Higher rates, lower risk cost to underpin UAE banks' profitability

Higher interest rates and lower cost of risk will continue to support banks' profitability in the UAE while across the GCC, earnings for most banks are expected to reach almost pre-pandemic levels by end-2022.

In the second half, asset quality of banks in the UAE will stabilise while non-performing loan (NPL) increases will remain contained as the economy improves and corporate activity recovers, analysts at S&P Global Ratings said.

Banks' performance in the UAE improved in first-half 2022 on the back of lower cost of risk and higher interest rates. The Central Bank of the UAE (CBUAE)'s Covid-19-related targeted economic support scheme (Tess) helped the system through a period of stress, limiting the increase in NPLs, said S&P Global Ratings credit analyst Zeina Nasreddine.

The 11 national banks listed on the UAE capital markets have registered net profits of $5.69 billion in the first half of this year, reflecting their strong financial solvency, strong revenues and high liquidity. These listed banks include First Abu Dhabi Bank, Emirates NBD, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, Emirates Islamic Bank, Sharjah Islamic, Bank, National Bank of Umm Al Quwain, Commercial International Bank, and Ras Al Khaimah National Bank

In the second half, S&P Ratings forecast for the GCC banking sector a more visible strengthening of interest margins and a manageable pick-up in cost of risk, amid lingering effects from the pandemic via loans that benefited from support measures and were then restructured.

“Combined, these factors will be a net positive for banks' earnings," said Nasreddine.

"However, GCC banks' strong momentum so far in 2022 may not be enough to shield them from adverse developments in 2023. Expected lower oil prices and potential recessions in the US and Europe next year may have knock-on effects for the region and its banks," Nasreddine said.

Under base-case assumptions, S&P Global Ratings expects global oil prices to average $85 per barrel (/bbl) next year compared with $100/bbl for the remainder of 2022.

Moreover, S&P Global Ratings now sees the chance of a US recession, as determined by the National Bureau of Economic Research, at 45 per cent in the next 12 months (40 per cent to 50 per cent and closer to 50 per cent heading into 2023 as cumulative rate hikes take hold). In Europe, escalating geopolitical risks and high inflation could mean weaker economic growth. This would hurt global growth and pressure commodities prices, leading to knock-on effects for the GCC region and its banks.

According to Kamco Invest's report, GCC banking sector net profits reached another record level of $11.1 billion (Dh40.7 billion) in Q2 2022, registering a quarter-on-quarter growth of 1.9 per cent and year-on-year growth of 31.9 per cent.

Junaid Ansari, head of investment strategy and research, said the increase in aggregate profits was mainly led by higher revenues for the sector coupled with a slight drop in provisions during the quarter. "The growth came after aggregates for all the countries in the GCC reported an increase, barring Kuwaiti banks that reported a q-o-q decline of 0.6 per cent, mainly led by higher operating expenses," he said.

— issacjohn@khaleejtimes.com