Most large UAE banks are set for more loan growth and higher profits for full year 2023 due to a buoyant domestic economy and robust oil prices.
Loan growth will reach 13.7% at Emirates NBD Bank PJSC for 2023, compared to negative 1.3% in 2022, according to average analyst estimates compiled by S&P Global Market Intelligence. Dubai Islamic Bank PJSC's and Abu Dhabi Commercial Bank PJSC's loan growth will also increase this year, while First Abu Dhabi Bank PJSC's will decline.
These increases come ahead of expected slowdown in 2024, when loan growth will contract at all four banks and settle at between 4.2% and 6.7%.
Each bank reported between 2% and 3% loan growth quarter over quarter in the 2023 second quarter. Growth was across the board and almost unprecedented, Rahul Bajaj, director of MENA equity research at Citi in Dubai, told Market Intelligence.
"Retail was driving growth in Dubai, especially, with strong demand for mortgages auto loans and credit cards, while Abu Dhabi-based banks attracted substantial credit demand from retail and also from the corporate segment," Bajaj said.
The UAE has benefited from strong oil revenues and rapid growth of the services-led economy in Dubai, according to an Aug. 29 Market Intelligence report. Inflows of funds from expats supported demand, and the country looks set for solid long-term growth as the economy is more diversified and government revenues are relatively broad-based. Inflation is expected to decelerate in the coming months.
Emirates NBD has revised its 2023 loan growth guidance to "high-single digits," the bank told Market Intelligence. Loan growth in the UAE had been strong, reflecting the buoyant Dubai economy, it said.
The four big banks are also all set to record higher year-over-year profits for full year 2023, with Emirates NBD expected to perform most strongly with 64% growth to 21.26 billion dirhams, according to analyst estimates. Like loan growth, profits are expected to decline at all four banks in 2024 compared to 2023, the estimates show.
Funding costs
Non-interest-paying accounts provide a large portion of banks' deposits, so the positive impact of higher interest rates is set to be bigger than the expected increase in the cost of funding, S&P Global Ratings said in a July report. UAE central bank rates track those in the US, which have increased by 5.25 percentage points since March 2022.
Higher rates are, however, spurring customers to switch money out of non-interest-paying accounts, causing funding costs to rise more quickly than anticipated, Bajaj said.
"Interest margins should remain flattish for the second half of 2023," Bajaj said. "The recent rate hikes are also being priced into loans ... so net margins should be little changed."
ENBD's second-quarter net interest margin (NIM) was 3.87% in the second quarter, down 18 basis points versus the first quarter partly due to declining spreads from its Turkish subsidiary, Denizbank. The unit is nonetheless the key reason for ENBD's substantially higher NIMs versus its UAE rivals; average rates on personal loans in Turkey were 48.1% in July, according to the country's central bank, while local-currency deposit rates averaged 27.8%.
FAB's second-quarter NIM was 1.66%, up 2 basis points versus the preceding three months. ADCB's second-quarter net interest margin was near-flat at 2.73%. DIB, which does not charge interest but instead levies a so-called profit rate on its lending, reported a half-year net profit margin of 3.2%, up from 3.0% from full-year 2022.
"Maybe by Q4 there could be some improvement in UAE banks' NIMs; that would imply that, overall, 2023 will be better than 2022, but NIM pressure will persist throughout Q3," Sara Boutros, head of real estate and financials research at Cairo's CI Capital, told Market Intelligence.
Such an outlook is borne out by S&P Global forecasts, which show full-year net interest margins will expand slightly at the four banks versus 2022 — ENBD by 46 basis points, FAB by 31 basis points, DIB by 9 basis points and ADCB by 1 basis point.
ENBD expects its NIM "to finish towards the lower end of the 3.8%-4.0% guidance range," it told Market Intelligence.
Asset quality
Any decline in asset quality is likely to be minor, according to the S&P Global Ratings report. Problem loans may arise in sectors such as construction and trade, as well as for some small and midsize enterprises, but a still-supportive non-oil economy is likely to help contain the generation of nonperforming loans (NPLs).
The pandemic spurred UAE banks to take a risk-averse approach, cleaning up their balance sheets and taking precautionary provisions. COVID-19's impact on NPLs proved more muted than banks expected, leaving them with sizeable buffers.
"Aside from the natural worries that come from high interest rates, there aren't any major pressing concerns for UAE banks," said Boutros.
"Within our UAE coverage, we favor ENBD," CI Capital wrote in a report. "ENBD is attractive from fundamental and valuation standpoints. We favor its robust profitability metrics, healthy capitalization, [and] high balance sheet growth."
CI Capital also likes DIB "for its strong growth potential, high profitability, and attractive dividend yield."
It also sees "further upside on FAB."
As of Sep. 4, US$1 was equivalent to 3.67 UAE dirhams.