Moody's Investors Service said it now expects the outlook to remain negative for the next 12 to 18 months as the banking system bears the strains of falling property prices and tightening liquidity.
Analysts said that the estimate is poor because of a large number of bank loans given to property developers who are expected to struggle to repay as the property market under goes a widespread price correction.
'Moody's is mainly concerned about the loans to opportunistic developers that have been extended over the past four to five years following Dubai's decision to allow freehold ownership for foreigners in 2003,' said John Tofarides, a Moody's analyst.
Another factor is tightening liquidity, which is likely to weigh on future asset growth and profitability, while the collapse in oil prices will weaken the UAE's fiscal surpluses and economic growth in 2009, he added.
However, the UAE banks' deposit ratings are underpinned by a high probability of systemic support, and had strong financial fundamentals overall to see through the economic downturn.
'High oil revenues over the past five years have served as a catalyst for growth and the accumulation of substantial financial reserves,' explained Tofarides.
'The banking sector's strong association with local governments and quasi-government institutions, which are the principal architects and drivers of infrastructure, have helped to boost the franchises of local banks,' he added.
