Overview of UAE Banking Sector

The UAE banking sector is still in recovery stage, post the 2008-09 real estate crisis in Dubai. However, the financial performance of the banks has stabilised especially over the past couple of years. The UAE banks, particularly Dubai based banks, are facing asset quality challenges, as reflected in their high proportion of non-performing loans and low level of provisions. On the other hand, Abu Dhabi based banks appear relatively less challenged from these issues due to their relatively lower exposure to real estate and higher exposure to oil based industries, which did well amid favourable oil price environment.

The key concerns related to the UAE banks include i) concentration in loans and deposits, ii) high proportion of related party exposures, iii) limited data transparency/availability, and iv) stiff industry competition. Moreover, the performance of the UAE banks has been constrained by the still recovering real estate and construction sectors. Although the banks maintain a strong presence in their local markets, the banking sector has limited diversification and displays concentration in terms of geographies, products, and customers.

That said, most of the UAE based banks benefit from strong ownership structure backed by local governments. In addition, most of these banks are in the process of restructuring their problem loans. The economy of Dubai has shown encouraging growth in the past two years. All key sectors of the economy including real estate, trade, tourism, and services have shown a considerable improvement. The improved performance of the core sectors would result in re-classification of some of non-performing loans as performing loans, which would reduce stress on the banking sector in the medium term.

Recent political unrest in some countries in the MENA region has benefited UAE, owing to its safe haven status in the region. Dubai has strengthened its position as a regional financial hub and has become a key channel for investment across the MENA region. This has directly helped local banks. The key characteristics of the UAE banking sector are as follows.

i) Strong links to local governments: The UAE banking sector has been strongly dominated by the governments of Abu Dhabi and Dubai. The ruling families are also actively involved through their investments in the country, typically through their holding companies. The government's significant involvement in the UAE banking system proved beneficial during the global financial crisis. The authorities responded quickly when needed and supported local banks in 2008 and early 2009. The UAE Central Bank has provided liquidity support as well as deposits to banks in the past to alleviate funding pressure. Markets expect a continuous support to the UAE banks from local governments in future, if needed.

ii) Strong capitalization: The UAE banking sector exhibits a very strong level of capitalization. Its capital levels are supported by consistent profitability, strong earnings retention, and equity injections from the government in times of need. Total capital adequacy ratio of the sector has exceeded 20% over the past three years, the highest in the Gulf Cooperation Council countries. However, the high capital levels are also justified by some banks' high share of non-performing loans, which requires a higher level of capital than the average.