DUBAI — The UAE banking sector emerged from the fiscal year 2023 with notable vigor, as indicated by the latest report from Alvarez & Marsal (A&M).
Despite global economic challenges, UAE banks have showcased resilience, marked by increasing profitability and robust return ratios. With a combined net income surge of 54.1 percent year-on-year (YoY) to AED 76.9 billion (US$20.93 billion), the sector has demonstrated its ability to navigate through adversity and capitalize on opportunities.
In the financial year 2023, loans and advances (L&A) witnessed growth of nine percent YoY, albeit at a slower pace than deposits, which grew by 13.4 percent YoY. This imbalance resulted in a slip of 3.1 percentage points YoY in the Loan-to-Deposit Ratio (LDR) to 74.9 percent. However, despite this relative deceleration in lending, UAE banks have maintained healthy asset quality and expanded net interest margins (NIM) by 36 basis points YoY to reach 2.8 percent.
The growth trajectory in operating income, soaring by 28.8 percent YoY, has been primarily fueled by the substantial increase in Net Interest Income (NII), surging by 27.6 percent YoY. This surge in income has been further bolstered by non-funded income, which escalated by 31.4 percent YoY, underlining the diversified revenue streams of UAE banks.
Challenges and Opportunities
While the sector has demonstrated remarkable growth, challenges persist. Operational cost efficiencies have improved, as evidenced by a 2.8 percentage points YoY decrease in the Cost-to-Income (C/I) ratio to 28.7 percent. However, with the increasing cost of funds by 2.2 percentage points YoY to four percent, banks must remain vigilant in managing operational expenses to sustain profitability.
The Cost of Risk (CoR) improved by 25 basis points YoY to 0.7 percent, reflecting a decline in impairment charges by 19.8 percent YoY. Despite this positive trend, banks must continue to fortify their risk management frameworks to navigate uncertainties effectively.
Driving Forces for Growth
Rising interest rates have emerged as a significant catalyst for enhancing the profitability of UAE banks. With aggregate net income soaring by 54.1 percent YoY, key return ratios such as Return on Equity (RoE) and Return on Assets (RoA) have witnessed notable improvements, climbing by 5.7 percentage points YoY to 19.9 percent and 0.6 percentage points YoY to 2.2 percent, respectively.
Moreover, as the Central Bank of the UAE aligns its benchmark rate with the US Federal Reserve, maintaining a steady rate of 5.4 percent, the banking sector anticipates a potential shift in the latter half of 2024. Rate reversals are expected to commence, presenting short-term margin enhancement opportunities.
However, amid geopolitical uncertainties, banks are cautiously optimistic, relying on their well-capitalized, profitable, and liquid positions and robust regulatory support to navigate future challenges.
The UAE banking sector has demonstrated remarkable resilience and growth in FY’23, underpinned by increasing profitability, improved asset quality, and enhanced operational efficiencies. Despite prevailing challenges, including shifting interest rates and geopolitical uncertainties, the sector remains well-positioned for stability and growth in the upcoming fiscal year.
With prudent risk management practices, strategic diversification of revenue streams, and a proactive approach to capitalizing on emerging opportunities, UAE banks are poised to continue their upward trajectory, contributing to the resilience and vibrancy of the nation’s economy.
As stakeholders monitor evolving market dynamics, collaboration between regulators, industry players, and other stakeholders will be pivotal in driving sustainable growth and ensuring the long-term prosperity of the UAE banking sector.