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Rates hike, business rebound set to drive UAE banks’ profitability

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According to S&P Global Ratings, the top 10 banks in the UAE are likely to have an increase of 15 per cent of their net income or an additional 1.4 percentage points of return on equity for every 100-bps increase in rates.



by

Issac John

Published: Mon 28 Feb 2022, 6:27 PM

Last updated: Mon 28 Feb 2022, 6:29 PM

Net profitability of large banks in the UAE will be driven by growth in net interest income during the next 12-18 months on the back of an expected interest rate hike and strong business momentum.

Analysts at various rating agencies expect UAE banks to benefit from the planned increase in interest rates by the US Federal Reserve in March. The Central Bank of the UAE (CBUAE) is likely to follow the rate hike because the dirham is pegged to the dollar.

Net profitability will 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, analysts at Moody's Investors Service said in a report.

According to S&P Global Ratings, the top 10 banks in the UAE are likely to have an increase of 15 per cent of their net income or an additional 1.4 percentage points of return on equity for every 100-bps increase in rates. “While these numbers are on the stylized assumption that banks' balance sheets remain static and the shift in the yield curve is parallel, it is a broad indicator of the direction and magnitude of the impact of rising rates,” the rating agency said in its report titled “When rates rise: UAE banks will benefit from higher interest rates.”

The profitability of the four largest banks in the UAE rebounded to near pre-pandemic levels in 2021, largely reflecting robust non-interest income and softening loan loss provisions," said Nitish Bhojnagarwala, a senior credit officer at Moody's. "We expect a full return to pre-pandemic levels of profitability in the next 12-18 months."

The four largest banks --- First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, and Dubai Islamic Bank reported a combined net profit of $8 billion for full-year 2021, up 31 per cent from the previous year.

The recovery was a result of improving consumer confidence as macroeconomic conditions in the UAE recovered, particularly given loosening pandemic restrictions, a strong vaccination roll-out, and recovering oil prices, Moody’s analysts said.

Moody's expects continued pick-up in bottom-line profitability to support the UAE banks' already healthy capital buffers and outweigh the pressure coming from increased lending activity in a context of economic recovery. Although net profitability has broadly bounced back to pre-pandemic levels (in dollar terms), the return on assets may not recover for some banks until 2023.

S&P Global 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. “A higher loan charge could push some mortgage- or personal-loan clients to the edge of default, while at the same time pressuring small and midsize enterprises (SMEs) that are still healing from the impact of the Covid-19 pandemic.”

“That UAE banks will on average benefit from the rising rate environment is not surprising,” analysts at S&P Global Ratings said. First, banks in the UAE continue to benefit from a large proportion of current account and saving deposits, which accounted for two-thirds of total deposits at a system level as of Sept. 30, 2021. Over the past three years, the contribution of these to the total deposit base of UAE banks continued to increase. Second, banks' balance sheets have been positioned in a manner that makes them benefit from the increase in interest rates--with a higher amount of repricing assets than liabilities, they said. — issacjohn@khaleejtimes.com


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