UAE banks enjoy the good times

13 October 2023

MEED's November 2023 special report on the UAE also includes: 

UAE construction sector returns to form
Hail and Ghasha galvanises UAE upstream market
> UAE closes ranks ahead of Cop28

UAE ramps up decarbonisation of water sector
> UAE aviation returns to growth


 

Talk to any Gulf banking analyst and the message is unanimous: UAE banks are doing very well, and there are few clouds dampening the outlook heading into 2024.

Nearly all UAE banks have reported strong growth in operating profit on the back of higher interest rates, wider margins, good loan growth and higher fees and commissions.

“Good GDP growth and improved business confidence have also contributed to an overall sense of wellbeing,” says Karti Inamdar, senior credit analyst at CI Ratings.

Fat profits reflect the robust environment for UAE banks. The big four UAE lenders – First Abu Dhabi Bank (Fab), Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank, which account for more than three-quarters of system assets – reported a combined net profit of $7.4bn in the first six months of 2023, up from $4.4bn for the same period of 2022.

“Bottom line profit is growing significantly for the four largest UAE banks, and that is a reflection of operating income growth, driven both by interest and non-interest income,” says Francesca Paolino, lead analyst at Moody’s Investors Service.

“That, in turn, has resulted from greater consumer confidence as macroeconomic conditions in the UAE remain strong.”

Region-beating returns

UAE banks topped the GCC region in the second quarter of this year in terms of return on equity, at 15.9 per cent – against a GCC-wide trend of 13 per cent. Net interest margins (NIMs) in the quarter were 3.44 per cent, compared with 2.44 per cent in the year-earlier period.

“Higher interest rates have helped banks in NIM expansion, as more than 60 per cent of banking sector deposits are still low or non-interest bearing,” says Puneet Tuli, financial institutions rating analyst at S&P Global Ratings.

Meanwhile, the cost of risk is reducing thanks to the more benign economic environment and stronger non-oil activity, which has also led to higher lending growth compared with S&P’s original expectations.

According to Fitch Ratings, UAE banks have been well-positioned for higher interest rates and, since 2021, their earning assets yields have risen more than their funding costs due to a still-high share of cheap current and savings accounts (Casa), and a large percentage of floating lending on their loan books. 

Higher interest rates and increased business volumes drove net interest income up 37 per cent in the first half of 2023, Moody’s Investors Service notes in relation to the four largest lenders. Again, interest income growth outweighed funding cost growth, as low-cost Casa accounts remained a big contributor to the banks’ funding.

The higher operating income reflects a combination of interest and non-interest income, supported by greater consumer confidence. Strong activity in non-oil sectors in the UAE, such as trade, tourism and real estate, is a pointer to this effect.

“A driver for UAE banks’ increased non-interest income is their foreign exchange and derivative income. They are also reporting higher fee-generating activity from both retail and investment banking,” says Paolino.

As of June 2023, non-interest income constitutes around one-third of the total operating income at the larger UAE banks. This reflects the large banks seeking to diversify their revenue streams while growing locally and internationally.

Robust fundamentals

Liquidity and capital positions are unsurprisingly robust, providing a layer of insulation should conditions for UAE lenders deteriorate.

The big four UAE banks maintained strong capital buffers with a tangible common equity ratio of 15.1 per cent in aggregate as of June 2023. Strong earnings contributed to higher core capital buffers, more than offsetting risk-weighted assets growth.

UAE lenders’ liquidity has been strong for several years now, given that deposit growth in the country is dependent on energy prices, which have been favourable.

“In the UAE, deposits are not difficult to find, especially if you are willing to pay a price, so it’s the cost of deposits that needs to be managed,” says Inamdar.

“There’s usually plenty of funding available in the financial system when oil prices are high.”

The main issue on the funding side is high customer concentration levels – a side-effect of the UAE’s large number of high-net-worth individuals and wealthy institutions.  

Asset quality has nonetheless improved in the UAE. New non-performing loan (NPL) classifications have declined and loan recoveries have been good, partly due to the improvement in the real estate sector, says Inamdar.

According to Moody’s, the overall NPL ratio declined to about 5 per cent as of the first half of 2023, from 5.4 per cent a year earlier, reflecting the recovering operating environment in the country. Yet this ratio is still one of the highest in the GCC.

“On the one side, you can expect some solid operating conditions to provide some improvements to NPL ratios,” says Paolino.

