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UAE banks’ loan losses to grow due to real estate – Moody’s

UAE banks’ loan losses to grow due to real estate – Moody’s
Increased lending to the sector has coincided with the market downturn

Abu Dhabi – Mubasher: Banks operating in the UAE are expected to see a rise in loan losses over the next 12 to 18 months as the drop in real estate prices and rising interest rate reduce borrowers’ cash flow, Moody’s said in a recent report.

Dubai’s residential property prices have been falling since 2014 due to high supply and weaker demand, which forced construction and engineering firms to cut jobs and halt expansion plans.

Moody’s noted that increased lending to the sector has coincided with the market downturn. Property sector lending increased to 20% of total lending by the end of 2018, compared to 16% in 2015.

“This rapid expansion in lending has deepened the indebtedness of the construction and real estate sector, increasing its vulnerability to potentially higher financing costs or to liquidity tightening,” Moody’s highlighted.

Moreover, UAE banks are expected to set aside additional loan-loss provisions, as lower property prices reduce the value of real estate collateral that banks hold against their lending.

Risks for UAE banks are forecast to be moderate due to tighter regulation on real estate exposure introduced since the 2008 financial crisis.

“UAE banks also benefit from high buffers in the form of strong capital and solid profitability,” Moody’s concluded.