• Profitability of top 10 lenders increased by 31.7 percent year-on-year (YoY) for FY’22, as higher interest rates boost earnings
  • Deposits grew by 11.3 percent YoY, faster than loans & advances (L&A) of 5.7 percent in FY’22

Dubai – Leading global professional services firm Alvarez & Marsal (A&M) has released its latest United Arab Emirates  (UAE) Banking Pulse for fiscal year 2022. The results of the biggest banks pointed towards increasing profitability, improving ratios around asset quality, returns on equity and assets alongside strengthening capital positioning. The aggregate net income increased by 31.7 percent YoY for FY’22 to AED 49.8bn driven primarily by higher net interest income (NII) by 26.7 percent YoY.

L&A increased by 5.7 percent YoY, faster than FY’21 (+1.6 percent YoY); and growth in deposits also accelerated by 11.3 percent YoY, more than the previous year (6.7 percent YoY). While the significant increase in interest rates contributed to higher profitability, the inevitable cycle of reduced loan demand was evident in Q4’22. This will likely lead to pressure on asset quality in 2023. For FY’2022 aggregate net interest margins (NIM) increased by 37 basis points (bps) due to the higher yield income for banks on the back of rising interest rates.

A&M’s UAE Banking Pulse examines data from the 10 largest listed banks in the UAE, comparing the FY’22 results against FY’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 country’s 10 largest listed banks analyzed 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 FY 2022 are as follows:

1. Customer deposits growth significantly outpaced L&A growth in FY’22. The aggregate deposits for the top 10 banks grew at 11.3 percent YoY whereas aggregate L&A increased by 5.7 percent YoY in FY’22. The rise in interest rates led to slow loan origination and a rise in deposits. Consequently, the aggregate Loan-to-Deposit Ratio (LDR) slipped 4.1 percent points YoY to 77.9 percent.

2. Total operating income increased by 17.5 percent YoY, primarily led by higher net interest income of 26.7 percent YoY. However, non-funded income undermined operating income, as other operating income declined by 3.8 percent YoY.

3. Aggregate NIMs expanded by 37bps from 2021 to 2.4 percent, due to higher yield on credit on the back of rising benchmark rates as the Central Bank of the UAE (CBUAE) increased the policy rates by 4.25 percent in FY’22 to 4.4 percent, on par with the US Federal Reserve interest rates, resulting in higher net interest income for all banks. The cost of funds increased by 66bps YoY to 1.8 percent.

4. Operational cost efficiencies improved on an aggregate level among UAE banks in FY’22. Cost-to-income (C/I) ratios improved, dropping 1.1 percent overall, YoY, to 31.7 percent in FY’22. Total operating income grew by 17.5 percent YoY and operating expenses grew by 13.5 percent YoY in FY’22. Of all 10 banks, only FAB reported deterioration in C/I, which increased by 5.3 percent YoY in FY’22.

5. Cost of risk (CoR) improved marginally as aggregate impairment charges decreased in FY’22. The CoR improved 19bps YoY to settle at 0.98 percent for FY’22. Total impairments decreased by 12.9 percent YoY in FY’22 to AED 17.1bn.

6. Rising interest rates look set to increase the profitability of UAE banks. Aggregate net income increased by 31.7 percent YoY. As a result, return ratios such as return on equity (ROE) and return on assets (ROA) improved by 2.1 percent points YoY to 13.2 percent and 0.3 percent YoY to 1.6 percent respectively in FY’22.

OVERVIEW

The table below sets out the key metrics:

CATEGORY

METRIC

FY 2021

FY 2022

Size

Loans and Advances Growth (QoQ)

1.6%

5.7%

Deposits Growth (QoQ)

6.7%

11.3%

Liquidity

Loan-to-Deposit Ratio (LDR)

82.1%

77.9%

Income & Operating Efficiency

Operating Income Growth (QoQ)

5.2%

17.5%

Operating Ince / Assets

12.0%

13.1%

Non-Interest Income / Operating Income

35.4%

30.3%

Yield on Credit (YoC)

5.1%

7.0%

Cost of Funds (CoF)

1.1%

1.8%

Net Interest Margin (NIM)

2.1%

2.4%

Cost-to-Income Ratio (C/I)

32.8%

31.7%

Risk

Coverage Ratio

94.2%

103.9%

Cost of Risk (CoR)

1.2%

1.0%

Profitability

Return on Equity (RoE)

11.1%

13.2%

Return on Assets (RoA)

1.3%

1.6%

Return on Risk-Weighted Assets (RoRWA)

1.9%

2.4%

Capital

Capital Adequacy Ratio (CAR)

16.6%

16.7%

Source: Financial statements, investor presentations, A&M analysis

Mr. Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services commented: “The overall results of the banking sector are encouraging and we can see the effect of the interest rate increase coming through; certain profitability and operating ratios are now at pre-pandemic levels. In FY’22, profitability and NIM improved even in a rising-interest-rate scenario. 2023, albeit sluggishly, may bring cheer to the UAE banks as the non-oil private sector expands. Non-performing loans and cost of risk are expected to increase marginally on higher provisioning due to lower credit demand amidst rising interest rates. However, the UAE banks are sufficiently capitalized to maintain Capital Adequacy Ratio (CAR) levels well above regulatory requirements.”

-Ends-

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 more than 7,700 people across five 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: AlvarezandMarsal.com. Follow A&M on LinkedIn, Twitter, and Facebook.