UAE banks better positioned, thanks to economic recovery, high oil prices

JP Morgan expects that the UAE’s GDP will grow 2.4% in 2021 and 3.5% in 2022 as compared to 6.2% contraction in 2020

  
First Abu Dhabi Bank head office situated at Khalifa Business Park Abu Dhabi. Image used for illustrative purpose.

First Abu Dhabi Bank head office situated at Khalifa Business Park Abu Dhabi. Image used for illustrative purpose.

First Abu Dhabi Bank / Handout via Zawya

The UAE banks are better positioned amid good recovery in economy and property prices, favourable oil prices and resilient domestic spending, JP Morgan said in a note on the country’s banking sector.

The US bank expects that the UAE’s GDP will grow 2.4 per cent in 2021 and 3.5 per cent in 2022 as compared to 6.2 per cent contraction in 2020 while Purchasing Managers’ Index (PMI) have continued to stay over 50.0 for the past six months. This bodes well for the local banking sector going forward.

The US bank’s study covered top three UAE lenders – First Abu Dhabi Bank (FAB), Emirates NBD and Abu Dhabi Commercial Bank (ADCB).

ADCB merger synergies

JP Morgan sees ADCB a preferred UAE banks’ exposure as merger synergies have positively surprised and publication of medium term outlook for the first time offers better visibility into the franchise’s return on equity (RoE) delivery through the medium term.

“Our visibility has improved steadily since Q1 2020 when ADCB was hurt by multiple shocks of NMC/Finablr default and Covid-19 related economic pressure,” said Naresh Bilandani, head of Mena equity research.

JP Morgan said ADCB is confident of exceeding the merger operational expenditure synergies from the Dh1 billion guided earlier.

Emirates NBD outlook up

For Dubai’s largest bank Emirates NBD, JP Morgan upgraded net income forecast for 2021 by 17 per cent.

“Underlying trends in ENBD were positive in Q1 2021. Franchise liquidity remains healthy with 65 per cent CASA (current account and savings account) mix at the UAE level, ENBD’s highest ever, led by lower spending needs of corporates and cost-effective deposit acquisition from ENBD’s digital investments including Liv,” JP Morgan said, adding that Emirates NBD’s performance is inherently linked to Dubai where pace of recovery, from economic pressure linked to Covid-19, has been surprisingly positive.

FAB revenue potential

First Abu Dhabi Bank’s (FAB) revenue delivery remained below potential in Q1 2021. “Liquidity continued to flow into the balance sheet at a robust pace, and the majority of it found its way into low yielding assets, the combination of these trends continuing to pressure FAB’s net interest margins,” it said.

 

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