Emirates: Non-oil growth and, consequently, credit growth in the UAE and Saudi Arabia remain robust despite the headwind caused by higher interest rates and Opec oil production cuts that constrain near-term growth prospects for most GCC economies.

Analysts at S&P Global Rating expect the UAE to report strong non-oil GDP growth of 6.0 per cent in 2023. “This, in combination with recoveries from provisions booked in the past two years, will reduce UAE banks’ credit costs in 2023, compared with 2022,” they said.

UBS Global Wealth Management expects a strong 4.5 per cent expansion for the UAE’s non-oil economy this year while according to data from Statista, the second-largest Arab economy’s GDP in current prices is on target to continuously increase between 2023 and 2028 in total by $140.4 billion (+28.14 per cent) to $639.34 billion, and said the non-oil sector is expected to continue to support aggregate output in 2023, albeit at a more modest pace compared to 2022.

Even though credit costs in the GCC region, with the exception of the UAE, will increase, S&P expects GCC banks’ return on assets (ROA) will improve in 2023, mainly due to higher margins and still satisfactory, albeit lower, lending growth in some GCC countries.

While higher interest rates will reduce GCC banks’ credit growth in general, the performance of banks in the UAE and Saudi Arabia will be more resilient, S&P Global Rating said. Although GCC banks face less favourable operating conditions, fundamentals remain supportive, it said.

“Despite a slight deterioration in asset quality indicators and an increase in the cost of risk, we expect GCC banks will report stronger profitability in 2023. This is because of higher net interest margins and generally lower-cost business models,” S&P Global Ratings credit analyst Zeina Nasreddine said.

Analysts at S&P Global Ratings expect that GCC banks’ capital buffers will remain comfortable, while a slowdown in credit growth and higher earnings will contribute to their stable capital metrics.

“UAE banks’ performance improved in the first half of 2023, on the back of lower credit losses and higher interest rates. We expect higher interest rates will continue to support banks’ profitability and, in combination with still high noninterest-bearing deposits, will moderate the increase in the cost of funding. The recovery of the non-oil sector has led to higher lending growth, compared with 2022. Yet, higher-for-longer interest rates and a slowdown of the oil economy could limit the pace of lending growth,” analysts said.

S&P analysts expect limited asset quality deterioration. The economic slowdown and higher interest rates will lead to a slight deterioration in asset quality. The banking sector could face a rise in problem loans in the construction and trade sectors and in the small and midsize enterprise segment. “That said, we believe the non-oil economy remains supportive enough to help contain an increase in NPLs. In addition, banks have booked precautionary provisions over the past couple of years, which will help them withstand the challenges ahead,” they said.

In the UAE, the report said, banks’ funding will continue to benefit from their strong deposit franchises. Banks have accumulated local deposits over the past 18 months. “Since we do not expect an acceleration in lending in the second half of 2023, banks’ funding profiles should continue to strengthen. One potential downside risk for UAE banks is the country’s large number of expatriates, which could make deposits more prone to higher volatility in the case of economic shocks. That said, deposit volatility was largely stable during past extreme events.”