UAE banks will benefit from higher interest rates. S&P economists expect the Fed to hike rates six times this year from March, and five more times in total in 2023 and 2024
The Central Bank of the United Arab Emirates expects the economy to grow by 4.2% in 2022, compared to its previous forecast of 3.8%. However, banks will remain cautious in granting new loans despite higher liquidity. — Reuters file photo
UAE banking sector assets are expected to grow in 2022 thanks to an economic recovery that has gained momentum as well as ongoing digital transformation, banking industry analysts have said.
Broader bank profitability, after a significant rebound in 2021, is expected to be driven by growth in net interest income (NII) this year as interest rates in the UAE are expected to rise alongside impending government rate hikes US Federal. Reserve, Asad Ahmed, managing director and head of financial services in the Middle East at Alvarez & Marsal, one of the world’s leading professional services firms, said in a report.
However, banks will remain cautious in granting new loans despite higher liquidity, according to the report.
Moody’s and S&P analysts also shared this bullish outlook. Moody’s Investors Service analysts said banks’ net profitability in the UAE would be “driven by growth in net interest income, supported by rising interest rate expectations and strong business momentum supporting earnings.” non-interest, while provisioning efforts ease”.
According to S&P Global Ratings, banks in the UAE will benefit from higher interest rates. S&P economists expect the Fed to hike rates six times this year from March, and five more times in total in 2023 and 2024.
“These changes will be accretive for UAE banks due to the structure of their balance sheets. However, they warned that the second-round effects of the rate hike could come from a higher cost of risk and higher cost of funding.
After reviewing data from the 10 largest banks listed in the UAE, A&M’s UAE Banking Pulse noted that in 2021, banks’ overall net income increased significantly by 48.6% year-on-year to 37.8 billion. dirhams, mainly due to a higher operating profit (+5.2%) as well as a decrease in impairment losses (-30.1%).
“The profitability of the UAE banking sector recovered significantly in 2021 as the economy continued to rebound from Covid-19. Overall, banks performed well in key market-related revenue categories , which continue to show high activity,” he said.
The top 10 listed banks analyzed in the report are First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, National Bank of Fujairah, National Bank of Ras Al Islamic Bank Khaimah and Sharjah.
Ahmed said the Central Bank of the United Arab Emirates expects the economy to grow by 4.2% in 2022, compared to its previous forecast of 3.8%.
“Rising oil prices, supportive government spending and normalization of non-oil sector activity should support gross domestic product growth and strengthen the creditworthiness of the UAE’s lender.”
He said the UAE government has extended the forbearance measure, the TESS program, until June 2022 to support economic recovery. “However, after the end of the lending forbearance period, banks may need to set up additional provisions which could affect the quality and profitability of their assets.”
For 2021, the A&M report notes that banks recorded strong earnings growth supported by lower provisioning and higher operating income. Aggregate net profit increased by 48.6% year-on-year thanks to higher operating income and lower provisions. Overall, profitability ratios such as return on equity and return on assets improved to 11.1% and 1.3% from 7.7% and 0.9%, respectively.