Top ten UAE banks net income jumps 24.4% to $3.43bln

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The top ten UAE banks’ net income jumped 24.4% to AED12.6 billion ($3.43 billion) in the second quarter (Q2) driven by better asset quality, improved profitability and margins, said Alvarez & Marsal (A&M).

The country’s 10 largest listed banks 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).

Total interest income of the banks grew drastically by 19.5% QoQ (quarter-on-quarter) in Q2’22, boosted by higher interest income, said A&M, leading global professional services firm, in its latest United Arab Emirates Banking Pulse for Q2 2022.

Loans and deposits

The push and pull between loans and deposits reveals an improvement in customers’ personal economic standing. The rise in interest income has been spurred by a sharp rise in both advances and deposits. Total advances grew by 1.8% while deposits grew faster at 4.5%.

Aggregate non-interest income (NII) surged by 15.1% QoQ and the overall net interest margin (NIM) jumped by 26.1 bps QoQ due to higher benchmark rates. Overall asset quality improved as non-performing loans (NPL)/ loans and advances (L&A) fell by 0.4% to 5.7% during the quarter.

A&M’s UAE Banking Pulse examines data of the 10 largest listed banks in the UAE, comparing the Q2’22 results against Q1’22 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.

Prevailing trends

The prevailing trends identified for Q2 2022 are as follows:

*Customer deposits growth outpaced L&A in Q2’22. The top ten UAE banks’ aggregate L&A increased by 1.8% QoQ in Q2’22, while the deposits grew at 4.5% QoQ. Consequently, aggregate loan-to-deposit ratio (LDR) decreased to 82.4% QoQ in Q2’22 compared to 84.5% QoQ in Q1’22.

*Operating income witnessed an uptick primarily due to higher interest income (19.5% QoQ) supported by NII such as foreign exchange income and investment gains. The total operating income increased by 13.6% QoQ as compared to -6.4% in Q1’22. The growth was primarily driven by NII which increased substantially by 15.1% QoQ and foreign exchange and investment related income of +24.1% QoQ.

*The UAE banking sector’s NIM noted an improvement as the benchmark interest rate increased. Although NIM increased to 2.3% it is still below the pre-pandemic levels of 2.6%. The NIM improved by 26.1bps QoQ as aggregate NII of +15.1% QoQ grew at a faster pace as compared to net interest-bearing assets of +3.9% QoQ. The yield on credit jumped 84bps QoQ to 5.9% for Q2’22 largely due to a substantial increase in interest Income at +19.5% QoQ due to interest rate hike. The cost of funds deteriorated by 26.2bps QoQ to 1.3% in Q2’22.

Operational efficiency

*Operational efficiency improved in Q2’22 despite an increase in operating expenses. The cost-to-income (C/I) ratio improved by 2.9bps QoQ to reach 31.5%. The drop in C/I ratio was due operating income of +13.6% QoQ growing at a faster pace than operating expense of +4.1% QoQ. Eight out of ten UAE banks reported an improved C/I ratio in Q2’22.

*Cost of risk (CoR) improved as aggregate impairment charges continued to decline for the sixth consecutive quarter. The aggregate CoR fell by ~9.7bps QoQ to 0.72% in Q2’22 and the decline is attributed mainly to the decrease in total provisioning to AED3.1 billion at -9.7% QoQ in Q2’22 from AED3.5 billion in Q1’22.

*The return ratios witnessed an uptick in Q2’22 as profitability improved across the board. The aggregate net income increased by 24.4% QoQ, as a result the return ratios such as return on equity (ROE) and return on assets (ROA) improved by 1.9% points QoQ and 0.3% points QoQ respectively.

Strong profitability

Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services commented: “The regional banking sector, including that of the UAE is expected to report continued strong profitability on the back of increasing interest rates, improving credit quality and robust economic growth.

“While clearly inflation is now a global concern, we foresee a lesser impact of this in the region, against the backdrop of firm oil prices, increased consumer confidence and strong economic activity. Extensive public participation in the recent wave of state-linked IPOs has also been a key contributor of the positive sentiment during this quarter.”-