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The Profitability of the UAE’s four largest banks is likely to remain under pressure in 2021 as the squeeze on net interest income, their main source of revenue, persists and provisions increase further, Moody’s Investors Service said in a report.
Their net profits for 2020 saw a sharp, but manageable, decline reflecting high loan-loss provisions related to the pandemic and lower interest rates, the report said.
However, this year, the impact will be softened by higher lending volumes as coronavirus-related restrictions ease and the vaccination rollout helps lower infection rates. Provisioning will increase further, the agency noted.
For 2020, the largest banks reported a combined net profit of $6.7 billion, down 35 percent from a very strong $10.2 billion in 2019.
The decline reflects high loan-loss provisions related to the pandemic, lower interest rates and a non-recurring gain in 2019 at Emirates NBD that made for a harsher than normal comparison. First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank accounted for 76 percent of UAE banking assets at end-December 2020.
The absence this year of a large one-time gain at Emirates NBD, that was reported in 2019, contributed to the banks combined 35 percent decrease. Excluding the gain, profits dropped by a smaller 26 percent.
Aggregate provisions surged by 72 percent, mainly driven by higher problem loans and anticipation of higher loan losses ahead.
The banks' combined reported net interest income rose 1 percent year-on-year after recent acquisitions by two of the four banks. Excluding acquisitions, net interest income dropped 8 percent due to declining margins driven by lower interest rates but remained solid.
"Net interest income was boosted by acquisitions, which when excluded, dropped by 8 percent in 2020," says Francesca Paolino, an analyst at Moody's Investors Service. "The increase in loan loss charges, was related to the pandemic and to the weakening of some large corporate names in the domestic market beforehand."
Income from investment securities, fee-based activities and market trading dropped 10 percent.
The four banks maintained their strong cost-efficiency. The group's cost-to-income ratio was 31.7 percent from 31.2 percent in 2019. Excluding the recent acquisitions, costs fell overall.
(Writing by Brinda Darasha; editing by Seban Scaria)
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