UAE Banking Pulse report for Q3 2018: Alvarez & Marsal

Liquidity remained stable, despite reduced loan to deposit (LDR) ratios

Large decline in operating income

Dubai: Leading global professional services firm Alvarez & Marsal (A&M) today released its latest UAE Banking Pulse for Q3 2018. The report shows that liquidity remained stable, but profitability decreased slightly as a result of increased cost of funds.

Alvarez & Marsal’s UAE Banking Pulse compares the data of the 10 largest listed banks in the UAE, looking at the third quarter of 2018 (Q3 2018) against the previous quarter (Q2 2018).

The prevailing trends identified for Q3 2018 were as follows:

• Deposits continued to grow faster (3.19 percent) than loans & advances (L&A) (2.06 percent), further extending the decrease in loan-to-deposit (LDR) ratio for Q3 2018, continuing the trend from the previous quarter. That said, eight of the top 10 banks remained in the LDR “green zone” of between 80 percent and 100 percent. Five of the top banks grew their L&A and deposit market share, while only two banks lost L&A and deposits market share.
• Operating income remained steady in Q3 2018, driven by mixed results in interest and non-interest income. Interest income continued to increase (by 1.5 percent) whilst non-interest income saw further decline (by 3.1 percent), resulting in an overall deceleration in income growth.
• Net interest margin (NIM) compressed by three basis points (bps), reversing the increase seen in Q2 2018. The compression was driven by a ~20 bps uptick in cost of funds, despite a rise in yield on credit, which grew by ~25 bps when compared to the previous quarter.
• Cost-to-Income (C/I) ratio retained previous quarter levels (33.1 percent), with income and expenses steady.
• Cost of risk saw a slight reduction of ~2 bps (from 0.76 percent in Q2 2018 to 0.74 percent in Q3 2018), driven by slight decrease in loss provisions and a slight increase in gross loans.
• Return on equity (RoE) decreased overall by ~ 68 bps, with two banks showing a large decrease of ~ 310 bps and ~ 270 bps respectively, and three banks managing to increase their RoE. The slight overall decline was driven by higher cost of funds and lower non-interest income.

Alvarez & Marsal’s report uses independently-sourced published market data and 16 different metrics to assess the banks’ key performance areas including size, liquidity, income, operating efficiency, risk, profitability and capital.

The country’s 10 largest listed banks analysed in A&M’s UAE Banking Pulse 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), Union National Bank (UNB), Commercial Bank of Dubai (CBD), National Bank of Ras Al-Khaimah (RAK) and the National Bank of Fujairah (NBF).

OVERVIEW

The table below sets out the key metrics:

CATEGORY	METRIC	Q2 ’18	Q3 ‘18
Size	Loans and Advances Growth (QoQ)	1.88%	2.06%
	Deposits Growth (QoQ)	2.21%	3.19%
Liquidity	Loan-to-Deposit Ratio (LDR)	88.8%	87.8%
Income & Operating Efficiency	Operating Income Growth (QoQ)	2.38%	0.15%
	Operating Income / Assets	3.62%	3.54%
	Non-Interest Income / Operating Income	29.3%	28.4%
	Yield on Credit (YoC)	6.58%	6.83%
	Cost of Funds (CoF)	1.73%	1.93%
	Net Interest Margin (NIM)	2.61%	2.58%
	Cost-to-Income Ratio (C/I)	33.14%	33.13%
Risk	Coverage Ratio	125%	122%
	Cost of Risk (CoR)	0.76%	0.74%
Profitability	Return on Equity (RoE)	15.93%	15.25%
	Return on Assets (RoA)	1.91%	1.88%
	Return on Risk-Weighted Assets (RoRWA)	2.57%	2.56%
Capital	Capital Adequacy Ratio (CAR)	17.74%	17.98%

Note: Difference in previous reported numbers due to revision in methodology and use of audited numbers

Source: Financial statements, investor presentations, A&M analysis

A&M Managing Director in the firm’s Strategic Performance Improvement Practice Dr. Saeeda Jaffar was lead author of the report. It was co-authored by A&M Head of Financial Services Asad Ahmed and Neil Hayward, who specialize in turnaround and restructuring.

Dr. Saeeda Jaffar commented: “Comparing the third quarter of 2018 to Q2 shows that liquidity remained stable, whilst profitability and RoE saw a slight decrease, which we attribute to higher cost of funds. In the coming months we expect to see increasing M&A activity in the fragmented UAE banking sector, which makes good business sense aligned with creating regional champions. Banks are looking at consolidation in order to address a tightening market, as well as to provide scale, cost efficiencies and operating synergies. M&A activity is a core competency of our firm. We help clients operationalize M&A strategies by building internal capabilities, governance structures, processes and playbooks in support of their individual goals.”

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About Alvarez & Marsal

Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) when conventional approaches are not enough to make change and achieve results.

Privately held since its founding in 1983, A&M is a leading global professional services firm that provides advisory, business performance improvement and turnaround management services.

With over 3000 people across four continents, we deliver tangible results for corporates, boards, private equity firms, law firms and government agencies facing complex challenges.

Our senior leaders, and their teams, help organizations transform operations, catapult growth and accelerate results through decisive action. Comprised of experienced operators, world-class consultants, former regulators and industry authorities, A&M leverages its restructuring heritage to turn change into a strategic business asset, manage risk and unlock value at every stage of growth.

To learn more, visit: alvarezandmarsal.com

© Press Release 2019