The UAE banking sector witnessed a strong comeback as profitability rebounded to pre-pandemic levels with a robust growth in Net Interest Income (NII) and other income, a review of third-quarter earnings of the top ten banks revealed.
The review, the UAE Banking Pulse, released by Alvarez & Marsal shows that while balance sheet growth slowed down, there was a sharp rise in earnings indicating that banks are prioritising profitability over growth.
Comparing the Q3’21 results of the top ten banks against their Q2’21 results, the report pointed out that operational efficiencies have helped these banks’ operating income growth to outpace expenses. The cost-income ratio decreased to its lowest level since 2018 to 31.8 percent as banks continue to optimize their expenses and overheads. Their combined operating ratio declined (-1.8 bps QoQ), as provisioning eased on the back of an improving economic environment.
In Q3’21, operating income increased by 7.4 per cent QoQ, driven by 6.8 per cent QoQ growth in net interest income (NII) along with 8.5 per cent increase in net fee, commission, and other operating income.
Chairman of UAE Banks Federation (UBF), Abdul Aziz Al Ghurair, observed in October that the positive results are an indication that the banking industry is in recovery mode, after having been in decline globally due to Covid-19. He expects UAE banks to maintain their growth momentum in the second half of the year, driven by improvements in operating conditions, cost efficiency, and credit demand.
The Banking Pulse report, co-authored by Asad Ahmed, managing director and head of Middle East Financial Services, and Sumit Mittal, senior director at Alvarez & Marsal, said the Net Interest Margin (NIM) of the 10 largest listed banks increased by 10 bps QoQ to 2.15 per cent with higher yields on loans (+24bps QoQ). However, the current NIM levels of 215bps are still below the pre-pandemic levels (260bps in 2019). The aggregate interest income increased 6.1 per cent QoQ, primarily driven by an increase in yields to 5.3 per cent.
This quarter saw ‘better-than-expected’ profits. However, the growth in profitability appears uneven, and is leaning more towards the larger banks than the mid-sized banks.
Ahmed said sound capital buffers, a stable funding profile, and expected government support should continue to uphold banks’ creditworthiness.
“However, asset quality may deteriorate over the medium term as forbearance measures are gradually withdrawn. It is expected that the economic boost from Expo 2020, continued economic recovery and digital transformation will continue to drive the UAE banking sector growth. An interesting outcome of the current IPOs would be to see how they impact the earnings of the local banks; it is probable that this may highlight the need for some of the banks to build better capabilities that broaden their fee income capabilities and hence diversify their income streams,” said Ahmed.
The 10 largest listed banks include First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, National Bank of Fujairah, National Bank of Ras Al Khaimah and Sharjah Islamic Bank.
Total net profit for the banks increased QoQ by 14.4 per cent due to a rise in NII of 6.8 per cent, a significant rise in other operating income of 25.4 per cent, and a marginal decline in impairment allowances of -0.3 per cent. Consequently, profitability metrics such as Return on Equity (RoE) at 12.3 per cent and Return on Assets (RoA) at 1.4 per cent increased. FAB with 15.6 per cent and DIB with 14.9 percent reported the highest RoE among the top ten banks, said the report.
In Q3, loans & advances grew marginally by 0.6 per cent, while deposits growth kept pace with last quarter’s growth of 2.1 per cent QoQ. Deposit growth kept pace with the Q2 level of 2.1 per cent QoQ. Loans to deposits ratio decreased marginally across the sector.
There was strong operating income growth, with 7.4 per cent QoQ in Q3 2021, driven by an increase in NII of +6.8 percent QoQ and other operating income of +25.4 per cent QoQ. However, this growth was partially offset by a 7.0 percent QoQ decrease in net fee and commission income. First Abu Dhabi Bank (FAB) (+23.5 per cent QoQ) reported the highest increase in operating income, driven by a 12.1 per cent QoQ increase in NII, alongside investment and property related gains.
The asset quality of the 10 banks remained stable in Q3 2021 with steady coverage ratios. The aggregate coverage ratio was mostly flat, -0.1 per cent points QoQ, at 92.2 per cent, while the aggregate non-performing loans (NPL) / net loan ratio remained flat at 6.2 per cent.
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