Banks in the UAE are outperforming their peers in the GCC, particularly in Saudi Arabia and Qatar, in terms of profitability and this trend is expected to continue on the back of a strong operating environment, Fitch Ratings has said.
While the performance of banks varies between markets, high oil prices, contained inflation and rising interest rates have all been positive factors for these financial institutions, the New York-based ratings agency said in a report on Thursday.
"UAE banks’ profitability has improved significantly," Fitch said.
"We expect this improvement to be overall sustained, which, along with other solid financial metrics being maintained, could lead to positive rating actions on some UAE banks’ viability ratings."
Banks in the main GCC markets – Saudi Arabia, the UAE and Qatar – are "geared positively towards rising interest rates", Fitch analysts wrote in the report.
"Most loan books reprice fairly quickly, while low-cost current and savings accounts deposits represent a significant proportion of funding."
UAE lenders, in particular, have benefitted the most from rising rates, with average net interest margins (NIMs) 100 basis points higher in the first half of 2023, compared with 2020. This is compared with an 11 basis point increase for Qatari banks and little change for Saudi lenders in the same period, the report said.
As a result, the NIMs of UAE banks are now at par with those in Saudi Arabia, it said.
NIM is a measure of how successful a lender’s investment decisions are, compared with their debt situations.
The UAE Central Bank last week held its benchmark borrowing rate after the US Federal Reserve hit pause for the second time this year as core inflation and the labour market in the US slowed.
Most central banks in the GCC follow the Fed's policy rate moves due to their currencies being pegged to the US dollar, with Kuwait the only exception in the six-member economic bloc as its dinar is linked to a basket of currencies.
Banks in the GCC, particularly in the UAE and Saudi Arabia, are expected to record stronger profitability in 2023 on the back of higher NIMs and lower-cost business models amid booming non-oil economic growth in the region, S&P Global Ratings said earlier this month.
Profits of the four largest banks in the UAE – First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank – grew sharply in the first half of 2023, boosted by rising interest rates and the strong growth momentum in the Arab world’s second-largest economy, Moody’s Investors Service reported last month.
The UAE's economy grew by 3.8 per cent on an annual basis to Dh418.3 billion ($113.9 billion) in the first quarter of this year amid its push for diversification, officials said last month.
That was boosted by non-oil gross domestic product, which rose 4.5 per cent year on year to Dh312 billion.
Fitch said UAE banks have been benefitting from healthy liquidity conditions, reflected in negative spreads of the Emirates Interbank Offered Rate and the Saudi Arabian Interbank Offered Rate.
"Liquidity is supported by high oil prices, foreign capital inflows and only moderate credit demand amid rising interest rates," it said.
However, Fitch added that the UAE bank NIMs have "now peaked and will remain stable in the second half of 2023, before declining slightly in 2024".
In Saudi Arabia, the Arab world's biggest economy, the lack of improvement in bank NIMs is mainly due to tighter liquidity, with financing growth in 2022 (14 per cent) outpacing deposit growth (9 per cent), it said.
Financing growth in the kingdom has largely been funded by term deposits, which cost more than Casa deposits. Liquidity pressure slowed down in the first half of 2023 as financing growth slowed to 5 per cent.
While expecting NIMs to increase moderately in the second half, Fitch said Saudi bank financing growth is likely to be above the GCC average in 2023-2024 due to increasing corporate credit demand.
With interest rates still high, it also expects liquidity pressure to prevent NIMs from rising much above 2023 second-half levels.
Meanwhile, NIMs for banks in Qatar have improved only slightly, reflecting a "higher reliance on price and confidence-sensitive non-domestic funding", Fitch said.
Casa deposits account for "only 20 per cent" of sector funding, compared with more than 50 per cent in the UAE and Saudi Arabia.
"NIMs are also dampened by weak credit demand and by the public sector continuing to repay its overdraft facilities. We expect NIM improvement to be minimal in the second half of 2023 and 2024 as strong competition limits banks’ ability to reprice assets," Fitch said.
Sarfira
Director: Sudha Kongara Prasad
Starring: Akshay Kumar, Radhika Madan, Paresh Rawal
Rating: 2/5
The Byblos iftar in numbers
29 or 30 days – the number of iftar services held during the holy month
50 staff members required to prepare an iftar
200 to 350 the number of people served iftar nightly
160 litres of the traditional Ramadan drink, jalab, is served in total
500 litres of soup is served during the holy month
200 kilograms of meat is used for various dishes
350 kilograms of onion is used in dishes
5 minutes – the average time that staff have to eat
Ten tax points to be aware of in 2026
1. Domestic VAT refund amendments: request your refund within five years
If a business does not apply for the refund on time, they lose their credit.
2. E-invoicing in the UAE
Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.
3. More tax audits
Tax authorities are increasingly using data already available across multiple filings to identify audit risks.
4. More beneficial VAT and excise tax penalty regime
Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.
5. Greater emphasis on statutory audit
There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.
6. Further transfer pricing enforcement
Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.
7. Limited time periods for audits
Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.
8. Pillar 2 implementation
Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.
9. Reduced compliance obligations for imported goods and services
Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.
10. Substance and CbC reporting focus
Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.
Contributed by Thomas Vanhee and Hend Rashwan, Aurifer
PROFILE OF INVYGO
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Sector: Transport
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Specs
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Water waste
In the UAE’s arid climate, small shrubs, bushes and flower beds usually require about six litres of water per square metre, daily. That increases to 12 litres per square metre a day for small trees, and 300 litres for palm trees.
Horticulturists suggest the best time for watering is before 8am or after 6pm, when water won't be dried up by the sun.
A global report published by the Water Resources Institute in August, ranked the UAE 10th out of 164 nations where water supplies are most stretched.
The Emirates is the world’s third largest per capita water consumer after the US and Canada.
Living in...
This article is part of a guide on where to live in the UAE. Our reporters will profile some of the country’s most desirable districts, provide an estimate of rental prices and introduce you to some of the residents who call each area home.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Fund-raising tips for start-ups
Develop an innovative business concept
Have the ability to differentiate yourself from competitors
Put in place a business continuity plan after Covid-19
Prepare for the worst-case scenario (further lockdowns, long wait for a vaccine, etc.)
Have enough cash to stay afloat for the next 12 to 18 months
Be creative and innovative to reduce expenses
Be prepared to use Covid-19 as an opportunity for your business
* Tips from Jassim Al Marzooqi and Walid Hanna
