The timing of the positive report issued by the credit rating agency “Moody’s” on the state of banks in the UAE is important as it comes in light of the turmoil faced by banks in the US and Europe after the collapse of the American banks “Silicon Valley” and “Signature” and the acquisition of Swiss “UBS” over rival “Credit Suisse”.
The collapse of the two banks has sparked panic in the banking sector and financial markets and sparked fears that the consequences will impact the global economy at a time of sharp inflation and slowing growth.
But Moody’s said the profitability of the UAE’s four largest banks would continue to grow this year amid rising interest rates and a reversal of provisions related to the pandemic.
The Moody’s report came days after it affirmed the UAE’s rating at AA2 while maintaining a “stable” outlook.
Official estimates indicate that UAE’s economy grew by 7.6 percent last year, the highest growth in 11 years, after expanding by 3.9 percent in 2021. The UAE central bank expects the economy to grow by 3.9 percent in 2023.
Read: UAE banks report $49.8 bn profit in 2022
Moody said the improved operating environment supported these lenders’ profitability – First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, and Dubai Islamic Bank – who account for around 77 percent of banking assets in the UAE.
The consolidated net profit reported for the four lenders rose to $9 billion at the end of last year — from $8 billion in 2021 and $8.3 billion in 2019. Net profit growth will continue in 2023, albeit at a slower pace, according to Moody’s.
Higher interest rates led to higher profit margins for banks as well as growth in net interest income, which grew 28 percent year-on-year.
“The combined gross profitability of the four banks exceeded pre-pandemic levels in 2022, reflecting strong growth in interest income and regular provisions charges,” Nitish Bhojnagarwala, Moody’s vice president and chief credit officer, and analysts Azhar Bouzidi and Badis Shabilat said in the report.
This “reflected the recovery of rising consumer confidence as macroeconomic conditions improved, driven by higher oil prices and strong activity in non-oil sectors such as trade and tourism.”
Moody’s has suggested that the impact of US bank bankruptcies is likely to be limited for most GCC-rated banks, mainly due to the structural features of these banks, including their strong trade privileges and the support they receive from their governments.
Banks in the GCC generally adhere to conventional banking rules and have appropriate regulatory and risk management procedures in place, with risk management and diversification being important factors in the banks’ operations.
The UAE banking system enjoys good capital levels, well above minimum regulatory requirements, which protect depositors and enhance the stability and efficiency of the economy’s financial system.
According to UAE Central Bank data, the overall capital efficiency ratio of UAE banks stood at 17.3 percent at the end of the fourth quarter last year, well above the Central Bank’s regulations in compliance with Basel III guidelines of a minimum 13 percent followed by banks in the UAE as of December 2017.
The Central Bank’s report on financial soundness indicators for the fourth quarter of 2022 stated that the value of liquid assets reached AED 577.03 billion at the end of last December, an increase on an annual basis by 9 percent, or the equivalent of AED 47.7 billion, compared to about AED 529.33 billion at the end of December 2021.
For more on Banking, click here.
