UAE banks’ credit fundamentals strong for 2023

Credit fundamentals for UAE banks look very strong for next year on the back of higher crude prices, rising interest rates and solid economic conditions, says Fitch Ratings.

Following the US Federal Reserve Bank’s decision to hike policy rate by 50 basis points on Wednesday, the Central Bank of the UAE hiked rates by a similar percentage point to 4.4 per cent from 3.9 per cent.

Interbank rates have risen more than 400 basis points this year and most large UAE banks mainly rely on net interest income for revenue generation.

Despite projections of a lower rate for next year, crude oil prices are expected to still stay higher. Global rating agency Fitch has forecast $85 per barrel for Brent for 2023 as against $100 in 2022.

“Operating conditions will be underpinned by our forecast average oil price of $85 a barrel and solid, albeit slowing, non-oil real GDP growth. Higher rates and strong liquidity conditions should underpin revenue expansion,” Fitch analysts said.

“Banks with high shares of current and saving accounts deposits will benefit most from higher rates. Liquidity is supported by high oil prices flowing into the sector, strong business conditions and weak credit demand,” said the global rating agency.

The UAE lenders’ performance in the first half of 2022 also improved on the back of lower cost of risk and higher interest rates.

“The macroeconomic environment has started to improve, thanks to higher oil prices and recovery in the non-oil sector. Better operating conditions led to higher lending growth in first-half 2202 compared with 2021, although this could be tempered by increasing interest rates in the second half. We expect the trend of higher interest rates and lower cost of risk to continue supporting banks' profitability,” S&P said in a recent report on the local banking sector.

The top 10 UAE banks reported an increase in profitability in the third quarter of 2022, driven by higher core interest income despite a slowdown in loans and advances growth, according to professional services firm Alvarez & Marsal (A&M).

“With the tailwinds of stronger economic growth and higher interest rates, UAE banks reported improved profitability. The Q3’2022 earnings momentum gathered pace with elevated margins and asset quality pickup. We expect the improving trend to continue in the fourth quarter, but remain cautious of the effect of higher rates on retail and corporate borrowers,” said Asad Ahmed, managing director of A&M.

Analysts at Fitch expect impairment charges to “fall further on the supportive macroeconomic backdrop and recovering real estate prices, and capital buffers will remain adequate.”

It also expects broadly stable capital levels in 2023 on modest sector loan growth of four per cent and stable internal capital generation.

— waheedabbas@khaleejtimes.com

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