Moody's Investors Service, a leading credit rating agency, expects strong financial performance to hold steady for the United Arab Emirates' largest banks in 2024. Their report highlights a confluence of factors that will buoy profits, despite a few headwinds.
One key driver is the absence of anticipated interest rate cuts until the latter half of the year. This means banks can maintain current interest income levels on existing loans. Moody's also forecasts an increase in credit growth, albeit in the mid-single-digit range, which will partially offset any dip in interest income.
The report acknowledges potential countervailing forces. Rising operating costs and the implementation of a new corporate tax are predicted to chip away at net earnings. However, these will likely be balanced by factors like higher overall revenue and stable provisioning charges, which are funds set aside for potential loan defaults.
The positive outlook is particularly significant when compared to 2023. The four biggest UAE banks – First Abu Dhabi Bank, Emirates NBD Bank, Abu Dhabi Commercial Bank, and Dubai Islamic Bank – collectively reported a net profit of $14.3 billion in 2023. This marks a substantial increase from $9.6 billion in 2022.
Moody's analysts credit the UAE's robust economic conditions for the banking sector's strength. The agency projects non-oil GDP, a key indicator of economic health excluding the oil sector, to grow at a solid 4.5% in 2024. This growth is fueled by high business confidence and government reforms aimed at bolstering the population and attracting foreign investment.
While the outlook is optimistic, Moody's acknowledges potential risks. As with other nations in the Gulf Cooperation Council (GCC), the report warns that an escalation of geopolitical tensions could disrupt the positive trajectory.
Overall, Moody's report paints a picture of stability and potential for continued growth in the UAE banking sector. The absence of immediate interest rate cuts, coupled with a growing domestic economy, is expected to sustain healthy profits for the nation's leading banks. However, it is crucial to remain vigilant against potential external challenges.