Economic growth in the United Arab Emirates has proven to be slower in recent years than in those prior, but the country’s banks have remained buoyant with lending still at relatively high levels and indicators such as capitalisation, liquidity and profitability showing good health.
The development of UAE banks correlates to the oil-weighted economy that they operate in. Higher oil prices over recent years have translated into reasonable economic growth, which has been helping credit fundamentals for the banks. Over the coming year there are going to be a number of stimulus measures taken in both Dubai and Abu Dhabi, including spending on hydrocarbon projects and on preparation for Dubai’s hosting of the World Expo in 2020.
However, the real estate market of the UAE is under some pressure. According to the central bank, property prices in Dubai decreased by 7.4% in Q3 of 2017, and by 6.1% in Abu Dhabi. Fewer white-collar jobs coming into existence at a time when a lot of new mid and upper tier residential developments are hitting the market. As a result, the Dubai and Abu Dhabi real estate markets are expected to be quiet for the next year or so but changes to regulations mean that the banks are more protected from the dangers of downturns in property than they used to be.
The upward trajectory of interest rates is creating challenges and opportunities for the wider banking sector. The central bank raised rates in September 2018, in response to the Federal Reserve’s 25-basis point increase to its federal funds rate. For most UAE lenders this is a positive thing because it will boost net interest income. But, the increase in the cost of borrowing that will happen as a result will hit small and medium-sized enterprises.
Consolidation of banks is expected in the UAE market over the short to medium period, following the example set by the merger of the First Gulf Bank and the National Bank of Abu Dhabi, to create First Abu Dhabi Bank. Late in 2018 the Abu Dhabi Commercial Bank, Union National Bank and Islamic lender Al Hilal Bank announced that they were in talks to create a new bank with combined assets of about $113 bn. The First Abu Dhabi Bank and Emirates NBD will account for close to 45% of the total sector, and with the new mega-bank on way, smaller lenders will find the environment very difficult.
Overall, the UAE is likely to face a number of unforeseen challenges in the years to come but in contrast to the how it fared in the shockwaves of the last global crisis, today its banking sector is making changes to remain well regulated and robust.