Today's Edition
A. SREENIVASA REDDY (ABU DHABI)
The UAE banking sector is set to fortify its long-term intrinsic creditworthiness, thanks to the implementation of new credit risk management standards by the Central Bank of the UAE in the fourth quarter of 2024, according to Fitch Ratings.
The updated standards are expected to enhance transparency in asset quality and strengthen provision coverage for problem loans. These measures aim to reduce pressure on capital and profitability metrics during periods of stress. “The new standards will encourage banks to address legacy bad debts through collateral foreclosure, disposal to third parties, or write-offs,” Fitch Ratings stated.
Fitch anticipates that while some banks may report higher ratios of Stage 2 and Stage 3 loans due to the revised classification requirements, the sector-average impaired loans ratio is forecast to decline to 4% in 2025, compared to 4.4% at the end of Q3 2024. “The impact on most large and medium-sized banks is likely to be limited, as robust growth should dilute increases in Stage 3 loans,” Fitch noted.
The new standards focus on stricter staging classifications, distinguishing between distressed and commercially driven restructuring. For distressed restructures with balloon repayments exceeding 40% of outstanding exposure, the loans must remain in Stage 3 for six to 24 months, depending on repayment structures, before being moved to Stage 2.
Fitch also highlighted a provision for collateral against Stage 3 loans, with gradual increases in haircuts over time. After five years, most collateral types, excluding dirham- and dollar-pegged cash or sovereign securities, could face haircuts of up to 100%. The central bank’s requirement to provision 100% for unsecured Stage 3 exposures after four years is expected to lead to additional provisioning charges for some banks but should bolster the sector's resilience.
The UAE’s economic environment continues to support the banking sector’s stability. Fitch revised its operating environment score for UAE banks to “bbb+” in September 2024. The favourable conditions have limited the occurrence of distressed restructures since the pandemic, and most older restructures have already met the repayment criteria to be reclassified to Stage 2. “We expect the migration of Stage 2 loans to Stage 3 due to the new standards to be limited,” Fitch stated.
Smaller banks, such as Commercial Bank International, are more affected by the revised standards, with some requiring over five years of pre-impairment profit to achieve full Stage 3 coverage. However, these banks have taken measures to enhance recovery functions, which Fitch expects will help reduce net Stage 3 loans over time.
Fitch expects the overall impact of the new credit standards on UAE banks to remain manageable, with no significant pressure on Viability Ratings. “The time available to increase provisioning ensures that banks can navigate these changes effectively,” Fitch concluded.
Commenting on the Fitch Ratings’ report, Samer Mardini, Chief Investment Officer at Yorklyn Asset Management, said: “The UAE Central Bank's new credit risk management rules are a big step toward making the banking sector stronger and more transparent. These changes tackle old bad debts, improve loan classifications, and increase coverage for risky loans, which will help banks handle tough economic times better.”
“Smaller banks might find it harder to adjust, but the sector’s steady growth and stable economy should make the transition smoother,” he added.
The new standards, combined with a stable economic environment and strong profitability, position UAE banks as resilient players in the global banking landscape.
