In its most recent March report, S&P Global Ratings gave UAE banks a clean bill of health and was optimistic of its future, despite headwinds.
It expected UAE’s robust economic activity to accelerate in 2022 prompted by high and rising oil prices, and supported by pro-banking government policies, and vibrant non-oil activity.
Asset quality contained
S&P believes that UAE banks are able to contain any potential deterioration of asset-quality indicators, rationalizing that the UAE economy is showing relentless economic improvement and healthy recovery of corporate activity.
“Corporates are recovering gradually as economic activity normalizes and the oil price recovers, but sectors such as aviation and hospitality could remain vulnerable,” S&P said.
S&P added: “The UAE banking sector should benefit from expected interest rate hikes, assuming banks adopt a pragmatic approach for borrowers by not reflecting the rate increase systematically. Stable and strong capital buffers, good funding profiles, and expected government support should continue to support banks’ creditworthiness in 2022.”
Exposure to the Russia-Ukraine war
S&P sees a limited impact of the Russia-Ukraine conflict on the UAE banking system given its limited exposures to Russian and Ukrainian counterparties.
If anything, the resulting effects of the war bringing oil prices higher, are likely to further boost confidence and sentiment in the UAE economy.
S&P worked on the assumption that Brent oil prices will average $85 in 2022, helping drive the nominal GDP to reach pre-pandemic levels, which will also benefit from supported by Expo 2020 activity in Dubai.
Acceleration in lending
According to S&P, lending growth is expected to accelerate thanks to UAE’s economic recovery, although the anticipated rise in interest rates could slow lending in H2.
For corporate exposures, S&P expects banks to adopt a pragmatic approach by not reflecting the full extent of the increase in rates whenever this could dip their debtors to the risk of nonperformance.
So far, residential mortgage loans contributed about 20%-25% of residential real estate demand in Dubai.
“We expect the CBUAE will mirror the Federal Reserve’s planned interest rate hikes, which would benefit banks in the UAE. We calculate a 15% increase in net income and 1.4% rise in return on assets for every 100-basis-points increase (parallel shift) based on the top 10 banks’ disclosures,” said S&P.
“It is anticipated that the cost of risk to stabilize, so we think UAE banks’ profitability will keep improving, reaching pre-pandemic levels by 2023.”
Despite lower profitability in 2020-2021 (due to COVID-19), strong capital buffers supported the UAE banking sector.
“With the anticipated increase in profitability, we expect banks to further strengthen their capital buffers. We think banks will start paying dividends at pre-pandemic levels from 2022, as profitability improves,” S&P opined.
Plenty of liquidity
Liquidity is not an issue for UAE banks, for now, S&P said.
UAE banks benefited from AED 50 billion free liquidity injection from the CBUAE and relaxation of regulatory liquidity ratios in 2020-2021.
“As of year-end 2021, almost one-quarter of UAE banks’ assets were liquid. Our rating and outlook distribution show that UAE banks are on a stable path heading into 2022.”