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UAE banks struggling to match 2023’s record profits

People using Mashreq Bank ATMs in Dubai. UAE banks’ combined net profit was a record AED 76.9bn in 2023 Reuters/Nawied Jabarkhyl
People using Mashreq Bank ATMs in Dubai. UAE banks’ combined net profit was a record AED 76.9bn in 2023
  • 9% corporate tax starts this year
  • US Fed likely to raise interest rates
  • Asset sales will be lower

Banks in the UAE will struggle to repeat last year’s record annual profits in 2024, after the introduction of corporate tax, expected US interest rate cuts and the likely absence of the bumper one-off gains that bolstered their bottom line in 2023.

However, a slight decline in profitability would still represent a strong performance by UAE lenders, analysts said.

Banks’ combined net profit was a record AED 76.9 billion ($21 billion) in 2023, up 45 percent from a year earlier and nearly double earnings in 2021, S&P Global data shows.



Reasons for the surge in profits included the UAE’s rising population, which has supported increased lending, a strong domestic economy, new government project awards and higher interest rates that have helped margins, said Rahul Bajaj, director of Mena equity research at Citi, and Shabbir Malik, a bank analyst at EFG Hermes.

Other factors the pair cited were relatively benign provisions and higher non-recurring revenues from foreign exchange gains and asset sales.

UAE banks will start paying a 9 percent corporate tax this year. Consequently, Citi forecasts that the combined profits of the five UAE banks it covers will fall  8 to 10 percent in 2024 compared to last year. EFG Hermes, in contrast, estimates broader banking sector profits will be “flat to lower” versus 2023.

Lenders’ aggregate annual net interest income in 2023 was a record AED104.1 billion, up 30 percent on 2022, after sustained US interest rate rises that lifted the Federal Reserve’s benchmark rate to a two-decade peak of about 5.3 percent, from near-zero in February 2022.

The UAE closely follows US interest rates because of the dirham’s dollar peg, with banks’ net interest margins 2.83 percent in 2023, up 42 basis points year-on-year, according to S&P.

Interest rate cuts tend to have a two to three-month lag before banks fully price these into their lending. The US Federal Reserve is likely to delay rate reductions until late 2024, so Citi forecasts that net interest margins among the UAE banks it covers will slip only a couple of basis points this year before a steeper decline in 2025.

All five UAE banks Citi covers are positively correlated to interest rates. Bajaj, highlighting Emirates NBD as the most sensitive to interest rate fluctuations, said: “The magnitude differs, so some will be more affected than others by rate cuts.

“Margins are just one part of the equation. The other is loan volume growth. So, a bank’s margin may fall, but if it’s able to expand its loan book, then interest income will probably be similar.”

Bank sector net customer loans rose 9 percent annually to AED 2.03 trillion in 2023.

I expect loan growth will be similar this year. There’s still borrowing appetite

Shabbir Malik, EFG Hermes

Malik said: “I expect loan growth will be similar this year. There’s still borrowing appetite, especially among retail customers if interest rates do decline, while some banks are also expanding into Saudi Arabia which should bolster their loan books,” said Malik.

Dubai banks estimate their loan growth will be around 5 percent this year, while some Abu Dhabi lenders’ guidance is higher, at 8 to 10 percent, Bajaj said.

The pace of Dubai’s post-pandemic economic resurgence will slow this year, so Abu Dhabi banks – which will help finance the emirate’s major government projects – will outperform in terms of loan growth in 2024, he said.

Problem loans fall

Problem loans fell, both in monetary terms and as a percentage of total loans, despite banks expanding their lending in 2023 and interest rates rising.

The fall was down to higher oil revenues supporting the country’s finances, an upbeat domestic economy and banks taking a more proactive approach to helping distressed borrowers before they default, Bajaj said.

Malik gave a similar view: “The macroeconomic backdrop is quite strong. While real estate prices are also increasing along with rents, so banks feel comfortable keeping their provisions low,” he said.

Banks’ loans-to-deposit ratio fell to 74.1 percent in 2023 from 77.0 percent in 2022, the lowest level since at least 2019.

The fall was partly due to sovereign borrowers such as Dubai government entities paying down debt in response to higher borrowing costs and increased public income, Malik said.

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