Impending rate hikes to spur UAE banks’ net-interest income

The UAE’s banking sector assets are expected to grow in 2022 on the back of an economic recovery that has picked up momentum as well as the ongoing digital transformation, banking industry analysts said.

Broader profitability of the banks, following a significant rebound in 2021, is expected to be driven by net-interest income (NII) growth this year as interest rates in the UAE are expected to increase in tandem with the impending rate hikes by the US Federal Reserve, Asad Ahmed, managing director and head of Middle East financial services at Alvarez & Marsal, a leading global professional services firm, said in a report.

However, banks will continue to remain cautious in originating new loans despite higher liquidity, said the report.

Analysts at Moody’s and S&P also have shared this bullish outlook. Moody’s Investors Service analysts said the net profitability of banks in the UAE would be “driven by growth in net interest income, underpinned by rising interest rates expectations and strong business momentum supporting non-interest income, while provisioning efforts ease.”

According to S&P Global Ratings, the UAE banks will benefit from higher interest rates. S&P economists expect the Fed to raise rates six times this year starting in March, and five more times in total in 2023 and 2024.

“These changes will be earnings-accretive for UAE banks because of the structure of their balance sheets. However, they warned that second-round effects of the rate increase could come from a higher cost of risk and cost of funding.”

After examining data of the 10 largest listed banks in the UAE, A&M’s UAE Banking Pulse noted that in 2021, the aggregate net income of the banks increased substantially by 48.6 per cent year-on-year basis to Dh37.8 billion, mainly driven by higher operating income (+5.2 per cent) along with lower impairments (-30.1 per cent).

“The profitability of the UAE’s banking sector recovered significantly in 2021 as the economy continued to bounce back from Covid-19. Overall, the banks have performed well on key income categories related to the markets, which continue to show elevated activity,” it said.

The 10 largest listed banks analysed 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 Khaimah and Sharjah Islamic Bank.

Ahmed said the Central Bank of UAE predicts that the economy will grow at 4.2 per cent in 2022, compared to their previous forecast of 3.8 per cent.

“Higher oil prices, supportive government spending and normalizing of non-oil sector activity are expected to support gross domestic product growth and reinforce the UAE lender’s creditworthiness.”

He said the UAE government has extended the forbearance measure, TESS scheme, up to June 2022 to support economic recovery. “However, post the end of the loan forbearance period, banks might have to book additional provisions which could affect their asset quality and profitability.”

For 2021, A&M’s report notes that the banks recorded a strong earnings growth supported by lower provisioning and higher operating income. Aggregate net profit increased by 48.6 per cent yoy on the back of higher operating income and lower provisions. Overall, profitability ratios such as return on equity and return on assets improved to 11.1 per cent and 1.3 per cent from 7.7 per cent and 0.9 per cent, respectively.

— issacjohn@khaleejtimes.com