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Primer: The UAE’s Economic and Banking Landscape
Pramod Shenoi - Head of Asia-Pacific Research, Head of Financials
Trung Tran - Analyst, Insurance
EXECUTIVE SUMMARY
- The UAE’s economy has evolved significantly since the discovery of oil in the 1960s and 1970s; in FY23, the country’s GDP was $514 bn with a high GDP per capita of $44,000, surpassing regional peers such as Saudi Arabia and Kuwait.
- The oil industry’s contribution to GDP has declined from 79% in the 1980s to around 25% today; however, it remains a key economic driver and has a significant impact on government spending, affecting various sectors such as construction, education and healthcare; high oil prices also leads to better liquidity in the banking system; to ensure less dependence on the sector, the UAE introduced VAT in 2018 and corporate taxation in 2023.
- The government has taken measures to ensure the continued relevance of its oil industry while pushing for economic diversification; the economy has benefitted over the past few years from a more relaxed visa regime, which has attracted high net worth individuals and corporate talent.
- The banking system is in good shape currently; profitability is at all-time highs as a result of high NIMs and strong fee growth, loan growth has been reasonable (CAGR of 3.8% between 2018-23), liquidity is strong (system LCR of 158%, NSFR of 114% at Jun-24), capital levels are comfortable (CET1 ratios >13%), and on the asset quality front high property prices have allowed banks to sell down real estate NPLs while guidance from the central bank has led to improved NPL provisioning at the banks.
- Higher for longer US rates should continue to be supportive for bank NIMs as the AED is pegged to the USD.
- The UAE’s real estate sector, which accounts for ~20% of banking sector credit and is the single largest sector by industry, has performed strongly over the past few years as housing prices and rents rose in both Abu Dhabi and Dubai; we may see moderation or falls in house prices in the coming years on the back of increased supply but we are not fussed because of better regulatory frameworks in both the building and banking sectors; the health of this sector is fundamental to the stability of the banking sector.
- The sector’s return on assets (ROA) is 2.1% and return on equity (ROE) is 14.8% as of June 2024, demonstrating strong performance.
- The central bank’s 2023 stress test showed that the UAE banking system could withstand severe economic shocks; the average CET1 ratio fell by 350 basis points from 13.8% to 10.3% in the worst-case scenario, but remained above minimum solvency requirements.
- The UAE faces risks from regional instability that could disrupt trade; however, in general the country has benefitted from a flight-to-quality when there has been regional instability.
- Analyst coverage has changed on two banks, First Abu Dhabi (FAB) and Emirates NBD (ENBD); we are also initiating on Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB); these are the four largest banks in the UAE and are also $ bond issuers.
The UAE’s Economic Evolution
The UAE owes much of its wealth to vast oil reserves discovered in Abu Dhabi in the 1960s. In FY23, the country reported a GDP of $514 bn, with a high GDP per capita of $44,000 – surpassing regional peers such as Saudi Arabia and Kuwait, each at $33,000. For comparison, South Korea’s GDP per capita is also $33,000. Politically, the UAE is a federation of seven emirates, with Abu Dhabi and Dubai as the central powerhouses. Abu Dhabi, which holds almost all (96%) of the UAE’s oil reserves, is the bedrock of national wealth, while Dubai has diversified its economy into trade, tourism, real estate, logistics and financial services.
The UAE has a population of over 10 mn, of which only 11% are local. It ranks fifth in the world in proven oil reserves, with 113 bn barrels, and sixth in natural gas reserves, with 8,210 bn standard cubic metres. This significant oil wealth has fuelled the Emirates’ transformation to a modern and developed state.
More recently, after a strong 2022, the UAE’s nominal GDP growth slowed to 2.3% in 2023 due to oil production cuts, although robust non-oil economic activity provided a buffer. Non-oil real GDP grew by 9.9%, driven by a revival in global travel and tourism, an improved real estate and construction sector supported by migration inflows, increased financial sector profits from high interest rates, and economic activity around events such as COP28.
Conversely, the OPEC+ agreement to cut production by 1.2 million barrels per day from April 2023 led to a 3.1% contraction in oil GDP for the year. The Central Bank of the UAE (CBUAE) forecasts a rebound in real output growth to 4.0% in 2024, with 0.7% growth in the oil sector and 5.2% in the non-oil sector. Looking ahead, real GDP growth is expected to accelerate to 6.0% in 2025, supported by stable oil production and continued growth in the non-oil sector.
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