“But on the other side, UAE banks remain exposed to the real estate sector and also to single borrower concentrations, as well as to large loan restructurings.”

While continued high interest could stoke future asset quality problems, local banks have built up provisions with a coverage ratio in excess of 100 per cent.

Technological dividends

Looking ahead, UAE banks will focus on their digital proposition, meaning investment in innovation and technology will likely continue and operating costs remain high. 

Banks in the UAE are already benefitting from years of significant investment in technology.

“We have seen a reduction of banks' physical footprint, with one of the banks reducing its network from 50 branches to just five without any significant impact on activity,” says Tuli.

“Banks did not experience any major cyber risk issues as well. All this is helping their overall profitability.”

In terms of future growth, some cross-border forays can be expected.

For example, Fab and Emirates NBD have strong regional ambitions that could help grow their individual balance sheets. Their diversified business base – in terms of geography, products and customer segments – renders them less vulnerable to a downturn in any of the markets they operate in.

There are few downside risks facing UAE banks, barring an unexpected drop in oil prices or – notes S&P’s Tuli – a significantly higher-than-expected migration of deposits from non-interest-bearing instruments to remunerated instruments that will reduce the benefits of higher interest rates.

That should leave analysts continuing to tell a positive story about the country’s banking prospects.

https://image.digitalinsightresearch.in/uploads/NewsArticle/11207028/main.gif
James Gavin
Related Articles
  • Riyadh Royal Commission awards metro Line 2 extension

    18 July 2025

     

    Register for MEED’s 14-day trial access 

    Saudi Arabia’s Royal Commission for Riyadh City (RCRC) has awarded an estimated $800m-$900m contract to build the next phase of the Riyadh Metro project, which is the Line 2 extension.

    The contract was awarded to the Arriyadh New Mobility Consortium.

    The Line 2 extension is 8.4 kilometres (km) long, of which 1.3km is elevated and 7.1km is underground. It includes five stations – two elevated and three underground.

    It will run from where Line 2 currently ends at King Saud University (KSU) and then travel onwards to new stations at KSU Medical City, KSU West, Diriyah East, Diriyah Central, where it interchanges with the planned Line 7, and then finally to Diriyah South.

    According to the consortium’s official website, the consortium members include Italy’s Webuild, India’s Larsen & Toubro, locally based Nesma & Partners, Japan’s Hitachi, Italy’s Ansaldo STS, the Canadian firm Bombardier, Spain’s Idom and WorleyParsons from Australia.

    In 2013, the Arriyadh New Mobility Consortium secured Riyadh Metro’s Line 3 project for $5.21bn.

    Line 3, also known as the Orange Line, stretches from east to west, from Jeddah Road to the Second Eastern Ring Road, covering a total distance of 41km. 

    Riyadh Metro

    Riyadh Metro’s first phase features six lines with 84 stations.

    The RCRC completed the phased rollout of the Riyadh Metro network when it started operating the Orange Line on 5 January.

    In December last year, the RCRC started operating the Red Line and Green Line.

    The Red Line, also known as Line 2, stretches 25.1km from the east of Riyadh to the west, via King Abdullah Road, connecting King Fahd Sports City and King Saud University. It has a total of 15 stations.

    The Green Line, also known as Line 5, extends 13.3km from King Abdullah Road to the National Museum. With 12 stations, it serves several ministries and government agencies, including the Defence Ministry, the Finance Ministry and the Commerce Ministry, as well as other areas.

    Earlier in December, the RCRC started operating the Blue Line (Line 1), Yellow Line (Line 4) and Purple Line (Line 6).

    The Blue Line connects Olaya Street to Batha; the Yellow Line runs along King Khalid International Airport Road; while the Purple Line connects Abdul Rahman Bin Awf Road with Al-Sheikh Hassan Bin Hussain Road.

    King Salman Bin Abdulaziz Al-Saud inaugurated the Riyadh Metro on 27 November last year.

    The network spans 176km. Four of the stations have been designed by signature architects.

    The metro is part of the Riyadh Public Transport Project, which encompasses metro and bus systems. The project aims to relieve traffic congestion.

    The $23bn project was scheduled to open in 2018, but construction activity slowed due to disputes over prolongation and the disruption caused by the Covid-19 pandemic.

    The RCRC awarded the main construction packages for the scheme on 28 July 2013.

