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
James Gavin
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