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UAE lenders chart a route to growth

10 April 2023

 

International markets may have been spooked by challenges in the global banking system that provide an eery reminder of past problems, but UAE lenders have little reason to fear that this year will interrupt the progress seen in 2022 as profits swelled on the back of an economy in recovery mode.  

Contagion fears may be misplaced. UAE banks had minimal exposure to the collapsed Silicon Valley Bank. Unlike Saudi Arabia and Qatar, there was no UAE exposure to Credit Suisse – the troubled Swiss lender swallowed up by its larger rival UBS last month.

Although UAE lending rates are not as vibrant as some of its neighbours, with nothing to rival the housing finance-linked boom in Saudi Arabia, the country’s banks have nonetheless shown some impressive performance metrics. Overall sector profits grew by 31 per cent in 2022, while assets grew by 10.6 per cent, according to figures collated by KPMG.

Profitability of the four largest lenders, First Abu Dhabi Bank (Fab), Emirates NBD, Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB), which control almost three-quarters of the banking system, exceeded pre-pandemic levels in 2022  – reflecting strong growth in interest income and normalised provisioning charges, according to Moody’s Investors Service.

Leading the pack, Emirates NBD showed a 40 per cent profit growth to AED13bn ($3.5bn), helped by a notably strong fourth-quarter performance that saw profits up by 94 per cent in year-on-year terms to AED3.9bn ($1.06bn) amid improving margins and a lower cost of risk.

DIB, the other Dubai lender of the big four UAE lenders, reported net profits up 26 per cent to AED5.5bn ($1.5bn), while ADCB reported a 23 per cent increase to AED6.4bn ($1.74bn). Fab, the UAE’s largest lender, had a more modest 7 per cent increase in net profits to AED13.4bn ($3.65bn).

Stabilising fundamentals

Banks can be confident that the prime source of their impressive profitability is unlikely to fade this year, given the global interest rate cycle. This continues last year’s picture. Net interest margins (NIMs) for UAE-listed banks grew 26 basis points (bps) in the fourth quarter of 2022, reaching 3 per cent for the first time, according to Kamco Invest Research.

“The interest rate environment reversed in 2022, driving aggregate growth of 28 per cent in the banks’ net interest income,” says Nitish Bhojnagarwala, senior credit officer at Moody’s.

“The growth reflected increasing asset yields, driven by rising interest rates, which more than offset higher funding costs.”

While the banks’ funding costs have increased, says Bhojnagarwala, they did not do so at the same rate, reflecting efforts to optimise their deposit mix and achieve strong zero or low-cost current and savings account balances, supporting margin growth.

NIMs should remain strong this year, not least given the continued cycle of rate rises emanating from the US Federal Reserve, which the UAE Central Bank tracks. The latter hiked its base rate by 25 bps to 5.5 per cent in March after the Fed hiked its base rate by a quarter per cent.

Some UAE lenders have also flagged priorities beyond fattening the bottom line. DIB said that given the rate environment and surplus liquidity, it had made a deliberate tactical move to support large corporate and public sector entities in adjusting and aligning their balance sheet in the new medium-term environment.

Elevated provisioning

Despite the strong conditions for profit growth, UAE banks will have a conservative strain in their approach to 2023, conscious of still elevated non-performing loan (NPL) ratios.

The big four banks’ NPL ratio declined to 5.3 per cent as of December 2022 from 5.9 per cent a year earlier.

“It remains high relative to the Gulf Cooperation Council region owing to the slower write-off policy of the UAE banks,” says Bhojnagarwala.

Coverage ratios have increased for the big four banks, standing at 100 per cent at year-end 2022, from 80 per cent a year earlier. Dubai’s ENDB was the standout bank here, with a coverage ratio of 145 per cent.

This reflects a broader tendency among banks to book higher provisions, with Dubai’s largest bank increasing absolute provisions in the fourth quarter of 2022 by $142.4m, reaching $517.9m.

Overall provisions booked by UAE-listed banks showed the biggest quarter-on-quarter percentage increase in the GCC of 40.2 per cent in the last quarter of 2022 to reach $1.23bn, says Kamco.

Moody’s anticipates loan loss provisions to stabilise at the current, pre-pandemic level and banks’ NPL ratio to improve modestly, driving higher coverage over the next 12-18 months.

“When we look at overall loan loss provisioning, it has fallen for two of the largest four banks, but in terms of cost of risk, fell by a collective 0.8 per cent from 1 per cent in 2021 and is now in line with pre-pandemic levels,” says Bhojnagarwala.

Evidence of faster payment settlements will bolster confidence levels among banks that credit losses will not rise this year. That may, in turn, afford more scope for lenders to scale back on provisioning at some point in the future.

Near future risk

Despite the improving conditions, analysts caution about potential economic headwinds.

Ratings agency S&P Global issued a warning earlier this year that real GDP growth could ease in 2023 and that the slowing of the non-oil sector will lower demand for credit. It sees the UAE property sector, which experienced strong demand in 2022 on the residential side, witnessing a moderation in price and rental increases this year.

UAE banks may need to countenance the prospect of higher problem loans in sectors such as construction and trade, as well as for some small and midsize enterprises. The latter is starting to feel the impact of more expensive credit in light of the higher interest rates.

Taken in context, this is unlikely to ruffle the Central Bank’s feathers. The country’s mix of elevated provisioning and strong profit performances suggest UAE banks will be suitably positioned to overcome such hurdles. And with healthy provisioning levels factored into the equation, the feeling remains that this year will continue the recovery record started in 2022.

