According to the latest Financial Stability Report from the Central Bank of UAE (CBUAE), in 2018, the UAE’s financial system remained strong. It endured a host of global macro financial risks centered around the pace of policy constricting in the US, pending trade tensions between the US and China, the hidden volatility around Brexit, exalted private and public sector debt in many nations, vacillation in the commodity prices and heightened geopolitical risks in the region.
The CBUAE in their report stated that the UAE banking system remained strong in 2018, overcoming these risks. However, banks need to remain careful to counter likely risks, ensuring that basic prudential and risk mitigation actions are in place. The aim of the 2018 stress test was to evaluate the comprehensive strength individual banks and the UAE banking system to a common set of negative shocks.
The target of the stress test was to analyze potential systemic risks from hypothetical conflicting scenarios in the real estate market, continued decline in oil prices and rising interest rates environment to simulate their impact on the UAE banking sector.
The coverage of stress tests was also widened in this exercise by containing both UAE national banks and selected large foreign banks covering over 90% of total banking sector assets. The stress test calculated the flexibility of individual banks and the banking sector as a whole under a common macroeconomic baseline and negative scenarios.
Test results revealed the comprehensive financial performance of the banking system lifted during 2018, with an increase in net interest income, reduced in operating expenses and better operating efficiency.
Aggregate banking system net profits grew 9.8% and the cost-to-income ratio improved to 35.9% in 2018. The Return on Assets (ROA) remained at 1.5% in 2018 as bank assets expanded widley in line with net profits.
The central bank report showed non-performing loans (NPL) ratio of the UAE banking system edged higher to 5.6% in 2018 from 5.3% in the previous year. The NPL ratio of UAE national banks was lower than the banking system as a whole at 4.6% in comparison to 4.4% in 2017.