According to a report by Standard & Poor’s Global Ratings, UAE banks are expected to exhibit strong performance in 2023 with a projected credit growth of 7 percent.
The report highlights that the banks will benefit from robust non-oil GDP growth, which will help counterbalance the impact of rising interest rates on credit expansion.
In 2023, it is anticipated that bank credit growth in UAE will increase to approximately 7 percent compared to 5 percent in 2022.
The paper also notes that the performance of UAE banks has improved in the first half of this year, supported by higher interest rates that are expected to sustain banks’ profitability.
Read more: Enhanced cost efficiencies, lower impairment charges boost UAE banks’ profitability
Additionally, the non-oil economy in the UAE continues to provide adequate support in reducing the number of “non-productive” loans, while banks’ reserve allocations over the past two years will aid in overcoming challenges.
The study emphasizes that bank financing will continue to benefit from successful deposit collections, particularly local deposits gathered over the past 18 months.
Overall, Standard & Poor’s expects improved bank returns in the GCC countries in 2023, driven by higher profit margins and sustained lending growth.
Global credit growth
Expectations are rising among rating analysts regarding higher levels of loan losses in banks’ loan portfolios due to the challenging macroeconomic environment. Unsecured retail, specialist commercial, and smaller business lending are anticipated to be the most vulnerable segments.
Huseyin Sevinc, a senior director in the EMEA banks team at Fitch Ratings, notes that UK banks experienced a buildup of expected credit losses in the third quarter of the previous year, coinciding with the weakening economic outlook. However, this increase was primarily driven by projections of a forthcoming recession, high inflation, rising unemployment, and house price declines, rather than actual increases in impaired loans.
Revised forecasts
S&P Global Ratings has revised its credit loss forecasts for 2024 due to the anticipated negative impact of higher interest rates on borrowers, which is expected to result in increased credit losses for banks. The new forecast projects credit losses to reach approximately $814 billion, a 24 percent increase compared to the previous estimate of $656 billion.
Additionally, covering 83 banking systems, credit ratings company Fitch suggests that credit losses could surpass $1.5 trillion over the two-year period ending in 2024. This represents an annual increase in losses of $105 billion (16 percent) in 2023 and a more modest rise of $42 billion (5 percent) in 2024.
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