MOODY’S UPGRADES OUTLOOK FOR UAE BANKS TO POSITIVE
▶ Profitability expected to be stable as interest rates remain high
Moody’s Investors Service has revised the outlook for UAE banks to positive, from stable, amid the country’s strong economic growth due to its diversification efforts.
The UAE’s real gross domestic product is expected to expand by 4.6 per cent this year, from 3.1 per cent in 2023, while the non-oil economy will grow by an estimated 4.5 per cent this year, supporting banks’ performance, the rating agency said in a report on Wednesday.
“Continued economic growth will support borrowers’ repayment capacity ... banks’ strong capital buffers will inch higher on the back of bottom-line profitability that will remain broadly stable,” Moody’s said.
The UAE economy made a strong rebound from the slowdown caused by Covid-19, growing by 7.9 per cent in 2022, the most in 11 years, to Dh1.62 trillion ($441 billion) at constant prices. It has maintained a robust growth momentum since.
The economy is expected to grow by 5 per cent this year, driven by a robust expansion in the country’s non-oil sector and an increase in foreign direct investment, Minister of Economy Abdulla bin Touq told state news agency Wam last month.
The non-oil economy currently accounts for 73 per cent of GDP, which is a “historic first for the country”, he said.
Moody’s expects the loan performance of banks to remain broadly stable. Problem loans will remain steady at about 4 per cent to 5 per cent as a proportion of total loans, as economic growth improves borrowers’ repayment capacity and sustains “a still-sound, mid-single-digit credit expansion”, the rating agency said.
Deposit growth will remain higher than credit demand, underpinning stable funding conditions. The profitability of UAE lenders is also projected to be stable as interest rates remain high and are not expected to be cut before the second half of the year, according to Moody’s.
The UAE government is also expected to step in to support lenders in times of stress.
“We expect the UAE government’s willingness and capacity to support UAE banks to remain very high, underpinned by local banks’ dominance in the domestic financial system, the banking system’s concentrated structure and the heavy footprint of the UAE government in most banks’ balance sheets.”
Badis Shubailat, assistant vice president and analyst at Moody’s, said the change in outlook to positive for the UAE banking system comes at a time when Moody’s is projecting that “real non-oil GDP will grow at a still robust 4.5 per cent in 2024, helped by high business confidence and structural reforms designed to increase the population and attract foreign investments”.
“Still, as elsewhere in the GCC region, an escalation of geopolitical tensions remains a risk,” he said.
The outlook for Saudi Arabia’s banking sector also remains positive amid the economic diversification agenda, Moody’s said.
The demand for credit for government-backed projects is expected to improve loan performance and generate strong profit for banks in the Arab world’s largest economy.
Saudi Arabia is investing heavily in its non-oil economy as part of its Vision 2030 strategy to diversify and reduce its reliance on oil. It is building a number of big projects, including the $500 billion futuristic city, Neom, as well as Qiddiya, an entertainment and sports project in Riyadh, to support its ambitions.
The outlook for banks in other GCC countries such as Bahrain, Kuwait, Oman and Qatar remains stable, according to the rating agency.