UAE banking sector resilient to market volatility, says central bank

UAE Banking Sector Displays Resilience Amidst Central Bank's Stress-Testing Exercise

The sector benefited from the UAE's strong economic momentum, with aggregate credit growth rebounding and profitability experiencing a significant boost, according to the UAE Central Bank's Financial Stability Report 2022. Khaled Balama, the governor of the central bank, highlighted that the financial system showed resilience, recovering key financial metrics to pre-pandemic levels, supported by favorable domestic macroeconomic conditions and robust funding and liquidity circumstances.

Lenders in the UAE Witness Strong Profitability and Successful Stress-Test Results

Aggregate profitability among lenders in the UAE, the second-largest economy in the Arab world, exhibited a robust rebound in the past year. Lower impairment charges and improved net interest income drove net profit growth, recording an impressive 31.8% increase compared to the previous year. Return on assets and return on equity, crucial measures of financial stability and profitability, rose to 1.4% and 10.5%, respectively. Additionally, the banks' performance in the central bank's stress-test exercise demonstrated their ability to maintain sufficient capital and liquidity levels, enabling them to withstand severe adverse scenarios while continuing to support the UAE economy through the provision of credit to borrowers.

UAE's Economic Recovery and Resilience Amid Global Uncertainties

The UAE's economy experienced a robust rebound from the slowdown caused by the Covid-19 pandemic, driven by higher oil prices and effective measures to mitigate the impact of the global health crisis. Despite geopolitical uncertainties, volatile commodity prices, inflation, and rising interest rates, the UAE government implemented measures that enhanced the resilience of the economy. The gross domestic product (GDP) expanded by an impressive 7.9% in 2022, surpassing the 4.4% growth recorded in 2021. The non-oil economy witnessed a 7.2% increase, while the oil sector's GDP expanded by 9.5%. Looking ahead, the central bank projects softer economic growth of 3.9%, mainly due to lower oil production and more moderate growth in the non-oil sector.

Stable Financial Conditions and Addressing Potential Vulnerabilities

Although average headline inflation in the UAE reached 4.8% in 2022, it remained below the global average driven by rising interest rates and commodity price fluctuations. The solid underlying macroeconomic conditions in the UAE offset the impact of a higher interest rate environment, contributing to favorable financial stability conditions in the country. The central bank acknowledges the importance of addressing potential vulnerabilities given the downside risks in the global outlook for 2023. Key risk drivers include financial condition tightening, persistent inflationary pressures, geopolitical tensions, uncertainty in global financial markets, and banking systems.

Strong Credit and Deposit Growth Bolster the Banking System

The UAE's banking system experienced a 4.8% increase in aggregate lending, driven by favorable funding conditions and sufficient credit capacity. Growth in credit primarily stemmed from lending to private corporates, government-related corporate entities, and the retail sector. Deposits also exhibited growth, bolstering liquidity and funding buffers. Banking system deposits recorded a remarkable growth rate of 11.3%, the highest in seven years. Strong deposit growth was driven by solid expansion in retail deposits, private corporate deposits, and government deposits. These factors contributed to the overall strength and stability of the banking sector.

Digitalization and Sustainability Essential for Long-Term Competitiveness

Looking ahead, the governor emphasized the pivotal role of digitalization and sustainability in maintaining the long-term competitiveness and resilience of the financial sector and the national economy. The UAE recognizes the importance of embracing technological advancements and promoting sustainability initiatives to enhance the financial system's efficiency and adaptability.