The UAE’s top banks benefitted from better margins in the first quarter of 2022, but there is a risk of deterioration of asset quality in the second half of the year as the government’s economic support scheme comes to an end.
In its UAE Banking Pulse for the quarter, Alvarez & Marsal (A&M) said banks had also seen increased lending and improved asset quality during the first quarter of the year.
Cost of risk (CoR) improved for most UAE banks during the quarter, falling by 26.9 basis points (bps) quarter-on-quarter, primarily due to significant decrease in net impairment charges, resulting from lower provisions due to economic improvements along with the extension of the targeted economic support scheme (TESS), A&M said.
Asad Ahmed, the consultancy’s managing director and head of Middle East financial services, said rising oil prices and supportive government policies, revival signs in the real estate sector and normalising non-oil activity are expected to accelerate the UAE economy in the next quarter.
Domestic lending is anticipated to grow on the back of revived economic activities and net interest margin (NIM) is expected to improve, and deposits will grow alongside the projected interest rate increase, he said.
“However, there are potential asset quality deterioration risks, in the later half of the year, when the Central Bank of the UAE’s TESS scheme ends in mid-2022,” he concluded.
Loans and advances increased by 2.8 percent quarter-on-quarter for the UAE’s top 10 banks, while loan to deposit ratio increased to 84.5 percent from 82.1 percent in the fourth quarter of 2021.
TESS was first rolled out in March 2020 and has been extended to mid-2022.
Aggregate non-interest income increased by 0.6 percent over the same period, while the overall net interest margin (NIM) remained flat at 2.1 percent due to low benchmark rates.
(Reporting by Imogen Lillywhite; editing by Brinda Darasha)