The four biggest banks in the United Arab Emirates are likely to maintain profit stability over the next 12 to 18 months, according to Moody’s. Banks have enjoyed higher levels of profitability as interest rates have risen recently, but the ratings agency warned that they may have to make more provisions for bad debts as the economic outlook softens.

The big four banks – First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB) – made a combined profit of 8 billion UAE dirhams ($2.18bn) in the second quarter of 2018 – a 21 percent increase on the same period last year, Moody’s said. The improvement was driven by an increase in net income as banks re-priced loans following interest rate rises.

The banks also benefited from lower loan loss provisions, Moody’s said, as they were able to absorb expected future credit losses from capital – a one-off measure relating to the new IFRS 9 accounting standards.  

Emirates NBD, in particular, enjoyed a strong second quarter, reporting a 30 percent profit increase to 2.63 billion dirhams, bringing its half-year profit total to over 5 billion dirhams. First Abu Dhabi Bank also reported a 19 percent increase in Q2 profit to 3.1 billion dirhams, bringing its half-year profit to 6.1 billion dirhams.

Moody’s said in its note that banks were facing higher operating costs, up by an average of 8 percent year-on-year, which was due to investments in technology. Higher oil prices are helping to drive increases in deposits, though, which were up 3 percent quarter-on-quarter.

In a press release accompanying its note, Nitish Bhojnagarwala, a vice president and senior credit officer at Moody's, said: "We expect core profitability for the large UAE banks to remain broadly stable over the next 12-18 months, as interest earnings hold steady at current levels, and as the decline in provisioning charges reverses due to softening business confidence."

According to data from Thomson Reuters Eikon, First Abu Dhabi Bank’s share price has increased by 35 percent in the year-to-date, closing at 14.15 dirhams per share on Wednesday. Emirates NBD was the top performer on the Dubai market for the first half of the year as its shares gained 19 percent in the first six months, but its share price was hit this week due to concerns about the impact of its deal to buy Denizbank for $3.2 billion announced in May, following the sharp decline in the value of the Turkish Lira. By market close on Wednesday, its shares for the year to date were up 9.6 percent to 8.99 dirhams per share. Abu Dhabi Commercial Bank’s shares were virtually flat at 7.01 dirhams, while Dubai Islamic Bank, which completed a rights issue in June to boost liquidity, closed at 5.06 dirhams per share – a year-to-date decline of around 9 percent.

Looking ahead, First Abu Dhabi Bank’s valuation is likely to benefit from what an EFG Hermes analyst Mohamad Al Hajj described in a telephone interview with Zawya last month as “a massive catalyst” – a potential re-weighting within MSCI’s emerging markets index, which is due in November.

“We think MSCI will be removing one of the adjustment factors that were applied historically to NBAD because of liquidity,” Al Hajj said. “That adjustment factor removal will lead to $370 million of passive inflows into FAB.”

First Abu Dhabi Bank is the biggest of the four major lenders, with a 27 percent share of the overall market measured by total assets held, according to Moody’s analysis of banks’ financial statements and the UAE Central Bank’s Statistical Bulletin. Emirates NBD has an 18 percent market share, ADCB has 10 percent, and Dubai Islamic Bank 8 percent.

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Source: Moody’s, banks’ financial statements, Central Bank Statistical Bulletin (May 2018 preliminary data)

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(Reporting by Michael Fahy; Editing by Shane McGinley)

(michael.fahy@thomsonreuters.com)

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