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Solid buffers help GCC banks withstand global financial market turmoil

Sector's overall exposure to US and Europe remains manageable

Banking sectors in the GCC are well-positioned to withstand the shocks emerging from financial markets in Europe and North America, Economist Intelligence said in a report.

Underpinned by solid financial buffers, stringent financial sector regulation, and the willingness of governments to step in and provide support in times of need, banking sectors in the region’s key business and finance hubs, especially Dubai, Abu Dhabi, Doha, Bahrain, Riyadh, and Kuwait City, have recorded impressive growth.

The EI report said these hubs hold the region’s key financial institutions and most developed banking industries and have started 2023 on a strong financial footing. “For instance, total assets, customer deposits, net loans and net interest income — the difference between interest earned from lending activities and interest paid to depositors — for GCC-listed banks have been on an upward trajectory since the start of 2021 and these performance measures reached record highs in the fourth quarter of 2022.”

Commercial banks in the GCC had less than 5.0 per cent of total assets and less than 3.0 per cent of total liabilities involving US counterparts at the end of 2022, and although they have increased their financial links to European financial services providers in recent years — especially Saudi Arabia following an aggressive outreach strategy — their overall exposure remains manageable, the EI report said.

Across the Middle East, banks retain the backing of governments with an active presence in the financial services sector, which can prove crucial in times of need to curtail runs on banks caused by depositors and investors seeking to withdraw funds or exit their investment positions.

“This is especially the case in the GCC, where governments have a track record of stepping in with considerable support during times of need, as seen during the global financial crisis of 2008 and the early stages of the Covid-19 pandemic in 2020,” it said.

The outlook for the banking industry in 2023 across the GCC and Israel looks reasonably bright, given the expectation of strong international energy demand and associated investment and exports, recovering tourism industries, buoyant non-energy business activity, major public and private investment programmes, and continued boom in initial public offerings (IPOs), which had a bumper year in 2022, the report added.

Following a 31 per cent rise in net profits and a 10.6 per cent increase in assets in 2022, the UAE’s banking sector is projected to remain stable, according to a KPMG report. The banking sector posted better-than-anticipated first-quarter 2023 profits on the back of a fast-rebounding economy as the outlook remained upbeat on improving ratios around asset quality, returns on equity, and assets alongside strengthening capital positioning.

Gross UAE bank assets, including bankers’ acceptances, increased by 2.2 per cent from Dh3.69 trillion at the end of January to Dh3.75 trillion in February, data from the Central Bank of the UAE showed. Gross credit jumped by 1.2 per cent to Dh1.9 trillion during the same period. It grew due to a 1.6 per cent increase in domestic credit, overriding a 2.1 per cent decline in foreign credit, the report said.

In its latest report, Moody’s said the improving operating environment has supported the profitability of the top lenders — First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, and Dubai Islamic Bank — which account for about 77 per cent of banking assets in the UAE. The combined reported net profit of the four lenders climbed to $9.0 billion in 2022 — up from $8 billion recorded in 2021 and $8.3 billion in 2019. The bottom line growth will continue in 2023, albeit at a slower pace, the rating agency said.

KPMG said in its UAE Banking Perspectives report that UAE banks benefit from large pools of capital and high net-worth customers on the back of a vibrant economy and a favourable business environment that continue to attract significant amounts of foreign investments, according to analysts at leading global accounting and rating firms.