UAE Banks Forecasted to Sustain Earnings Growth Amid Monetary Tightening

The United Arab Emirates' banking sector is projected to maintain its earnings growth into 2025, bolstered by robust government support and strong capital positions, even as monetary policies tighten. Consultancy firm Alvarez & Marsal reports that aggregate earnings for UAE-listed banks increased by 8% year-on-year in 2024, primarily due to a 26.8% decline in annual impairment charges, attributed to recoveries and reduced write-downs. However, return on equity and return on assets experienced declines of 87 basis points and 6 basis points, respectively, due to decreased net profitability.

Lending growth accelerated to 12.6% year-on-year, driven by a 19.9% surge in retail loans. Corporate and wholesale loans continued to dominate the aggregate loan book, accounting for 55.5%. Deposits grew by 10.7%, propelled by an 11.1% increase in time deposits, influenced by the higher interest rate environment, while current account savings account deposits rose by 8.0%. The high-interest scenario led to a 91 basis points increase in Yield on Credit and a 130 basis points rise in Cost of Funds year-on-year, resulting in a net interest margin contraction of 12 basis points to 2.7%.

Operating income for these banks rose by 10.7%, driven by a 22.0% increase in fees and commission income. Despite this, the cost-to-income ratio deteriorated marginally by 24 basis points year-on-year as operating expenses grew by 11.7%. Asset quality improved, with the cost of risk reaching a decade low of 0.5%, a decrease of 25 basis points year-on-year, indicating lower loan loss provisioning requirements.

Asad Ahmed, Managing Director of Financial Services at A&M, commented that despite pressures on net profitability, the overall outlook remains positive. He noted that the Central Bank of the UAE has commenced rate cuts, aligning with the U.S. Federal Reserve's actions. These cuts, coupled with robust economic growth driven by consumer spending, tourism, and construction, position UAE banks well for continued earnings growth into 2025.

In 2024, UAE banks achieved their highest profitability, with the sector's average operating profit estimated at 3.4% of risk-weighted assets, up from 3.2% in 2023. This performance was underpinned by high interest rates and healthy liquidity, as reported by Fitch Ratings. The Central Bank of the UAE's total assets reached approximately AED 896 billion in 2024, reflecting the central bank's pivotal role in fostering monetary and financial stability.

The analysis by A&M encompassed the 10 largest listed banks in the UAE, including First Abu Dhabi Bank , Emirates NBD , Abu Dhabi Commercial Bank , Dubai Islamic Bank , Mashreq Bank, Abu Dhabi Islamic Bank , Commercial Bank of Dubai , National Bank of Fujairah , National Bank of Ras Al-Khaimah , and Sharjah Islamic Bank . These banks have demonstrated robust profitability and improved return ratios, driven by strong lending growth and higher fee income.

The UAE's banking sector has also been proactive in adopting digitalization initiatives to enhance operational efficiency and customer experience. Banks have increased spending on digital platforms, reflecting a strategic shift towards technology-driven services. This focus on digital transformation is expected to further strengthen their competitive position in the evolving financial landscape.

The UAE's economic diversification efforts, aimed at reducing dependence on oil revenues, have created new opportunities for banks to finance projects in sectors such as renewable energy, technology, and infrastructure. This diversification is anticipated to contribute to sustainable economic growth and, consequently, to the stability and profitability of the banking sector.

However, challenges remain as banks navigate the tightening monetary environment. The increase in the Cost of Funds necessitates prudent liquidity management and strategic pricing of loan products to maintain margins. Additionally, the global economic outlook, influenced by geopolitical tensions and fluctuating oil prices, could impact the UAE's economic performance and, by extension, its banking sector.