OREANDA-NEWS. Any measures to prevent UAE bank capital ratios falling from their current levels will support the standalone Viability Ratings assigned to these banks, says Fitch Ratings. By reminding banks at the outset of the year that clearance must be obtained prior to announcing dividend payments, the UAE central bank is signalling prudence in a tougher operating environment.

Capital adequacy, as measured by Fitch core capital as a percentage of risk weighted assets, is strong, reaching an average of 16% at end-3Q15 at Fitch-rated UAE banks. Leverage ratios are also robust, averaging 12.5% at end-3Q15. In general, asset quality and risk appetite are more influential factors in the Viability Ratings of UAE banks than capitalisation and leverage as we believe they have solid capital ratios. But the banks need to maintain solid capital buffers, especially because risk concentrations tend to be high and loss absorption capacity needs to be upheld to cover potential unexpected losses, which could be significant.

UAE banks are some of the most profitable among Gulf Cooperation Council (GCC) peers, with rated banks reporting an average operating return on equity in excess of 16%. Internal capital generation capacity is strong, held up by wide margins, solid loan growth and contained impairment charges at the banks. Historically, bank dividend payouts have been high, averaging about 50%, and affordable because profitability has been high. But we think banks' performance indicators are unlikely to improve in 2016 as loan growth moderates, loan quality starts to deteriorate and liquidity remains tight. The outlook for UAE banks is discussed in the 2016 outlook report for GCC banks, available by clicking on the link below.

The local regulator has long required prior notification about proposed dividend payments but we think the latest reminder is a signal to banks that high dividend pay-outs are less likely to be tolerated now that the operating environment has become more difficult.

Banks represent 45% of all quoted stocks in the UAE and regional investors have become accustomed to high dividend payments. The UAE central bank's December 2015 Monthly Outlook report said that dividend payments have stagnated since mid-2015 and notes that dividends are an important source of income for local retail investors. Dividend cuts are likely to prove unpopular with investors but we think that sustaining capital ratios at their current high levels is important to support confidence and regional financial stability.

The regulator and the banks will have to find the right balance between reducing dividend payments to safeguard capital ratios, while at the same time allowing reasonable dividend pay-outs to maintain investor interest.