The five largest banks in the UAE are forecast to see profitability remaining "solid" over the next 12-18 months, according to ratings agency Moody's.
In the fourth quarter of 2016, Emirates NBD, National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, First Gulf Bank and Dubai Islamic Bank posted solid profitability, said Moody's Investors Service in a report.
"We expect the five large United Arab Emirates banks' core profitability to remain solid over the next 12-18 months," said Nitish Bhojnagarwala, assistant vice president at Moody's.
"However, we anticipate pressure from rising funding costs as liquidity continues to tighten, and as banks increase their reliance on wholesale funding."
The five banks reported a solid combined net profit of AED6.8 billion ($1.8 billion) in Q4 2016, despite a decline in UAE's non-oil real GDP growth to 2.5 percent in 2016 from a 2012 peak of 6.4 percent, weighed down by weak oil prices.
Overall net profitability in Q4 was 2 percent lower than in Q3 2016, and down 5 percent from Q4 2015, largely driven by decline in "other" income, including one-off gains, dividends from investments, and other non-recurring income.
"This performance was underpinned by higher fee and commission income from retail and corporate lending services. Overall, the core operating income was stable when compared with Q4 2015 and 2% higher versus Q3 2016," said Bhojnagarwala.
This helped offset a modest increase in operating expenses as well as higher funding costs, which rose to 1.2 percent from 0.9 percent a year earlier due to tightening liquidity conditions, Moody's added.
The agency said impairment charges were also lower for most of the peer group in Q4, as previous significant increases in loan loss coverage ratios have resulted in adequate financial buffers.
"We expect a rise in impairment charges in 2017, however, driven by the continued economic slowdown," said Bhojnagarwala.