Despite higher provisioning and operating costs, four largest banks in the UAE managed to report higher net profit in the fourth quarter of 2017 on strong growth in net interest, as well as fee and commission income, Moody's Investors Service said.

The four banks - First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank - reported a solid combined net profit of Dh7.3 billion (in the fourth quarter, up eight per cent compared with the same period in 2016 and two per cent higher quarter on quarter, the ratings agency said.

The four largest UAE banks, accounting for around 62 per cent of UAE banking sector assets as of December 2017, delivered a solid rise in net profits in the final quarter of 2017, said Nitish Bhojnagarwala, vice president at Moody's.

"This was largely driven by higher business volumes and recent interest rates hikes, which generated higher recurring income, both in the form of net interest income and fees and commissions," said Bhojnagarwala.

Operating expenses at the four banks rose 10 per cent quarter on quarter and seven per cent from a year ago. "The increases were mainly related to investments in technology to drive digitalization and to improve operational efficiency," said Bhojnagarwala.

Moody's said customer deposits at the four banks increased two per cent to Dh1 trillion, compared with the third quarter of 2017. Deposits grew fastest at FAB and DIB, (up 4.5 per cent and 2.5 per cent respectively for the quarter) reflecting their solid deposit franchises as the largest UAE bank (FAB) and the oldest Islamic bank (DIB).

In general, banks in the GCC are expected to breathe a little easier in 2018 on the back of improving stable financial footing, according to S&P Global Ratings.

After two years of significant pressure, 2018 would mark the stabilization of the financial profiles and performance of GCC banks, barring unforeseen events, S&P said in its report. GCC banks should see a more stable financial footing in 2018. The UAE banking sector's performance would see a stabilisation as the economy also does so with the recovery in crude prices and strong capitalisation of financial institutions.

"We think that 2018 will be marked by a stabilisation of the performance of UAE banks as the economy stabilises. We think that growth will remain muted as economic growth remains below the era where oil prices were at triple-digits/record highs. On asset quality, we are of the view that most of the deterioration would have been already taken into account by the beginning of 2018," said Mohamed Damak, senior director and global head of Islamic finance at Standard & Poor's.

Damak believes that the cost of risk will stabilise at a higher level.

"The main sector to watch would be the real estate sector as prices continue their decline although we are far from being in a 2007 scenario as the drop in price was controlled to a large extent," said Damak.

M.R. Raghu, managing director of Marmore Mena Intelligence, said the performance of the UAE's banking sector stabilised marginally in 2017 compared to 2016, which can be attributed to growth in the non-oil economy, improved liquidity and stable funding conditions.

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