The combined net income of the top 10 banks listed in the UAE increased by 54 percent year-on-year in 2023, reaching AED76.9 billion ($20.93 billion). This growth was primarily driven by a 28 percent increase in net interest income. This is according to recent a report by financial services firm Alvarez & Marsal (A&M).
The Central Bank of the UAE (CBUAE) raised policy rates by 1.0 percent last year to 5.4 percent, aligning them with U.S. Fed rates, which resulted in higher net interest income for all banks.
Read more: UAE top lenders witness strong profitability in Q3 2023: Alvarez & Marsal
The report also highlighted a decline in impairment charges (-19.8 percent YoY), which further supported the increase in net income. However, the slower growth in total interest income (+76.5 percent YoY) compared to total interest expense (+156.9 percent YoY) affected profitability. Banks relied on time deposits, which accounted for 42.9 percent of total deposits and grew by 13.6 percent YoY, putting pressure on the cost of funds.
Despite these factors, the net interest margin (NIM) expanded by 36 basis points to 2.8 percent due to a higher yield on credit. The cost of funds increased by 2.2 percentage points to 4 percent. A&M Managing Director and Head of Middle East Financial Services, Asad Ahmed, noted that while 2023 showed positive results for banks with increased profitability and stronger return on investment metrics, the final quarter of the year was slower.
Potential short-term margin enhancement
Looking ahead, Ahmed anticipates a shift in the second half of 2024 when rate reversals are expected to begin as the UAE Central Bank continues to align its benchmark rate with that of the U.S. Federal Reserve, which is expected to remain steady at 5.4 percent. This shift may lead to short-term margin enhancement as deposit costs are likely to decrease faster in response to rate cuts compared to the adjustment in asset pricing.
Overall, the sentiment in the UAE banking sector is cautiously optimistic, considering the geopolitical scenario. Ahmed stated that with well-capitalized, profitable, liquid, and well-regulated banks, they expect stability in 2024.
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