    In November 2022, the RCRC struck a deal with three contracting consortiums working on the Riyadh Metro scheme regarding the completion of the project’s remaining works.

    The Fast consortium won lines 4, 5 and 6, reportedly valued at $7.82bn. The Bacs consortium was awarded lines 1 and 2 for $9.45bn, while Arriyadh New Mobility secured Line 3 for $5.21bn.

    US firm Bechtel leads the Bacs consortium. Italian firm Ansaldo STS is the leader of the Arriyadh New Mobility group, and Spanish firm FCC Construccion heads the Fast consortium.

    AtkinsRealis has delivered programme management and supervision services for the operations and maintenance of the Riyadh Metro scheme.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/14289337/main.jpg
    Yasir Iqbal
  • Firms submit bids for Maaden gold project water pipeline

    17 July 2025

    Saudi Arabian Mining Company (Maaden) has received proposals from local firms for a water pipeline network it plans to build as part of a larger project to develop a new gold mining and processing facility in the Al-Rjum region of the kingdom.

    The Al-Rjum gold mining and processing facility, located in Medina province, is expected to be commissioned by the end of 2027. It will become the largest gold mining operation in Saudi Arabia when operational.

    According to sources, the pipeline is to be developed using a build-own-operate-transfer (BOOT) model. The engineering, procurement and construction (EPC) works will have a duration of 38 months, followed by a 20-year operations and maintenance period.

    Lamar Holding and Alkhorayef are understood to be the only bidders for the proposed Taif to Al-Rjum water pipeline, which forms package B of the Maaden gold mining project.

    The two contractors submitted bids for the water pipeline project on 1 July, sources told MEED.

    The main scope of work involves building a 150-kilometre pipeline that will supply treated sewage effluent water to the Al-Rjum gold mining facility.

    ALSO READ: Saudi Arabia issues mining exploration licences

    The Al-Rjum gold mining and processing facility will have an output capacity of 250,000 ounces of gold a year. The project will increase Maaden’s total gold production to 700,000 ounces a year by 2028, helping the company support Saudi Arabia’s overall goal of doubling gold production by 2030 and achieving a four-fold increase in output by 2040.

    MEED recently reported that Maaden had received bids for a tender to develop accommodation facilities for over 4,500 of its workers at the upcoming Al-Rjum gold mining and processing facility.

    Bids for the Al-Rjum worker accommodation tender, which is also under the BOOT model, were submitted in late June. The operations and maintenance period for this contract is 15 years.

    ALSO READ: Saudi Arabia and Oman open up their minerals potential
    https://image.digitalinsightresearch.in/uploads/NewsArticle/14284263/main3503.jpg
    Indrajit Sen
  • Bahrain and US sign nuclear energy agreement

    17 July 2025

    Bahrain and the US have signed a cooperation agreement covering the field of peaceful nuclear energy.

    The agreement aims to enhance collaboration in nuclear energy, recognising its vital role in sustainable development and energy security. It aligns with Bahrain's ambitious goal of achieving carbon neutrality by 2060 and contributes to global efforts to combat climate change.

    As Bahrain explores alternative energy sources, senior officials have previously indicated to MEED that they are closely monitoring developments in small modular reactor (SMR) technology. This is particularly crucial for Bahrain, where limited land availability poses challenges for solar energy projects. Floating solar plants have been identified as a potential solution, but the exploration of nuclear energy and SMRs remains a priority for future energy diversification.

    The agreement was signed during an official visit to the US by Prince Salman Bin Hamad Al-Khalifa, the crown prince and prime minister of Bahrain.

    The agreement was formalised by Abdullatif Bin Rashid Al-Zayani, Bahrain’s minister of foreign affairs, and Marco Rubio, the US secretary of state.

    Al-Zayani added that the agreement builds upon the Comprehensive Security Integration and Prosperity Agreement (C-SIPA) signed in 2023. The agreement aims to strengthen cooperation in defence, security, emerging technologies, trade and investment.


    READ THE JULY 2025 MEED BUSINESS REVIEW – click here to view PDF

    UAE and Turkiye expand business links; Renewed hope lies on the horizon for trouble-beset Levant region; Gulf real estate momentum continues even as concerns emerge

    Distributed to senior decision-makers in the region and around the world, the July 2025 edition of MEED Business Review includes:

    > PROJECTS MARKET: GCC projects market collapses
    > GULF PROJECTS INDEX: Gulf projects index continues climb
    To see previous issues of MEED Business Review, please click here
    https://image.digitalinsightresearch.in/uploads/NewsArticle/14281751/main.jpeg
    Colin Foreman
  • Kuwaiti firm wins $53m Duqm coastal road contract

    17 July 2025

    Kuwaiti contractor Combined Group Contracting Company (CGCC) has won a RO20.6m ($53m) contract to construct coastal roads in Duqm.

