CBUAE published the financial stability report, which assesses the resilience of the financial system and identifies issues in the banking and financial system that require additional support. The report presents a comprehensive assessment of the macro-financial conditions and the banking system in the country, including stress testing, regulatory developments, and other aspects relevant to financial stability. The report also includes valuable contributions and assessments of trends and developments in the payment systems, capital markets, and insurance sector.
According to the report, the UAE banking system remained resilient in 2019, with the ability to withstand the challenging operating environment, as demonstrated by the regulatory stress tests. Capital ratios and liquidity buffers of banks remained adequate and well above the regulatory requirements. The capital adequacy ratio was 16.9% as of the end of March 2020 and the eligible liquid asset ratio was 16.6% as of the end of May 2020. The banking system remained profitable, with improved cost efficiency benefiting from efficiency gains related to recent mergers in the sector. Asset quality, however, represented a challenge with an increase in non-performing loans ratio, although partially mitigated by good provisioning levels. During the year, bank lending continued to grow at a steady rate, although its distribution was not broad-based. Retail lending registered a decline, while credit to certain sectors such as real estate and construction continued to grow, supported by improved affordability due to declining real estate prices.
International exposures of the UAE banking system increased during 2019 underpinned by cross-border acquisitions and diversification in terms of foreign debt securities. The finance companies sector recorded a decline in total assets with profitability and cost-efficiency remaining under pressure in a challenging operating environment. Overall liquidity and capital ratios of the finance companies sector remained adequate and specific provision levels improved, with some notable differences between individual finance companies. The size of the finance companies sector represented only about one percent of the banking system. The year also marked concerted efforts from CBUAE including enhancement of regulatory frameworks regarding corporate governance, anti-money laundering, and the continued implementation of the Basel III capital adequacy standards with further focus on financial technology and cyber risks. The UAE payment systems remained resilient and continued to operate without any major disruptions.
Looking ahead, the COVID-19 pandemic has radically changed the outlook for global and domestic activity in 2020 and brought volatility into the financial markets. However, stress tests demonstrate that the UAE banking sector is able to withstand macro-financial shocks of any size. The UAE government and CBUAE have taken a wide range of measures to mitigate the adverse impact of COVID-19 pandemic and launched substantial financial programs to help affected individuals and corporates and the economy at large. In addition, the temporary measures introduced by CBUAE include the IFRS 9 guidance, postponement of the implementation of remaining Basel III standards and regulatory stress testing to ease the operational burden on the banks, and prudential filters to neutralize the effects of increased provisioning on capital base of banks. This financial stability report focuses on developments during 2019; therefore, the consequences of the COVID-19 pandemic for the banking system are not visible in this report.
Keywords: Middle East and Africa, UAE, Banking, Financial Stability Report, Regulatory Capital, Basel, Stress Testing, Credit Risk, IFRS 9, COVID-19, Fintech, Cyber Risk, CBUAE
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