UAE banking sector shows positive outlook for 2021: Report

By Rahul Vaimal, Associate Editor
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The US-based multinational investment bank and financial services provider, Bank of America has forecasted a positive outlook for the UAE’s banking sector for 2021, in light of the measures initiated by the government to support the economy.

According to the report from Bank of America, “while the backdrop remains cautious we see several factors that provide material upside risks to earnings via a more optimistic economic outlook.”

The American financial service provider projects a stronger loan growth and lower provisioning costs for the UAE’s banks in the next year as the economy getting back from the pandemic and the government introduced new regulations including 100 percent foreign ownership of businesses, expansion of the 10-year golden visa scheme and the granting of five-year visas for wealthy foreign retirees.

Other measures taken by the government including the normalization of relations with Israel, the extension of the Targeted Economic Support Scheme (TESS) and government plans to vaccinate the population against COVID-19 will also have a positive impact on the banking sector.

The government’s decision in enabling 100 percent foreign ownership of businesses will boost foreign direct investment in the UAE and the 10-year visa and retirement visa schemes will help the country to fight the decrease in population.

The UAE amended its commercial companies’ law last month and invalidated the need for onshore companies to have an Emirati shareholder to attract foreign capital into the country.

Earlier this month, Sami Al Qamzi, director-general of Dubai Economy stated that the foreign investment will increase by 35 percent following changes to the commercial companies law.

The UAE is also targeting to raise the number of businesses operating in the country from 300,000 currently to 1 million in the coming ten years in light of the changes to the law, according to the Ministry of Economy.

“The announcement of diplomatic relations with Israel, which we see combatting geopolitical risks in the region as well as spurring further economic activity,” the bank stated.

The UAE and Israel normalized relations after signing the Abraham Accord in September and the two countries have signed a series of agreements to enhance co-operation in sectors ranging from aviation to finance.

The extension of the $13.6 billion TESS loan deferral program will reduce the risks of a spike in asset quality deterioration. The scheme was initiated in March to support the UAE’s economy to fight the pandemic driven crisis, offering zero-cost collateral funding to banks as a way of keeping lending flowing to the broader economy.

The news about the COVID-19 vaccine developments is particularly relevant to the UAE as it will help in the revival of the tourism sector to boost the economy. “We believe the vaccine provides a realistic chance that the travel and tourism sector, including attendance at the Expo and trade could rebound more strongly than currently anticipated,” the report added.

Dubai-based banks including Emirates NBD and Dubai Islamic Bank are set to benefit more than their counterparts in Abu Dhabi due to the revival of the economy, Bank of America said.

“The current backdrop of economic uncertainty has seen ENBD management pursuing a path of conservative but prudent provisioning. This policy has culminated in one of the best-provisioned banks in the region,” it said.

Banks in Saudi Arabia are expected to post strong loan growth in 2021, underpinned by “continued strong growth in the mortgage market” and the awarding of major government contracts associated with long-awaited mega projects, it added.

As per the Central Bank of the UAE, the economy is estimated to grow by 2.5 percent in 2021, according to Saudi Arabia is forecasting growth of 3.2 percent next year.