Return of margins: the banks of the United Arab Emirates foresee bright days

Dubai: A combination of factors ranging from the rapid resumption of economic growth supported by higher oil prices, the resumption of loan growth, increased interest margins and the significant decline in costs and provisions for loan losses should boost the fortunes of UAE banks.

It is clear that the economic recovery is supporting the appetite for business and personal loans. The latest credit sentiment survey from the UAE Central Bank showed rising credit demand supported by easing credit conditions.

The increase in credit volumes along with higher spreads resulting from higher interest rates and is expected to boost the profitability of UAE banks from the second half of 2022.

“We expect banks in the UAE to benefit from the planned increase in interest rates by the US Federal Reserve, which the UAE Central Bank will likely reflect because the UAE dirham is pegged to the US dollar,” said Mohamed Damak, Senior Director. within S&P Global Rating Financial Services.

S&P Global economists predict the Fed will raise rates six times this year starting in March, and five more times in total in 2023 and 2024.

Analysts expect GCC banks to make significant interest rate margin gains as interest rates rise.

“GCC banks are one of the biggest beneficiaries of rising rates within the emerging market banking space, having access to a large base of non-interest bearing deposits, while loan portfolios are mostly variable rate,” said Ehsan Khoman, head of emerging markets. Research (EMEA), MUFG.

On average, UAE banks are expected to benefit from the expected increase in interest rates. S&P estimates a 15% increase in net income and a 1.4 percentage point increase in return on equity for every 100 basis point (1%) increase.

Operating conditions

The rapid recovery of operating conditions in the UAE, supported by strong gains in oil prices and the opening up of the economy following the COVID crisis, is expected to boost capital spending by government-related entities and the private sector, leading to increased demand for loans.

Annual banking results from the UAE’s top five banks showed significant year-on-year loan growth, with bankers attributing it to a strong underlying economy.

Key financial data from banks such as First Abu Dhabi Bank (FAB), Emirates NBD (ENBD) and Dubai Islamic Bank (DIB) in 2021 showed that these institutions maintained strong profitability, high credit quality and growing margins. improvement in difficult economic conditions posed by the pandemic and low interest rate environment.

“The operating environment for UAE banks is recovering from the effects of the pandemic. This should support banks’ financial fundamentals, in particular profitability, capital and liquidity,” ratings agency Moody’s said in a statement. recent note.

Rising credit yields, spreads

Rising loan demand combined with rising interest rates is expected to boost net interest margins and loan yields for UAE banks.

Lower interest rates had reduced the overall margins and profitability of GCC banks. UAE banks were hit hard at the onset of the rate cuts, as lower rates passed through almost immediately to floating rate loan yields, while repricing of matching deposits and other sources of funding has been delayed. Since the second quarter of last year, banks have reported modest but steady improvement in margins. In Q3 2021, Net Interest Margin (NIM) increased by around 10bps QoQ to 2.15% with higher yields on loans (+24bps QoQ) .

While anemic loan growth tested UAE banks’ overall interest income, the pick-up in economic activity saw overall interest income rise 6.1% in the third quarter 2021, mainly due to an increase in loan yields to 5.3%.

UAE banks on average are expected to benefit from the rate hike. UAE banks continue to benefit from a large share of Current Accounts and Savings Deposits (CASA), which accounted for two-thirds of total system-level deposits as of September 30, 2021.

“Over the past three years, their contribution to the total deposit base of UAE banks has continued to grow. Second, banks’ balance sheets have been positioned to benefit from rising interest rates, with a higher amount of revaluation of assets than liabilities,” Damak said.

Profitability, asset quality

Adverse economic conditions dictated by lower oil prices, rising defaults and the impact of the pandemic have made it imperative for UAE banks to seek cost savings in operations through digitalization , streamlining staffing and branch operations. The significant cost savings achieved in recent years are having a positive impact on profitability.

Legacy asset quality issues combined with those added to balance sheets during the pandemic are now under control. Although the CBUAE support measures have helped the banks land softly, the residual risks related to asset quality are considered within manageable limits.

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