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Dubai - Banks in the United Arab Emirates (UAE) are prepared for deteriorating conditions into next year as oil prices remain lower for longer, leading to a decline in government spending, slower economic growth and falling asset quality, according to Standard & Poor’s.

The five UAE banks rated by S&P “are ready to face the tough period ahead,” thanks to high loan-loss reserves, capital ratios and strong funding profiles, even as earnings will probably fall this year and be “lackluster” next, credit analyst Timucin Engin wrote in a note on Monday. The firm has a stable outlook on National Bank of Abu Dhabi PJSC, Abu Dhabi Commercial Bank PJSC, Sharjah Islamic Bank, National Bank of Fujairah PJSC and Mashreqbank PSC.

The slump in crude will also cause a drop in investments by private companies and bank lending, S&P said. Stronger lending practices and balance sheets at UAE banks than seven years ago mean banks can cope with the deterioration in asset quality better than during the financial crisis in 2009, it said.

“We are likely to see a gradual but longer deterioration in operating conditions for banks over the next several quarters or years,” said Timucin Engin, a Dubai-based credit analyst at S&P. “It should be noted that bank regulation in the UAE and underwriting practices at UAE banks are now stronger, and GREs are generally operating with stronger balance sheets than in the past,” he said, referring to government related entities.

Gulf banks are seeing surplus cash dry up because of the slump in crude, which has fallen by about 70% since June 2014. Government deposits dropped by more $13bn in a year, National Bank of Abu Dhabi said in October, while the Emirates Interbank Offered Rate, a local benchmark used to price some loans, climbed to 1.05971%, the highest since April 2013.

Slowing economic growth is already starting to have an impact on some lenders. United Arab Bank said a 272.6 million- dirham ($74m) loss in the third quarter was caused by provisions for loan defaults, while Union National bank missed third-quarter profit estimates after higher impairment charges.

A rising number of smaller- and medium-sized company owners are abandoning the country without repaying debt, according to Emirates NBD.