    The scope of work covers the construction of roads with a total length of 14 kilometres, including a coastal road, a proposed service road, an extension to an existing service road, a resort street, four roundabouts, future extensions and proposed links.

    The contract duration is two years from the start date of construction.

    MEED reported in August 2023 that CGCC had emerged as the lowest bidder for the project.

    GlobalData estimates that the construction industry in Oman will grow by 3.6% in real terms in 2025, supported by rising foreign direct investment (FDI) in the country, particularly in the manufacturing sector, as well as investment in the energy and transport sectors.

    The infrastructure construction sector is estimated to grow by 5.7% in 2025, before recording an annual average growth of 5.2% between 2026 and 2029, supported by the government’s investment in upgrading road and airport infrastructure.

    CGCC’s contract win in Oman comes shortly after a key contract win in the UAE, worth AED685m ($186m).

    The scope of work under this contract encompasses the upgrade works on Emirates Road, from the Al-Badea intersection in Sharjah to the E55 intersection in Dubai.

    The UAE’s Ministry of Energy & Infrastructure is the project client.

    The contract duration is 25 months.


    READ THE JULY 2025 MEED BUSINESS REVIEW – click here to view PDF

    UAE and Turkiye expand business links; Renewed hope lies on the horizon for trouble-beset Levant region; Gulf real estate momentum continues even as concerns emerge

    Distributed to senior decision-makers in the region and around the world, the July 2025 edition of MEED Business Review includes:

    > PROJECTS MARKET: GCC projects market collapses
    > GULF PROJECTS INDEX: Gulf projects index continues climb
    To see previous issues of MEED Business Review, please click here
    https://image.digitalinsightresearch.in/uploads/NewsArticle/14281451/main.gif
    Yasir Iqbal
  • Algeria awards $855m contract for gas production project

    17 July 2025

    Register for MEED’s 14-day trial access 

    Algeria’s national oil and gas company Sonatrach has awarded an $855m contract to China’s Jereh Group for a project to develop facilities at the Rhourde Nouss gas field.

    Jereh Group said that its subsidiary Jereh Oil & Gas Engineering will build a natural gas booster station in the Rhourde Nouss gas field and upgrade and renovate related transmission pipelines.

    The Yantai-based company cited a letter of award from Sonatrach and said that the contract will boost the company's footprint in North Africa’s oil and gas engineering service sector.

    The Rhourde Nouss boosting project will centralise the boosting of natural gas produced by the gas field and the adjacent Gassi Touil gas field, to improve their production efficiency and natural gas processing capacity, the company said.

    Sonatrach, the largest gas producing company in Africa and the largest state-owned enterprise in Algeria, will pay $629.1m and $226m for the construction of the project, Jereh said.

    Jereh's growing footprint

    Jereh has been expanding overseas in recent years and has won contracts with major Middle Eastern oil and gas clients, including Saudi Aramco, Abu Dhabi National Oil Company (Adnoc) and Kuwait Petroleum Corporation.

    In June 2021, the company was awarded a contract for the design, procurement and construction of a gas debottlenecking project in Algeria.

    The project was located in the Bir Rebaa Nord and Rhourde Ouled Djemma fields, which are located in the eastern Algerian desert, about 300 kilometres southeast of Hessi Messaoud.

    The client on that project was Groupement Sonatrach Eni, a joint venture of Sonatrach and Italian energy company Eni.


    READ THE JULY 2025 MEED BUSINESS REVIEW – click here to view PDF

    UAE and Turkiye expand business links; Renewed hope lies on the horizon for trouble-beset Levant region; Gulf real estate momentum continues even as concerns emerge

    Distributed to senior decision-makers in the region and around the world, the July 2025 edition of MEED Business Review includes:

    > PROJECTS MARKET: GCC projects market collapses
    > GULF PROJECTS INDEX: Gulf projects index continues climb
    To see previous issues of MEED Business Review, please click here
    https://image.digitalinsightresearch.in/uploads/NewsArticle/14278458/main.jpg
    Wil Crisp