Rate hikes, high oil prices to boost UAE banks’ credit profiles
High oil prices, strong economic activity and rising interest rates should help the banks’ profitability back to prepandemic levels in FY22 Analysts at Fitch
The standalone credit profiles of banks in the UAE will be supported by improved operating conditions due to high oil prices and rising interest rates in 2022-2023, Fitch Ratings said.
Following a sector ratings review, Fitch Ratings said financial performance is recovering towards prepandemic levels as it revised its outlook on the operating environment to stable from negative, reflecting substantially lower risks to the banks. “We affirmed all banks’ Long-term Issuer Default Ratings with Stable Outlooks,” it said.
The UAE’S government support measures, high oil prices (Fitch forecasts $100 per barrel in 2022 and $80 a barrel in 2023), and the easing of pandemic restrictions, have boosted economic activity and growth prospects. The rating agency expects real GDP growth of 6.3 per cent in 2022 and 3.8 per cent in 2023, while the non-oil economy should grow by 4.5 per cent in 2022 and 3.3 per cent in 2023.
Fitch’s upbeat outlook for the banking system is in line with a recent forecast made by Moody’s Investor Service. It has said higher oil prices driven by global supply issues stemming from the military conflict between Russia and Ukraine would support UAE banks’ funding and liquidity.
According to Moody’s, the UAE banks have strong liquidity with liquid assets at 38 per cent of total assets as of December 2021, up from 36 per cent as of December 2020. With operating conditions of banks in the UAE returning to normal on the back a rebound in economic activity, Moody’s has revised the outlook for the banking system to stable from negative.
Recent purchasing managers’ index readings suggest still-strong operating conditions in the non-oil sector, and consumer confidence is at its highest since 2011, Fitch noted in its report. The average Stage-3 loans ratio for Fitch-rated UAE banks increased to 7.0 per cent at end-2021 from 6.6 per cent at end2020 as forbearance measures were gradually withdrawn.
“However, we expect a slight decrease in 2022-2023 as credit growth picks up and economic conditions improve. Deferred loans and related balances were 11 per cent of total loans, on average, and ‘group 2’ exposures (customers facing substantial credit deterioration) were less than 2.0 per cent. Given strong economic conditions, we expect a large proportion of deferred exposures to be performing once the deferral scheme fully terminates at end of 2022 first half.”
“High oil prices, strong economic activity and rising interest rates should help the banks’ profitability back to pre-pandemic levels in FY22. The US Federal Reserve increased its benchmark rate by 50bp last week and we expect the Central Bank of the UAE to continue raising rates throughout 2022 given the peg with the dollar,” analysts at Fitch said.
“We believe the sector is better positioned to benefit from higher rates than during the last monetary tightening cycle in 2014-2018, when funding costs increased significantly due to tight liquidity amid low oil prices,” it said.