Rising rates credit positive for UAE banks: Moody’s

2.7% Credit growth during the first six months of this year

dubai — Increasing interest rates will support the UAE banks’ profitability and are credit positive for the local lenders, global ratings agency Moody’s Investors Service said in a note.

“The rate hikes are credit positive for UAE banks because they will support their profitability by increasing net interest income. This is a key profitability driver, accounting for around 69 per cent of rated UAE banks’ total net revenue during 2017,” said Mik Kabeya, AVP-Analyst, Moody’s Investors Service.

The UAE Central Bank raised interest rates on its certificates of deposit on September 26th after the US Federal Reserve’s 25-basis-point increase in the federal funds rate.

“We expect that rising interest rates will increase systemwide net interest margins as banks’ higher gross yields outweigh the increase in funding costs,” he added.

Higher interest rates will increase banks’ gross yields as they gradually re-price their loan books. Loans to the corporate and government sectors, which typically carry floating rates, account for the bulk of UAE banks’ loan books at 74 per cent as of June 2018.

Kabeya expects increased government spending in the country to support economic growth and lending opportunities which will make it easier for banks to re-price their lending in the competitive local environment following constrained pricing increases in 2017 amid muted credit growth and lenders’ focus on high-quality, price sensitive large borrowers.

Credit growth picked up to 2.7 per cent during the first six months of this year, compared with 0.4 per cent during full-year 2017.

In August, Moody’s had forecast core profitability for the large UAE banks to remain broadly stable over the next 12-18 months, as interest earnings hold steady at current levels.