UAE banking sector remains resilient to market volatility, central bank says

Lenders have benefitted from UAE’s economic momentum in 2022, as credit growth rebounded and profitability jumped

Net profit of UAE lenders grew by 31.8 per cent in 2022 in favourable macroeconomic conditions. Silvia Razgova / The National

The banking sector in the UAE is well capitalised with adequate liquidity buffers and remained resilient last year against the risk of stagflation and market uncertainties in central bank’s stress-testing exercise.

The banks also benefitted from the UAE’s robust economic momentum last year, as aggregate credit growth rebounded and profitability jumped, the UAE Central Bank said in its Financial Stability Report 2022.

“The UAE financial system remained resilient during 2022, recovering across key financial metrics to pre-pandemic levels amidst a favourable domestic macroeconomic environment and strong funding and liquidity conditions,” said Khaled Balama, the central bank's governor.

Aggregate profitability of lenders in the Arab world’s second-largest economy rebounded strongly last year, driven by lower impairment charges and improved net interest income.

Net profit grew by 31.8 per cent from last year, while return on assets and return on equity – measures of gauging financial stability and profitability – increased to 1.4 per cent and 10.5 per cent, respectively.

The lenders also performed well in the regulator’s stress-test exercise, where financial institutions showed they obtained sufficient capital and liquidity to “withstand severe, adverse hypothetical scenarios whilst continuing to support the economy by maintaining credit supply to UAE borrowers”, the central bank said.

The UAE's economy has bounced back sharply from the Covid-19-induced slowdown on the back of higher oil prices and measures to mitigate the impact of the pandemic.

The government adopted an array of measures that enhanced the resilience of the economy, despite global headwinds, including continued geopolitical uncertainties, volatile commodity prices, inflation and rising interest rates.

The UAE gross domestic product expanded last year by 7.9 per cent, faster than 4.4 per cent recorded in 2021. The sharp growth was driven by a 7.2 per cent increase in the non-oil economy a 9.5 per cent expansion in oil-sector GDP

The central bank estimates UAE economic growth to soften to 3.9 per cent, mainly due to lower oil production and more moderate growth in the non-oil sector, with oil and non-oil GDP rising by 3 per cent and 4.2 per cent, respectively, the report said.

Average headline inflation in the UAE increased to 4.8 per cent in 2022, however, it remained significantly below the world average that was driven higher by rising interest rates and commodity price fluctuations.

“National economic output rebounded in 2022, even as global economic growth slowed down. On balance, the financial stability conditions in the UAE remained favourable during 2022 as the solid underlying macroeconomic conditions in the UAE offset the impact of a higher interest rate environment,” Mr Balama said.

The central bank, however, remains committed to addressing “potential vulnerabilities, given the global outlook for 2023 remains subject to downside risks", he added.

“Key risk drivers include tightening of financial conditions affecting debt service costs and demand for new credit; persistent inflationary pressures impacting disposable income; geopolitical tensions; and related uncertainty in global financial markets and some banking systems."

The aggregate lending in the UAE’s banking system increased by 4.8 per cent last year, as strong funding conditions and ample credit capacity boosted banks’ appetite for credit growth.

Growth in credit was driven mainly by lending to private corporates, government-related corporate entities and the retail sector.

Growth in deposits also continued last year, boosting liquidity and funding buffers.

Banking system deposits grew by 11.3 per cent, the highest growth rate recorded in seven years. Strong deposit growth was driven by “concurrent solid growth in retail deposits, private corporate deposits and government deposits”, the central bank said.

“Looking further ahead, digitalisation and sustainability of the financial sector will continue to play a pivotal role in maintaining longer-term competitiveness and resilience of the financial system and the national economy,” the governor said.