Higher loan yields lift profitability of banks

Year-to-date bank results show UAE banks have benefited from rising interest rates, after the three rate hikes by the Federal Reserve. GCC central banks track US interest rates, as their currencies are pegged to the dollar. It is important to maintain interest rates at par or in close range with US rates, to prevent capital flight in the event of higher rates offered on dollar deposits.

Analysts say banks in the UAE continue to hold significantly large low cost deposits in current and savings accounts (Casa), the pricing of which is not hugely impacted by the Fed rate hike because of the comfortable liquidity situation and relatively modest credit growth. On the lending side, banks have more flexibility on the pricing, leading to better yield and net interest margins.

“Results season so far has broadly confirmed our expectations, as higher asset yields for most banks offset increased funding costs, while bad debt provisions remain well contained, despite International Financial Reporting Standards 9 (IFRS 9),” Arqaam Capital said in a recent note.

Consecutive rate hikes have allowed banks to reprice their loans and improve their loan yields and interest margins. “The rate hikes are credit positive for UAE banks, because they will support their profitability by increasing net interest income,” said Mik Kabeya, an analyst at Moody’s.