S&P Global Ratings expects a banner year for UAE banks in 2024, citing favorable interest rate conditions and healthy asset quality. Analysts at the credit rating agency highlighted these factors during a recent roundtable discussion on credit trends within the Gulf Cooperation Council (GCC) region.
Dr. Mohamed Damak, a financial institution ratings analyst at S&P, expressed optimism regarding the performance of Emirati banks. He pointed to prevailing high-interest rates as a key driver of profitability, even with anticipated reductions later in the year. “We expect three interest rate cuts this year, totaling 75 basis points in the second half, followed by further cuts of 125 basis points in 2025,” Dr. Damak said. However, he emphasized that these adjustments won’t significantly impact banks’ bottom lines in the near term.
Another positive indicator for UAE banks is the low level of non-performing loans (NPLs). NPLs represent outstanding loans that a borrower is unlikely to repay. According to Dr. Damak, NPL levels in the UAE remain low, reflecting the overall strength of the banking sector. He added that the high coverage ratio for NPLs provides an additional layer of security. A coverage ratio indicates the extent to which a bank has set aside provisions to cover potential loan losses.
S&P’s forecast aligns with recent data from the Central Bank of the UAE (CBUAE). The CBUAE reported a record-breaking surge in the UAE’s total banking assets, exceeding $1.1 trillion in February 2024. This growth is attributed to a combination of factors, including increased bank lending and investments. Furthermore, the UAE Fund Transfer System (UAEFTS) processed a staggering AED 3 trillion in transactions during the first two months of 2024, signifying robust financial activity within the country.
Looking ahead, S&P expects credit growth to moderate in the UAE compared to 2023. Dr. Damak anticipates a slight slowdown in new lending activity due to rising borrowing costs and a projected easing in non-oil sector growth. However, he predicts continued strength in retail lending as banks focus on this profitable segment.
The UAE’s robust economic performance also contributes to the positive outlook for its banking sector. The country’s GDP expanded by 3.7% in the first half of 2023, driven by diversification efforts beyond the oil industry. The UAE Central Bank has subsequently revised its 2024 growth forecast upwards to 5.7%, citing an anticipated increase in oil production.
Overall, S&P’s analysis paints a promising picture for UAE banks in 2024. Favorable interest rate conditions, healthy asset quality, and a strong underlying economy position the sector for continued success.