Moody’s Investors Service revised the outlook for UAE banks to positive from stable amid the country’s strong economic growth due to its diversification efforts.
The UAE’s real gross domestic product is expected to expand by 4.6 per cent in 2024, from 3.1 per cent in 2023, and the non-oil economy will grow by an estimated 4.5 per cent this year, supporting banks' performance, the rating agency said in a report on Wednesday.
“Continued economic growth will support borrowers' repayment capacity … banks' strong capital buffers will inch higher on the back of bottom-line profitability that will remain broadly stable,” Moody’s said.
The Emirates' economy rebounded strongly from the slowdown caused by Covid-19, growing by 7.9 per cent in 2022, the most in 11 years, to Dh1.62 trillion ($441 billion) at constant prices. It has maintained a robust growth momentum since.
The UAE economy is expected to grow by 5 per cent this year, driven by a robust expansion in the country's non-oil sector and increase in foreign direct investment, Minister of Economy Abdulla bin Touq told state news agency Wam last month.
The non-oil economy currently accounts for 73 per cent of the UAE’s GDP, which is a “historic first for the country”, he said.
Loan performance of banks will remain broadly stable, Moody’s said.
Problem loans will remain steady at around 4 per cent to 5 per cent as a proportion of total loans, as economic growth improves borrowers' repayment capacity and sustains “a still-sound mid-single-digit credit expansion”, it added.
Deposit growth will remain higher than credit demand, underpinning stable funding conditions.
UAE lenders' profitability is also projected to be stable as interest rates remain high and are not forecast to be cut before the second half of the year, according to Moody’s.
The UAE government is also expected to step in to support the country’s lenders in times of stress.
“We expect the UAE government's willingness and capacity to support UAE banks to remain very high, underpinned by local banks' dominance in the domestic financial system, the banking system's concentrated structure and the heavy footprint of the UAE government in most banks' balance sheets.”
Badis Shubailat, AVP-analyst at Moody's, said the change in outlook to positive for the UAE banking system comes as “Moody's projects real non-oil GDP will grow at a still robust 4.5 per cent in 2024, helped by high business confidence and structural reforms designed to increase the population and attract foreign investments”.
“Still, as elsewhere in the GCC region, an escalation of geopolitical tensions remains a risk,” he said.
The outlook for Saudi Arabia’s banking sector also remains positive amid the economic diversification agenda, Moody's said.
The demand for credit for government-backed projects is expected to improve loan performance and generate strong profit for banks in the Arab world's largest economy.
Saudi Arabia is investing heavily in its non-oil economy as part of its Vision 2030 strategy to diversify away from oil.
It is building a number of mega projects, including the $500 billion futuristic city Neom as well as Qiddiya, a huge entertainment and sports project in Riyadh, to support its ambitions.
The outlook for banks in other GCC countries including Bahrain, Kuwait, Oman and Qatar remains stable, according to the agency.
“Our banking outlooks across the Gulf Cooperation Council region reflect continued growth in the non-oil economy and supportive operating conditions,” said Nitish Bhojnagarwala, senior vice president andmanager at Moody’s.
