Levels of asset growth in the UAE banking system and loan exposures to various sectors of the economy are within the risk absorption capacity, and do not pose any imminent systemic threat, according to the Central Bank of UAE (CBUAE). To evaluate the resilience of the UAE banking system to potential macro-financial shocks, the CBUAE conducted annual regulatory stress test during 2018, including risk factors stemming from shocks in real estate prices, oil revenues, and rising funding cost.
Overall, the stress test demonstrated that the UAE banking system remained resilient to the considered macro-financial shocks. As part of the stress testing the central bank closely looked at the asset portfolios of banks and their exposure to key sectors of the economy. The UAE banking system assets amounted to Dh2.9 trillion in 2018, which accounted for about 208 per cent of the UAE nominal GDP or 263 per cent of the non-oil nominal GDP. Data showed the UAE national banks accounted for 88 per cent of the total assets of the UAE banking system.
Overall, the banking system remained focused on traditional loan-based commercial banking activities principally funded by deposits. As such, credit risk remains the core risk exposure, in particular in the lending portfolio. The financial investment portfolio comprises mainly of highly rated debt securities. In comparison to credit risk exposures, the share of market risk exposures remained small. The loan portfolio of the UAE banking system expanded by 4.8 per cent during 2018. The growth rate more than doubled from the subdued lending growth of 1.7 per cent during 2017. The rebound was primarily driven by corporate sector lending, while lending to the government sector also increased particularly during the last quarter of the year. In contrast, retail sector lending remained stagnant throughout the year.
The UAE banking system lending portfolio of Dh1.7 trillion comprised 65 per cent of wholesale corporate loans, 21 per cent of retail loans, 12 per cent of lending to the government sector, with the remaining 2 per cent extended to non-bank financial institutions. The share of private corporate loans increased to 65.4 per cent of total wholesale corporate loans during 2018, while the share of the GRE loans decreased to 17.2 per cent, and the share of SME lending decreased to around 8.6 per cent.
During 2018, the NPL ratio for the private corporate sector edged higher to 6.9 per cent (2017: 6.6 per cent). The Net NPL ratio for the sector, which excludes specific provisions, reached 1.8 per cent compared to 1.6 per cent in 2017. Within the wholesale corporate portfolio, the asset quality of the SME loans remained the weakest, followed by the private corporate sector, while the asset quality of GRE and HNI loans remained relatively stable.
Retail lending remained stagnant during 2018 declining by 0.1 per cent, compared with the 3.4 per cent growth during the previous year. While the growth of residential mortgage loans remained strong (9.2 per cent) during the year, the stagnant overall retail lending was underpinned by the contraction in other three largest retail subcategories, personal loans (-1.0 per cent), credit card loans (-0.6 per cent), and car loans (-13.4 per cent). The NPL ratio of retail loans declined to 3.5 per cent in 2018 from 3.6 per cent in the previous year despite the contraction in retail lending. The stable NPL ratio was reflected across most of the retail portfolio subcategories.