However, several banks may need additional capital injections to meet the UAE Central Bank’s regulatory requirements, added the report by Dubai-based Shuaa Capital.

The report, which comes at a time when local banks remain risk averse and reluctant to extend credit to the private sector due to concerns over future losses and writedowns, stress tested eight local banks.

The participant banks, accounting for 70 percent of the banking assets in the UAE, included Emirates NBD, National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, Mashreq, First Gulf Bank, Dubai Islamic Bank, Union National Bank and Commercial Bank of Dubai.

The report focused on what Shuaa considered to be the banks’ riskiest assets on their balance sheets — including real estate and personal loans extended in 2008, potential losses associated with banks’ exposure to Saad, Al Gosaibi and Dubai World and “renegotiated loans,” which appeared on most banks’ 2009 financials.

Shuaa also took into account the fact that Dubai-based banks incur a higher risk associated with their real estate exposure than Abu-Dhabi based lenders.

Additional measures could be taken by authorities to “clean up” UAE banks’ balance sheets, restore confidence and encourage them to resume lending to households and businesses, said Shuaa.

These measures include replacing high-risk assets in the banks’ balance sheets with low-risk government securities, stricter provisioning requirements, and providing side measures to encourage bank lending to sectors and businesses with long-term strategic importance, the report advised.

Broad structural and economic reform to encourage private sector and foreign investment in the UAE would yield greater long-term benefits, said Shuaa.

“Greater transparency, improved corporate governance and a stronger regulatory framework in the financial sector and within the broader economy would contribute to greater investor confidence and — ultimately — improved access to funding at better terms, both for banks and corporate entities at-large,” the company said.

The stress test report is likely to pacify local banks that are witnessing a slump in their profits as a result of the global credit crisis and a downturn in Dubai’s real estate sector.

“The UAE banking sector overall has the ability to withstand potential losses associated with further deterioration in asset quality, largely due to the authorities’ efforts to strengthen banks’ balance sheets since the onset of the financial crisis,” it said.

“While the banks on average are well capitalized, the stress tests show that several banks would need additional capital injections to meet the central bank’s regulatory requirements in all given scenarios,” the company said.

The report estimated that individual banks would require additional capital injections, ranging from $681 million in the best case scenario up to $4.3 billion in the worst case. “We believe that the authorities have the capacity to provide this financial support, if ever required,” it added.

The UAE government had stepped in to provide financial support to some UAE banks at the height of the financial crisis.