Net profits of the UAE's four largest banks are likely to remain at the current robust levels in 2024 as interest rate cuts are not expected to be implemented before H2, Moody's said in a new report.

The rating agency also expects mid-single-digit credit growth to partially offset a drop in interest income derived from the existing loan book.

For 2024, the higher revenue and stable provisioning charges will be balanced by increasing operating costs and a new corporate tax which will dent net earnings, Moody's said.

In 2023, the four largest banks – First Abu Dhabi Bank (FAB), Emirates NBD Bank (ENBD) Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB) - which together accounted for around 74% of total UAE banking assets as of December 2023, reported a combined net profit of $14.3 billion, up from $9.6 billion in 2022.

"Despite higher operating costs, large UAE banks reported a 49% increase in their net profit, supported by both higher interest and noninterest income. Return on assets improved to 1.8% in 2023, above 1.3% in 2022," Badis Shubailat and other analysts noted.

The higher combined profit for the past year was due to higher interest rates, rebound in non-interest income, easing provisioning charges and improving operating efficiency, the report noted.

Higher interest rates drove net interest income up 24% year on year. Non-interest income rebounded following a contraction of 2% in 2022. Combined non-interest income rose 32%, driven by large gains in trading, fee-generating activity and foreign-exchange income, which collectively grew 30% in 2023.

While combined operating expenses increased 16% year-on-year because of higher employee expenses and technology investments, the cost-to-income ratio fell to 28% from 30% a year earlier as higher operating income (up 27%) more than offset the increase in costs, the report said.

The four banks' combined impairment charges fell 16% year over year, reflecting lower and stable charges at two banks, driven by solid recoveries.

While the UAE is expected to be the top performing economy in the Gulf region this year and next, lifted by the strong performance of its non-oil sector, the UAE central bank recently revised down its growth forecast for 2024 from 5.7% previously to 4.2%, on the back of lower oil production.

(Writing by Brinda Darasha; editing by Seban Scaria)