Banks in the United Arab Emirates face new headwinds due to a weakening global economy and Abu Dhabi's move to scale back spending and delay construction projects, Fitch Ratings said on Tuesday.
In a report, Fitch said the global slowdown will affect key sectors such as trade, tourism and services while a fragile real estate sector and problems at Dubai state-linked firms and other companies "pose significant asset quality challenges".
The ratings agency also cited the short-term impact of slowing projects in the emirate of Abu Dhabi which has taken a tough line on budget spending and jettisoned non-core infrastructure plans, such as building local branches of the Guggenheim and Louvre museums.
Across the oil-exporting emirate, which accounts for more than half of the United Arab Emirates' economy, government-backed real estate, commercial and tourism projects, many conceived during the boom years of 2003-2008, are under review and in some cases being delayed or put on hold.
"This sharper-than-anticipated slowdown in the construction sector in Abu Dhabi could have some implications for the banks' asset quality in the short-term," it said.
Fitch said that UAE banks remain profitable, despite slower loan growth and weaker asset quality. It said a key challenge would be their ability to raise long-term funding.
"Fitch anticipates core earnings will decline given low business volumes and the recent Central Bank of the UAE rules on retail banking."
The central bank capped the amount commercial banks can lend to individuals at 20 times their salary and set the period for loan repayment at 48 months this year to prevent excesses seen during the oil boom years of 2007-2008.