The four largest banks in the UAE, which account for 77% of bank assets, saw their combined profit jump 12.5% to $9 billion, compared with the year-ago period, driven by higher net interest income and lower provisioning charges as the operating environment in the UAE recovered.

According to Moody's Investors Service, the four largest banks, First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank, are likely to see their profitability improve--albeit at a slower pace-- as pandemic-related provisioning charges have normalised, and the reversal in benchmark interest rates and restored business activity continue.

The report said the reversing interest rate cycle in 2022 eased pressure on net interest margins (NIMs). "As a result and combined with the banks' funding profile (higher zero or low cost current and savings account balances), growth in interest income outweighed funding costs, and the banks' combined NIM rose to 2.2% from 1.8% in 2021."

Net interest income grew by 28%, while combined non-interest income declined by 2% driven by two banks largely due to one-off gains in 2021 which did not repeat in 2022.

The banks maintained strong capital buffers with tangible common equity ratio at 14.8% in aggregate as of December 2022.

"Strong profit generation, combined with payout ratios restored to pre-pandemic levels, will be sufficient to fund expected modest credit growth of 5% in 2023, supporting broadly stable capital buffers."

(Writing by Brinda Darasha; editing by Seban Scaria)