UAE banks' profits deteriorate; bad loans likely to go up

Challenging economic conditions result in higher non-performing loans for Q3

  
Image used for illustrative purpose. A customer makes a transaction at a bank in Dubai.

Image used for illustrative purpose. A customer makes a transaction at a bank in Dubai.

REUTERS/Mohammed Salem

Profits of UAE’s top banks continued to deteriorate in the second quarter of the year as interest rates and credit uptake remained low and bad loans grew amid challenging economic conditions.

Total interest income  of the ten largest banks in the country continued to fall for the third consecutive time by 7.7 percent quarter over quarter, while net income dropped by 3 percent due to lower interest and other operating income, according to Alvarez & Marsal, a global professional services firm.

“Challenging macroeconomic conditions, low oil prices and effects of COVID-19 have severely impacted overall asset quality and resulted in higher non-performing loan (NPL) reporting, at 3.6 percent quarter over quarter increase,” the firm said.

“The challenging economic environment impacted credit uptake as [loans and advances] remained flat in Q3 2020 compared to Q2 2020,” the firm added.

It also warned that the country’s lenders may have to brace for further increases in bad loans, particularly after the payment deferral relief for borrowers is lifted.

Top banks

The firm’s UAE Banking Pulse reviewed the financial results of First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB), Dubai Islamic Bank (DIB), Mashreq Bank, 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).

Lenders have been on the frontline of the coronavirus pandemic, extending financial relief to businesses and individuals impacted by the crisis. At the end of the third quarter of the year, the largest banks in the country provided borrowers access to 5.1 billion dirhams through the UAE Central Bank’s Targeted Economic Support Scheme (TESS).

According to the study, deposits at the banks increased by 4.2 percent during the period, but this was largely on the back of a 16 percent increase in FAB’s deposits. Consequently, loans to deposit ratio fell to 84.1 percent compared to 87.7 percent in the previous quarter.

The aggregate net interest margin (NIM) of the UAE’s lenders fell by about 21 basis points (bps) to 2.05 percent during the period, on account of additional decline in interbank rates.

Cost-to-income (C/I) ratio also increased despite a decline in operating expenses. Out of the ten banks included in the study, ENBD, ADIB, and SIB reported a decline in their CI ratios.

Provisioning

Total loans provisioned dropped 7.2 percent quarter over quarter, but they increased by about 37 percent compared to a year earlier.

The challenging market environment caused by the pandemic resulted in higher NPLs, up by 3.6 percent quarter over quarter, while cost of risk fell 11 bps year over year to 1.3 percent and coverage ratio went up 1.1 percent to 90.3 percent.

“Banks are likely to see higher NPLs in the coming period,” Alvarez & Marsal said.

“While the Central Bank’s recent announcement that it will extend the TESS scheme until June 30 next year should provide a temporary relief to certain sectors of the economy, banks’ balance sheets remain exposed to considerable credit risks. Once the deferral period ends, there could be a sizeable increase in NPLs for the banks, should the economy fail to recover,” the firm added.

(Writing by Cleofe Maceda; editing by Seban Scaria)

Cleofe.maceda@refinitiv.com 

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© ZAWYA 2020

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