The UAE banking sector has witnessed a remarkable turnaround in 2023, as the four largest banks reported a combined net profit of $9 billion, up 12.5% from 2022. This was driven by higher net interest income, lower provisioning charges, and improved asset quality amid a favorable operating environment.
Higher Interest Rates Boost Net Interest Income
One of the main factors that contributed to the profitability of the UAE banks was the increase in net interest income, which grew by 28% quarter-on-quarter in the fourth quarter of 2023. This was supported by the reversal in benchmark interest rates, which rose from 0.25% in 2022 to 1.25% in 2023, as the UAE central bank followed the US Federal Reserve’s tightening cycle.
The higher interest rates also enhanced the net interest margins (NIMs) of the banks, which rose to 2.2% from 1.8% in 2022. The banks were able to benefit from the higher yield on their credit portfolios, which grew by 7.4% year-on-year in 2023, while maintaining a low-cost funding profile. The banks’ current and savings account balances, which accounted for 57% of their total deposits, increased by 10% year-on-year in 2023.
Lower Provisions Reflect Improved Asset Quality
Another factor that boosted the profitability of the UAE banks was the reduction in provisioning charges, which declined by 34% year-on-year in 2023. This reflected the improved asset quality of the banks, as the non-performing loans (NPL) ratio fell to 5.5% from 6.1% in 2022. The banks also increased their coverage ratio to 97% from 93% in 2022, indicating a higher level of reserves against potential losses.
The improved asset quality was a result of the recovery in the UAE economy, which grew by 5.1% in 2023, according to the IMF. The economic growth was supported by the rebound in oil prices, which averaged $75 per barrel in 2023, up from $42 per barrel in 2022. The UAE also benefited from the successful hosting of the Expo 2020, which attracted millions of visitors and boosted the tourism and hospitality sectors.
Outlook Remains Positive for 2024
The outlook for the UAE banking sector remains positive for 2024, as the profitability of the banks is expected to continue to improve, albeit at a slower pace. The banks are likely to see further growth in their net interest income, as the interest rates are projected to increase by another 50 basis points in 2024, according to the UAE central bank. The banks are also expected to maintain their asset quality, as the economic recovery continues and the pandemic-related risks subside.
However, the banks may face some challenges in terms of increasing their lending activity, as the loan-to-deposit ratio (LDR) declined to 78.9% in 2023, from 81.5% in 2022. This indicates a lower demand for credit, as the customers and businesses remained cautious amid the uncertainty caused by the pandemic. The banks may also face some competition from the emerging fintech players, which are offering innovative and customer-centric solutions in the digital financial services space.
