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UAE banks are likely to weather the brewing US storm

Emirates NBD says its funding for SMEs is up 34% year on year Reuters/Hamad I Mohammed
Emirates NBD says its funding for SMEs is up 34% year on year
  • Most banks posted increases in Q1 profits
  • Only First Abu Dhabi Bank saw its profits slide
  • Capital buffers in place in well capitalised UAE banks

UAE banks are equipped to handle any risks posed by another banking storm brewing in the US, according to economists, after the majority posted healthy increases in first quarter profits.

First Republic is the latest international bank to see its future thrown into possible turmoil as deposits fell by over $100 billion in the first quarter of the year.

The problems at First Republic follow the high profile collapse of Silicon Valley Bank (SVB) and Signature Bank within days of each other earlier this year.

Some of the biggest banks in the US subsequently deposited $30 billion in First Republic to head off a run.

But as Wall Street searches to find a solution for the San Francisco-based lender, experts are not expecting a contagion effect to make its way to the UAE.

James Swanston, emerging markets economist at Capital Economics, told AGBI: “The capital buffers in place within the UAE are high and banks are well capitalised if there were to be any increase in non-performing loans on their books.”

He said that, if there were to be strains, they would likely lead to a “small” rise in non-performing loans and a tightening of credit conditions.

Emirates NBD, Dubai’s largest bank, said its first-quarter 2023 profit doubled year-on-year to AED6 billion ($1.63 billion).

There was further double-digit and triple-digit growth in profits at most of the country’s banks for the first three months of the year.

Only First Abu Dhabi Bank, the UAE’s biggest lender by assets, saw its profits slide, by 23 percent, to AED3.93 billion. Its previous year’s earnings had been boosted by a disposal.

Anton Lopatin, senior director at Fitch Ratings, said annual lending growth is forecast in the region of 4-5 percent “broadly in line with internal capital generation”.

He added: “We expect a moderate improvement in the sector average profitability metrics in 2023 compared to 2022, subject to a stable operating environment.”

Earlier this month the World Bank lowered the economic growth projection for countries in the GCC to 3.2 percent for 2023 and 3.1 percent in 2024.

The UAE economy, the GCC’s second biggest, is forecast to grow at 3.3 percent in 2023, down from the 4.1 percent foreseen in October.

Scott Livermore, Dubai-based chief economist at Oxford Economics, said that while underlying growth momentum remains robust, tighter global bank credit conditions are likely to contribute to non-oil growth easing in the second half of 2023 and into 2024 “by slightly more than previously forecast”. 

The UAE’s purchasing managers’ index registered a five-month high of 55.9 in March.

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