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Banks in UAE unaffected by oil fail.

Banks in UAE unaffected by oil fail.

Resilient capital and liquidity buffers will help keep UAE's banking system stable despite a slowdown driven by low oil prices, ratings agency Moody's said on Wednesday.

Maintaining its stable outlook for country's banking system, Moody's said asset quality of banks is expected to remain steady, with impairments at around five per cent of total loans for 2016.

However, in line with tightening liquidity across the GCC region as a result of lower oil prices, liquidity metrics for UAE banks will decline for the first time since the 2008 crisis, it warned.

Liquid assets are expected to decline to a still solid 25 per cent from a peak of around 30 per cent of total assets as of December 2014 over the outlook period of 12 to 18 months, the ratings agency said.

"The stable outlook reflects our expectation that despite the economic slowdown driven by low oil prices, banks' credit profiles will broadly remain resilient. While we expect subdued credit growth and a modest rise in new problem loan formation, strong profitability as well as the release of provisions related to the resolution of legacy problem loans will cushion the impact," the ratings agency said.

It said although lower oil-related government revenues will continue to cause a modest slowdown in the flow of government deposits, the banks will maintain solid capital and liquidity buffers and, "overall, a resilient credit profile."

The operating environment for banks will soften, driven by economic slowdown.

Moody's forecasts real GDP growth of around 3.1 per cent and 3.2 per cent for 2015 and 2016, down from 4.6 per cent in 2014. The forecast falls short of a more upbeat projection given by UAE Minister of Economy Sultan bin Saeed Al Mansouri, predicting a surge of more than 3.5 per cent in 2015 and next eyar.

"The UAE economy remains the most diversified in the region with continued, although moderating, public sector spending by Abu Dhabi complementing the continued growth in Dubai's significantly more diversified private sector, particularly the trade and transport sectors," Moody's said in its report on the UAE banking sector.

However, the impact of the prolonged low oil prices on the UAE's economy will slow credit growth to three-five per cent on an annual basis, down from around nine per cent in 2014.

"Tail risks to our current baseline scenario have also risen slightly, driven by intensification of geopolitical tensions in the region and the prospect of a more protracted period of low oil prices, which would further dampen confidence, future spending and economic growth," it said.

While asset quality of UAE banks will remain broadly stable despite the economic slowdown, Moody's expect impairments to remain at current level of around five per cent of total loans for 2016, the report said.

It observed that despite an anticipated increase in new problem loan formation, particularly in the small and mid-sized company segment, non-performing loan metrics would be kept stable by the parallel resolution of legacy problem loans.

"We expect UAE banks' credit profiles to broadly remain resilient despite the economic slowdown driven by low oil prices, owing to their strong capital and liquidity buffers coupled with resilient profitability," said Nitish Bhojnagarwala, an assistant vice president at Moody's.

"While pressures in the small and mid-sized enterprise sector will increase, the UAE banks' continued resolution of legacy problem loans will moderate the new problem loan formation" said Bhojnagarwala.

"Deposit growth will decelerate sharply to two per cent-four per cent this year and into 2016 from 10 per cent for 2014. This is driving the banks to raise funding from increasingly expensive and confidence-sensitive debt and sukuk markets to support growth" said Khalid Howladar, senior credit officer at Moody's.