UAE banks to benefit from planned interest rates increase by US Fed, S&P says

Lenders will be more than capable of absorbing the projected increase in cost of risk

The Central Bank of the UAE usually follows moves by the Fed on interest rates. Ryan Carter / The National

UAE banks are expected to benefit from the planned increase in interest rates by the US Federal Reserve due to higher profitability, according to a report from S&P Global Ratings.

The Central Bank of the UAE usually follows moves by the Fed on interest rates, as the country's currency is pegged to the US dollar.

“On average, banks in the UAE will benefit from the planned increase in interest rates,” the rating agency said on Tuesday. “We calculate a 15 per cent increase in net income and 1.4 percentage-point rise in return on equity for every 100-basis-points increase.”

S&P Global economists expect the Fed to raise rates six times this year starting in March, and five more times in total in 2023 and 2024.

“Second-round effects of the increase in interest rates could come from a higher cost of risk and cost of funding,” it said.

The cost of funding is expected to rise as some deposits migrate from no-or low-interest to interest-bearing products. However, with around two-thirds of total deposits bearing no or limited interest, UAE banks' funding will remain a strength, it said.

“The net external asset position is also likely to shelter UAE banks against lower and more expensive global liquidity,” S&P Global Ratings said.

“We rate five banks in the UAE, the ratings on which all carry stable outlooks, reflecting our view that their strong capitalisation and profitability will continue to protect their creditworthiness over the next 12-24 months.”

Banks in the UAE, including First Abu Dhabi Bank, Emirates NBD and Dubai Islamic Bank, among others, have all reported higher 2021 profits as the country’s economy recovers from the coronavirus pandemic on the back of higher oil prices and fiscal stimulus measures.

First Abu Dhabi Bank, the UAE’s largest lender by assets, reported a 19 per cent jump in its 2021 profit on the back of higher net fee and commission income and gains on investments, while Emirates NBD’s full-year profit jumped 34 per cent to Dh9.3bn due to lower impairment allowances.

“We believe that banks will be more than capable of absorbing our projected increase in the cost of risk,” the rating agency said.

“Banks are also very efficient, with a cost-to-income ratio of around 36 per cent for the top 10 banks at year-end 2021. While we expect a slight increase in costs for some rated banks, efficiency will continue to support their profitability.”