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UAE banks stay strong and well-insulated against contagion risks

The profitability of the top 10 UAE lenders increased by 31.7 per cent in 2022 year-on-year as higher interest rates boost earnings

Reinforced by a remarkable surge in profitability, banks in the UAE remain strong with their capitalisation in good shape and well-insulated against the contagion of global banking crises, including the recent collapse of two US banks.

The profitability of the top 10 UAE lenders increased by 31.7 per cent in 2022 year-on-year as higher interest rates boost earnings. Deposits grew by 11.3 per cent YoY, faster than loans and advances (L&A), according to Alvarez & Marsal, a leading global professional services firm.

The results of the biggest UAE banks pointed towards increasing profitability, improving ratios around asset quality, returns on equity, and assets alongside strengthening capital positioning.

The aggregate net income increased to Dh49.8 billion driven primarily by a surge in net interest income (NII) by 26.7 per cent. L&A increased by 5.7 per cent, faster than FY’21 (+1.6 per cent YoY basis. Growth in deposits also accelerated by 11.3 per cent YoY basis, more than the previous year (6.7 per cent), A&M said.

Asad Ahmed, A&M managing director and head of Middle East Financial Services, said the overall results of the banking sector are encouraging.

“We can see the effect of the interest rate increase coming through; certain profitability and operating ratios are now at pre-pandemic levels,” he said.

“In FY ’22, profitability and NIM improved even in a rising-interest-rate scenario. 2023, albeit sluggishly, may bring cheer to the UAE banks as the non-oil private sector expands. Non-performing loans and cost of risk are expected to increase marginally on higher provisioning due to lower credit demand amidst rising interest rates. However, the UAE banks are sufficiently capitalised to maintain Capital Adequacy Ratio (CAR) levels well above regulatory requirements,” said Ahmed.

The country’s 10 largest listed banks analysed in A&M’s UAE Banking Pulse 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 Khaimah and Sharjah Islamic Bank.

Total operating income increased by 17.5 per cent YoY basis, primarily led by a higher net interest income of 26.7 per cent. Customer deposits growth significantly outpaced L&A growth in FY ’22.

The aggregate deposits for the top 10 banks grew at 11.3 per cent YoY basis whereas aggregate L&A increased by 5.7 per cent in FY ’22. The rise in interest rates led to slow loan origination and a rise in deposits. Consequently, the aggregate Loan-to-Deposit Ratio slipped 4.1 percent points to 77.9 per cent.

Data from the Central Bank of the UAE revealed large deposits (greater than Dh20 million) made up 59 per cent the total deposits held by the banks based in the UAE totalled Dh2.222 trillion until the end of 2022.

S&P Global said in a report that the economic slowdown and the higher interest rate environment may lead to higher problem loans for UAE banks in 2023 in sectors such as construction and trade, as well as for some small and midsize enterprises. Despite that cost of risk for banks will rise only slightly.

"While banks will face higher funding cost pressures, we believe higher policy rates will facilitate wider margins for UAE banks. They will also continue to benefit from stable and strong capital buffers, good funding profiles, and expected government support,” S&P Global has said in its report.

A&M report noted that while the significant increase in interest rates contributed to higher profitability, the inevitable cycle of reduced loan demand was evident in Q4 ’22.

“This will likely lead to pressure on asset quality in 2023. For FY’2022 aggregate net interest margins increased by 37 basis points due to the higher yield income for banks on the back of rising interest rates,” according to the report.

— issacjohn@khaleejtimes.com