High oil prices allow UAE banks to boost liquidity

High oil prices allow UAE banks to boost liquidity

According to the latest information, banks in the United Arab Emirates have accumulated significant liquidity. In December 2021, it was known that the share of liquid assets was 38% of their total assets. A year earlier, in December 2020, this share was 36%.

The state of the banking sector is especially important for the local real estate market, as mortgage lending is one of the major drivers of its development.

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Reasons for the increase in oil prices

One of the main reasons for the liquidity increase in bank accounts is the recent sharp oil price boom, caused by the same sharp supply reduction of natural resources in the global market. The reason for the current stage of events is the ongoing conflict between Ukraine and Russia.

The price growth served as a catalyst to speed up the existing liquidity growth connected with the general economic recovery of the United Arab Emirates. It also includes the return of big and medium foreign businesses to the country, and the creation of new enterprises.

In the meantime, the international Moody's investors service revised its forecast for the UAE banking sector’s development from negative to stable.

Profitability of UAE banks in 2022

In the United Arab Emirates, it is expected that the bank’s profitability should increase in 2022. The results at the end of 2021, an increase of 60% in annual terms, are really confidence-building. This year, the pace may be slower, but it should remain at the forefront of the current trend.

One of the main reasons for the growth will be rising lending interest rates associated with the growth of lending interest rates in the United States (note: The Central Bank of the United Arab Emirates tied the movement of interest rates in the country to their change by the Federal Reserve System in the United States).

Moody's indicates that the bank reserves of the UAE financial institutions will also remain stable. High oil prices will support liquidity and offset the costs of financing the economy. The UAE government intends to continue supporting local banks, if necessary, over the next 12-18 months.

It is worth noting, however, that banks will face a “quality” deterioration of loans disbursed because of the delayed shock caused by the pandemic. Small institutions will be particularly affected.

Economic forecasts

Moody’s predicts that the real GDP of the UAE economy will grow by 6.3% in 2022 and that it will rise by 4% in 2023. The economic non-oil sector and natural resource sector will show an increase of 4.4%, and the resource sectors will grow of 11.4%. Oil production will return to pre-pandemic levels.

The service sector continues to expand and remains one of the main engines of economic growth. This is particularly evident in Dubai, in the context of a recovery in tourist flows and the growing number of rented areas in the resort real estate market.

Real estate is another non-oil field that initiates economic development, along with the service sector. This market has been actively growing since the beginning of 2021 in terms of sales volumes, sales values, prices, and rental rates.

The World Expo 2020 in Dubai fueled the recovery of several sectors of the emirate's economy at once:

  • Finance;
  • Business;
  • Retail;
  • Transport.

Problems and reasons of uncertainty

The global macroeconomic situation, linked to the events between Russia and Ukraine, may become a major problem for the UAE banks. However, it should not have a significant impact on the banking sector of the United Arab Emirates considering the distance from both countries.

But other sectors of the economy can be negatively affected. Thus, the construction sector has lost direct supplies of building materials from these countries. Ukraine was the main supplier of rolled steel for property developers in Dubai.

Returning to the banking sector, Moody's points to the possible increase of problem loans. This is especially true for loans issued by small banks. For the most part, these loans are a postponed problem of 2020. Previously, it was flooded by state support packages.

In general, for the financial sector, the share of non-performing loans is expected to grow to 7% by the end of 2022. In December 2021, the share of bad loans was 6.4% in total.

Post-pandemic lending

Since the beginning of the pandemic, the banking industry has been supported by various government aid initiatives and financial instalments. On the whole, the UAE authorities are going to continue to provide support for the plan period of 12-18 months, but specific “coronavirus” programmes will be cancelled.

Old loans will be restructured without a financial cushion provided by the state. Current bank reserves will soften the blow, but the first-level total equity rate across the sector will remain in the 13-15% risk-weighted range over the next 12-18 months.

What to expect

At the moment, UAE banks are financed by direct deposits. Turning to volatile funding sources remains fairly limited. For now, the demand for credits is relatively moderate, and the volume of deposits is high. This helps the sector to maintain sufficient financial stability. During 2022, profitability will increase moderately and remain at pre-pandemic levels.

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