UAE banks to lead regional growth in 2024

Overall stability expected in key metrics for GCC banks


Issac John

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Published: Sun 4 Feb 2024, 6:46 PM

The UAE banking sector is likely to maintain its solid performance in 2024 and take the lead in regional growth after a strong third quarter 2023 result despite a slight moderation expected in the second half with the US Federal Reserve likely to start cutting rates in mid-2024, two leading rating agencies predicted.

Analysts at Fitch Ratings said the UAE banking sector growth will be driven by robust credit demand stemming from dynamic non-oil sectors and comprehensive economic diversification programs in both countries.

In its GCC Banking Sector Outlook 2024, Fitch also predicts that the UAE and Saudi Arabia will have the most robust return on assets forecasts, and their elevated levels of capitalization position them favourably when compared to both their regional and global peers.

The report forecasts a generally stable credit growth in the GCC for 2024, expecting healthy lending activities throughout the year. “Despite potential challenges such as base effect, persistent high interest rates, growing risk aversion, and uncertainty in external economic activities, the overall outlook for credit growth remains positive, as per the agency’s analysis,” Fitch analysts said.

Banking experts at S&P Global anticipate overall stability in key metrics for GCC banks in 2024. Credit growth and profitability are expected to remain robust, with the UAE and Saudi banking systems leading the region. However, potential risk, they wrote.

Moreover, S&P expects non-oil growth to remain dynamic in Saudi Arabia and the UAE. Meanwhile, high interest rates are anticipated to persist with a 1 per cent decrease by year-end mirroring the U.S. Federal Reserve’s trajectory.

S&P Global‘s ‘GCC Banking Sector Outlook 2024’ reveals a challenging yet optimistic perspective. Despite geopolitical uncertainties and potential economic headwinds, S&P expects GCC banks to maintain their well-capitalised, profitable, and liquid status.

In 2023, the net profits of 10 UAE banks listed on the local financial markets rose to Dh46.3 billion, reflecting their strong financial solvency, strong revenues, and high liquidity, benefiting from the prosperity of the national economy.

According to disclosures of listed banks announced on financial market websites, net profits of banks from January to December 2023 increased by 63 per cent, the equivalent of Dh17.9 billion. That is compared to the net profits recorded in 2022, amounting to Dh28.4 billion.

Edmund Christou, senior research analyst at Bloomberg Intelligence, said the performance of UAE banks last year exceeded their counterparts in the region and major banks witnessed a noticeable increase in revenues of 27 per cent over the past year. Attributing the strong performance of UAE banks to strong commercial activities, abundant liquidity, and continued momentum in the real estate market, Christou highlighted the better-than-expected margin expansion and income gains from foreign currencies and investment.

The combined net profit reported by Fitch-rated banks (which accounted for 99 per cent of UAE banking sector assets) was Dh57 billion in 9M23, which translated into a healthy annualised return on average equity of 20 per cent compared with 14.5 per cent in 2022.

The performance metrics of the UAE banks were underpinned by higher interest rates, as reflected by an improved sector average net interest margin (NIM) to a healthy 3.3 per cent in 9M23, from 2.8 per cent in 2022 and was stable in 3Q23 on a quarterly basis. The NIM improvement was driven by a high share of current and savings accounts at UAE banks and generally favourable liquidity conditions. The sector’s liquidity is supported by deposit growth outpacing lending growth in 2022-9M23, which resulted in the sector average loans/deposits ratio declining to 79 per cent at end-3Q23 from 89 per cent at end-2021.

“We believe that the average UAE banks’ NIM has peaked, and will be broadly stable in 2024, before declining in 2025, assuming interest rates will remain stable in 1H24, with the first rate cuts happening only in 2H24. Our base case for 2024 assumes the sector average operating profit/risk-weighted assets ratio to remain in the 3 per cent-3.5 per cent range (annualised 3.3 per cent in 9M23). An escalation of Israel’s military conflict is a risk for the currently favourable operating environment for banks in the UAE, although the exposure of UAE banks to Israel is negligible,” Fitch said in its report, “UAE Banks Datawatch – 3Q23”.

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