Cash flow pressures due to higher-for-longer rates could eventually weigh on corporate credit quality and further weaken demand for new credit in 2024 for UAE banks, said S&P Global Ratings.

 

“High interest rates and reduced non-oil sector activity slowed credit growth in the UAE in the last quarter of 2023, said S&P Global Ratings in a Credit FAQ titled "What Lies Ahead For UAE Banks In 2024".

 

That said, profitability remained exceptionally strong last year on the back of lower provisioning requirements and higher interest margins. In addition, liquidity improved further as deposit growth outpaced new lending. Moreover, the uncertain geopolitical situation could pose risks to the overall economic sentiment in the region, S&P said.

 

Risks for UAE banks

Regarding risks for banks, S&P Global Ratings credit analyst Puneet Tuli said: "Prolonged higher interest rates may result in lower-than-expected lending growth and weaker asset quality for banks. Although the Israel-Hamas war and Red Sea conflicts currently pose a limited downside, a sharp escalation involving direct conflict between key actors could change the picture. UAE banks with exposure to Egypt face potential risks, but our base case scenario does not foresee any shock that the banks could not absorb."

 

Geopolitical uncertainty poses risks, but stable outlooks prevail for rated banks. Risks include prolonged high interest rates impacting lending growth and asset quality, albeit mitigated by strong net asset positions.

 

Economic growth forecast is at 5.3%, with stable oil prices and expanding non-oil sectors supporting GDP. However, risks include delayed US rate cuts and geopolitical tensions, potentially affecting the banking system.

 

Credit growth expected to slightly decrease from 7%, driven by high borrowing costs and slower non-oil sector growth. Retail borrowing remains robust, while the Dubai government deleverages.

 

Real estate sees strong recovery

Real estate sector sees strong recovery, but there is potential for gradual slowdown in Dubai amid price stabilisation concerns. Banks' risk remain contained due to cash transactions and developers' liquidity buffers.

 

Asset quality is expected to remain stable, with slight increase in non-performing loans. Strong profitability in 2023 likely to moderate as margins contract, despite higher interest rates.

 

Banks maintain strong liquidity and funding positions, with high deposit growth and capital buffers strengthening. External capital flows pose risks amid geopolitical tensions, but UAE banks are resilient.

 

Sustainability gaining importance

Sustainability is gaining importance, with leading banks committing to sustainable financing. S&P sees limited direct lending to energy-transition vulnerable sectors, but higher indirect exposure.

 

The ratings agency predicts stable outlook for UAE bank ratings, with potential risks from geopolitical escalations and oil price volatility affecting economic growth.--TradeArabia News Service