The aggregate net income of the 10 largest UAE-listed banks increased by 54% year-on-year (YoY) to AED 76.9 billion ($20.94 billion) in 2023, driven by a 28% YoY rise in net interest income, according to financial services firm Alvarez & Marsal (A&M).

The Central Bank of the UAE increased the policy rates by 1.0% last year to 5.4% at par with the US Fed rates, resulting in higher net interest income for all banks, the firm said in its latest UAE Banking Pulse 2023 report.

Furthermore, a decline in impairment charges (-19.8% YoY) supported the increase in net income.

“Our analysis reveals a healthy showing among banks in 2023, with many institutions experiencing an increase in profitability and stronger return on investment metrics; the year, however, ended on a slower fourth quarter,” said Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services.

However, profitability was affected by slower growth in total interest income (+76.5% YoY) than total interest expense (+156.9% YoY). Banks relied on time deposits, accounting for 42.9% of the total deposits, which grew 13.6% YoY, leading to higher pressure on the cost of funds.

Net Interest Margin (NIM) expanded by 36 basis points YoY to 2.8 percent due to higher yield on credit. The cost of funds increased by 2.2 percentage points YoY to 4%.

As the UAE central bank continues to align its benchmark rate with that of the US Federal Reserve, holding steady at 5.4%, Ahmed anticipates a shift in the second half of 2024 when rate reversals are expected to commence.

“This may present some short-term margin enhancement as deposit costs are likely to reduce relatively faster in response to rate cuts compared to the pace at which asset pricing may adjust.”

In general, the sentiment is optimistic, though cautious, given the geopolitical scenario, Ahmed added.

“Given that the UAE banks are mostly well capitalised, profitable, liquid, and well supported by regulators, we look forward to a stable 2024,” he stated.

(Editing by Brinda Darasha;