This month's special report on the UAE also includes: UAE power sector shapes up ahead of Cop28

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James Gavin

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    In a region where geopolitical turbulence has amplified by an order of magnitude, Jordan is managing to stand out as a beacon of relative stability, with the Hashemite kingdom’s banking sector acting as a case in point.

    Lending has grown in recent years, with credit up by an average 4.9% between 2020 and 2025, according to the Central Bank of Jordan (CBJ) – a faster rate than average nominal GDP growth of 2.3% over the same period.

    The IMF took care to note an increase in credit to the private sector in its latest Article IV assessment of Jordan, standing at 80.1% of GDP at end-2024, compared to just 66.6% 10 years earlier.

    Banks in the kingdom ended 2025 in a liquid state, but caution remains the watchword for local lenders. The loan-to-deposit relationship bears that out. For that year, deposits ended up 7.1% to JD50bn ($70.5bn), while credit facilities were up just 3.7% to JD36.1bn ($50.9bn).

    Analysts see this as a case of Jordanian banks being prudent, given the tricky operating environment and limited lending opportunities, rather than banks being excessively defensive. 

    According to Christos Theofilou, an analyst at Moody’s Investors Service, it is cautious lending in fraught macroeconomic conditions.

    “On the one hand, we’ve seen a structurally strong and stable deposit base that has been growing more compared to lending. That indicates a certain degree of limited risk appetite, but also the fact that, given the challenging operating conditions, there were limited business opportunities in the market,” says Theofilou.

    Liquidity banked

    Jordan’s banks look able to withstand further shocks, given solid capital positions and relatively strong earnings performances. Arab Bank, the largest lender, saw net profits grow 12% last year to $1.13bn, despite a highly charged geopolitical situation across Jordan and the neighbouring Palestinian territories.

    As Moody’s notes, Jordanian banks’ funding base remains stable, with banks mainly deposit-funded – with deposits at 67% of total assets as of December 2025 – mostly comprising well-diversified retail deposits. The ratings agency noted that banks retain the capacity to increase lending without relying on more volatile and costly external funding, as indicated by the 72% loan-to-deposit ratio.

    The earnings outlook in Jordan may be better than other banking sectors in the immediate region, but this does not translate into a picture of booming profits going forward.

    “Profits should remain resilient, but we’re not expecting any significant improvement,” says Theofilou. “We have the challenging operating conditions, and the lower interest rates that have come down over the past few years. On the other hand, banks have had lower provisioning in the past 12 to 18 months compared to the period prior to that.”

    Asset quality remains a strong point, despite some weakening over recent years. Moody’s sees non-performing loans (NPLs) falling below 5.5% this year from 5.8% in June 2025.

    However, the continuing Iran conflict and its deleterious regional impacts – including on the West Bank, where about 9% of Jordanian banks’ loans are located – suggest that bank exposures to troubled sectors will require focus.

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    Another challenge is the banks’ high credit concentration among large corporates, with a noted high exposure to real estate.

    Commercial and residential real estate loans accounted for 17.4% of total credit facilities as of year-end 2024, while residential mortgages accounted for 40.9% of household credit. Regulatory oversight may limit the impacts – the CBJ caps loans for real estate at 20% of local currency customer deposits.

    The real estate exposures are meaningful, but Moody’s views overall concentration risk as more material rather than real estate risk per se.

    “So, on the one hand, Jordanian banks have real estate loans, both commercial and residential, slightly below a fifth of the total credit facilities,” says Theofilou. “Banks also face challenges in quickly disposing of properties, but within the context of a relatively lengthy foreclosure process. On the flipside, we see Jordanian banks having fairly high collateralisation, so they do hold a lot of collateral against the real estate exposures.”

    The CBJ has earned plaudits for its regulatory oversight, with the IMF lauding its strengthening of the Financial Stability Committee, while refocusing its role on macroprudential policies and systemic risks. 

    Jordanian banks’ brisk uptake of digital technologies has also been a positive.

    Last year, digital payment systems in Jordan recorded over 184 million digital transactions, exceeding $38bn in value. The CBJ has introduced an AI regulatory framework for the sector and the authorities are now working to burnish the country’s credentials as a fintech hub, based on a 90% plus internet penetration. 

    In the year ahead, Jordanian banks will be looking to find exposures to new lending opportunities, given the past risk aversion that has prevented them from building stronger growth avenues.

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    Big new infrastructure projects could yet come to the fore as bankable opportunities for local players. For example, the National Water Carrier Project, costed at $5.8bn and aiming to increase water supply by 40%, is looking to achieve financial close this summer. It is the type of project that could prove significant in helping diversify local lenders’ exposure away from real estate towards infrastructure.

    “If we see a lot of these infrastructure projects requiring financing coming to the market, then we could see a bit of a pickup in lending growth as well,” says Theofilou.

    New lending opportunities will come from large corporates and infrastructure-related lending. Those will play the key role in any significant pickup in credit growth, says the Moody’s analyst, in contrast to the small- and medium-enterprise (SME) sector, which poses a different challenge for banks.

    “The SME segment does represent a potential growth opportunity and it’s supported by policy focus, however its expansion is constrained by the operating environment. The sector is exposed to high overall credit risks, and when conditions are challenging, banks tend to be more cautious in lending to the SME markets,” says Theofilou.

    So long as the regional conflict persists, banks will be inclined more towards caution than exuberance in their lending approaches. And yet that strong and stable inclination may be what serves them best in a notably turbulent year in the Middle East’s recent history.

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    Mohammed Alabbar, the founder of Emaar Properties, has released a statement saying that the Dubai-based real estate developer is about to announce a $55bn project in Dubai.

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