• While asset quality improves and risk costs decline, banks remain cautious on new loan originations
  • Impact of cost efficiency measures during pandemic comes through, as the sector records lowest levels in Cost-to-Income ratio (C/I) since 2018 

Dubai  – Leading global professional services firm Alvarez & Marsal (A&M) has released its latest UAE Banking Pulse for Q3 2021. The report indicates that while balance sheet growth slowed down, there was a sharp rise in earnings indicating that banks are prioritizing profitability over growth. Third quarter earnings of the top ten banks pointed towards increasing profitability, higher return ratios and an overall improved credit outlook.

Co-authored by Asad Ahmed, Managing Director and Head of Middle East Financial Services, and Sumit Mittal, Senior Director at Alvarez & Marsal, the UAE Banking Pulse, examines the data of the 10 largest listed banks in the UAE, comparing the Q3’21 results against Q2’21 results. Using independently sourced published market data and 16 different metrics, the report assesses banks’ key performance areas, including size, liquidity, income, operating efficiency, risk, profitability and capital.

The report details banks’ operational efficiencies have helped their operating income growth outpace expenses. The C/I ratio decreased to its lowest level since 2018 to 31.8 percent as banks continue to optimize their expenses and overheads. The CoR declined (-1.8 bps QoQ), as provisioning eased on the back of an improving economic environment. In Q3’21, operating income increased by 7.4 percent QoQ, driven by 6.8 percent QoQ growth in net interest income (NII) along with 8.5 percent increase in net fee, commission, and other operating income.

The report noted that Net Interest Margin (NIM) increased by ~10 bps QoQ to 2.15 percent with higher yields on loans (+24bps QoQ). However, the current NIM levels of 215bps are still below the pre-pandemic levels (260bps in 2019). The aggregate interest income increased 6.1 percent QoQ, primarily driven by an increase in yields to 5.3 percent.

The country’s 10 largest listed banks analysed in A&M’s UAE Banking Pulse are First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB), Dubai Islamic Bank (DIB), Mashreq Bank (Mashreq), Abu Dhabi Islamic Bank (ADIB), Commercial Bank of Dubai (CBD), National Bank of Fujairah (NBF), National Bank of Ras Al-Khaimah (RAK) and Sharjah Islamic Bank (SIB).

The prevailing trends identified for Q3 2021 are as follows:

  • Loans & advances (L&A) grew marginally by 0.6 percent, while deposits growth kept pace with last quarter’s growth of 2.1 percent QoQ. Deposit growth kept pace with the Q2 level of 2.1 percent QoQ. Loans to Deposits Ratio (LDR) decreased marginally across the sector.
  • There was strong operating income growth, with 7.4 percent QoQ in Q3 2021, driven by increase in NII of +6.8 percent QoQ and other operating income of +25.4 percent QoQ. However, this growth was partially offset by a 7.0 percent QoQ decrease in net fee and commission income. First Abu Dhabi Bank (FAB) (+23.5 percent QoQ) reported the highest increase in operating income, driven by 12.1 percent QoQ increase in NII, alongside investment and property related gains.
  • While NIM expanded by 10 bps QoQ to reach 2.2 percent, supported by higher asset yields, it remains below pre-pandemic 2019 NIM average of 2.6 percent. The yield on credit increased by 24.0 bps QoQ to 5.3 percent, while the cost of funds remained flat QoQ at 1.1 percent. NIMs expanded across the board, though ADCB witnessed a decline of 22 bps QoQ driven by a decline in asset yields.
  • Operating efficiency improved as operating income grew twice as fast as costs. Cost-to-income (C/I) ratio improved by 117 bps QoQ to 31.8 percent in Q3 2021, its lowest level since 2018. Five of the top 10 banks witnessed an overall improvement in the C/I ratio.
  • The asset quality remained stable in Q3 2021 with steady coverage ratios. The aggregate coverage ratio was mostly flat, -0.1 percent points QoQ, at 92.2 percent, while the aggregate non-performing loans (NPL) / net loan ratio remained flat at 6.2 percent.
  • Total net profit for the banks increased by 14.4 percent QoQ due to a rise in NII of 6.8 percent QoQ, a significant rise in other operating income of 25.4 percent QoQ, and a marginal decline in impairment allowances of -0.3 percent QoQ. Consequently, profitability metrics such as Return on Equity (RoE) at 12.3 percent and Return on Assets (RoA) at 1.4 percent increased. FAB with 15.6 percent and DIB with 14.9 percent reported the highest RoE among the top ten banks.


The table below sets out the key metrics:


Mr. Ahmed commented: “This quarter saw ‘better-than-expected’ profits. However, the growth in profitability appears uneven, and is leaning more towards the larger banks than the mid-sized banks.

Sound capital buffers, a stable funding profile, and expected government support should continue to uphold banks’ creditworthiness. However, asset quality may deteriorate over the medium term as forbearance measures are gradually withdrawn. It is expected that the economic boost from Expo 2020, continued economic recovery and digital transformation will continue to drive the UAE banking sector growth. An interesting outcome of the current IPOs would be to see how they impact the earnings of the local banks; it is probable that this may highlight the need for some of the banks to build better capabilities that broaden their fee income capabilities and hence diversify their income streams.”

Read the graphical report here


About Alvarez & Marsal

Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) for leadership, action and results. Privately held since its founding in 1983, A&M is a leading global professional services firm that provides advisory, business performance improvement and turnaround management services. When conventional approaches are not enough to create transformation and drive change, clients seek our deep expertise and ability to deliver practical solutions to their unique problems.

With over 5,500 people across four continents, we deliver tangible results for corporates, boards, private equity firms, law firms and government agencies facing complex challenges. Our senior leaders, and their teams, leverage A&M’s restructuring heritage to help companies act decisively, catapult growth and accelerate results. We are experienced operators, world-class consultants, former regulators and industry authorities with a shared commitment to telling clients what’s really needed for turning change into a strategic business asset, managing risk and unlocking value at every stage of growth.

To learn more, visit: www.AlvarezandMarsal.com  

Kiran Makhija/ Prerna Agarwal, Hanover Middle East
Sandra Sokoloff, Senior Director of Global Public Relations
Alvarez & Marsal, +1 212-763-9853

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