UAE banks outperform GCC peers as economy's growth boosts profits

Banks in the Emirates, Saudi Arabia and Qatar are geared positively towards rising interest rates, Fitch says

The UAE economy grew by 3.8 per cent on an annual basis in the first quarter of 2023 amid a push to diversify away from oil. Khushnum Bhandari / The National

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.