Dubai - Mubasher: Moody's Investors Service has kept its outlook on the United Arab Emirates (UAE) banking system at stable.

This reflects a gradually recovering economy, as well as banks' strong capital, resilient profitability and solid funding.

Recovering economy and resilient financial fundamentals drive stable outlook, especially as the recovering economy will stimulate credit growth, according to a recent report by the ratings agency.

A combination of rising oil production, government infrastructure spending in Dubai, as well as Abu Dhabi's fiscal stimulus package will bolster economic growth.

Moody's forecasts GDP growth of 2.2% in 2018 and 2.9% in 2019, following a slowdown to 0.8% in 2017.

“Loan performance will progressively stabilise, as the recovering economy and the resilience of large borrowers will offset ongoing problem loan formation among small and mid-sized businesses and individual borrowers,” the report noted.

“Strong capital levels provide a large, loss-absorbing buffer for the UAE's banks.

“Moody's expects strengthening profitability to support capital levels, with sector-wide tangible common equity (TCE) at 14% to 15% of risk-weighted assets over the next 12 to 18 months,” it added.

The UAE government's willingness and capacity to support local banks if needed will remain high over the next 12 to 18 months.