2017.


Regarding the core segments, the NPL ratio of the wholesale corporate sector was 7.2 per cent (with the SME segment reflecting the weakest asset quality) and the NPL ratio of the retail loan portfolio was 3.5 per cent down from 3.6 per cent in the previous year. The UAE banks are required to hold specific provisions for non-performing assets and general provisions for performing assets. The specific provision coverage of the non-performing loans improved to 70 per cent during 2018 (2017: 68.1 per cent).


The total provision coverage of non-performing loans, which includes specific and general provisions, was at 106.1 per cent during 2018 and 114.7 per cent for UAE national banks.

The stress test report has noted that the adoption of new accounting standards and provisioning requirements have improved the asset quality last year.

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