The UAE banking sector’s profitability has been growing. According to research from global professional services firm Alvarez & Marsal (A&M), this has been primarily the result of an increase in non-interest income and reduced impairment charges.
The report, United Arab Emirates (UAE) Banking Pulse for the second quarter of 2023, reveals that on a quarter-on-quarter (QoQ) basis, the banking sector was stable. Peaking interest rates have slowed the net interest income (NII) growth. The Central Bank of UAE (CBUAE) Credit Sentiment Survey indicated strong loan demand growth and optimistic expectations on credit appetite from financial institutions. CBUAE continues to anchor its benchmark rate to the US fed and increased it by 50bps between Q1’23 to July’23.
Despite benchmark interest rates reaching their peak, NII contributed minimally to profitability with a 1.3 per cent QoQ growth. Loans and advances (L&A) experienced a 2.7 per cent QoQ growth. This was predominantly fueled by corporate/wholesale loans’ 3.7 per cent QoQ expansion.
Deposits growth moderated at 0.8 per cent QoQ, influenced by a decline in time deposits by 2.1 per cent QoQ. Net interest margin (NIM) contracted by four basis points, and the non-performing loan (NPL) ratio improved marginally by 19 basis points to 5.2 per cent. The provisioning coverage for stage three loans stood at approximately 63.4 per cent. Return on equity (RoE) improved by 99 basis points. Meanwhile return on assets (RoA) remained steady at 2.2 per cent throughout the quarter.
Analysing the UAE’s biggest banks
A&M’s UAE Banking Pulse examines data from the 10 largest listed banks in the UAE, comparing the Q2’23 results against Q1’23 results. Using independently sourced published market data and 16 different metrics, the report assesses banks’ key performance areas, including size, liquidity, income, operating efficiency, risk, profitability, and capital.
The report also offers an overview of the key developments affecting the banking sector in the UAE. Starting with this issue, A&M has added further granularity to the analysis with a segment view of loans and assets, deposit mix and a stage–wise breakdown of the lending book.
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)
- Commercial Bank of Dubai (CBD)
- National Bank of Fujairah (NBF)
- National Bank of Ras Al-Khaimah (RAK)
- Sharjah Islamic Bank (SIB)
Navigating the broader macroeconomic landscape
Asad Ahmed, A&M managing director and head of Middle East financial services commented: “We are continuing to witness sustained resilience in the UAE’s banking sector. Profitability remains robust and is emblematic of the sector’s adaptability, with non-interest income elevation and a reduction in impairment charges steering the positive trajectory.
“UAE banks continue to stand on firm financial ground and are poised to navigate through the broader macroeconomic landscape. The alignment of the UAE’s interest rates with the US Federal Reserve, marked by a gradual 50bps rise from Q1’23 to July’23, further assists in this economic stance.
“Additionally, the upward revision of the non-oil economic growth forecast for 2023, now at 4.5 per cent, reflects the vibrant signals coming from both the buoyant tourism and real estate sectors. In particular to the latter, a sizeable 363 per cent year-on-year surge in foreign direct investment within Abu Dhabi’s real estate sphere, amassing AED834.6million in H1’23, is very noteworthy.”
Prevailing trends identified for Q2 2023
- Aggregate L&A increased by 2.7 per cent QoQ in Q2’23. Aggregate deposits for the top 10 banks grew marginally by 0.8 per cent QoQ. Consequently, loan-to-deposit ratio (LDR) increased 1.4 per cent points QoQ to 76.3 per cent. During Q2’23, all top 10 banks reported an increase in L&A, where CBD reported the highest growth of 5.5 per cent QoQ. A decline in deposits of FAB (-4.6 per cent QoQ) slowed the pace of aggregate deposits growth.
- Total operating income increased by 3.2 per cent QoQ in Q2’23 compared with 3.7 per cent QoQ in Q1’23. The growth in total operating income was driven by non-interest income which increased by 7.7 percent QoQ. In spite of a rise in the benchmark rates, the NII grew marginally by 1.3 per cent QoQ.
- NIMs narrowed by 4bps as the lag effect in the declining trend in LDR reflected in contraction of NIMs besides decline in spread differential QoQ. Yield on credit increased (+76bps QoQ) to 11.0 per cent, slower than cost of funds (+48bps QoQ) to 3.7 per cent in Q2’23. Aggregate net interest income (+1.3 per cent QoQ) grew marginally due to an increase in the CBUAE policy rate by 25bps for the quarter.
- Cost-to-income (C/I) ratio improved by 10bps QoQ to reach 27.6 per cent in Q2’23 as total operating income growth (+3.2 per cent QoQ) outpaced the total operating expense (+2.9 per cent QoQ).
- Eight out of 10 banks reported an improvement in cost of risk (CoR). The CoR improved by 8bps QoQ to settle at 0.7 per cent for Q2’23. Total impairments declined by 8.5 per cent QoQ in Q2’23 to AED3.3billion.
- Marginal growth of NII (+1.3 per cent QoQ) along with non-interest income (+7.7 per cent QoQ) and reduction in impairment charges (-8.5 per cent QoQ); resulted in 4.8 per cent QoQ growth in aggregate net income. Consequently, RoE expanded by 99bps QoQ to 20.3 per cent; however, RoA remained stable at 2.2 per cent for the quarter.
The table below sets out the key metrics:
|CATEGORY||METRIC||Q1 2023||Q2 2023|
|Size||Loans and Advances Growth (QoQ)||2.0%||2.7%|
|Deposits Growth (QoQ)||6.2%||0.8%|
|Liquidity||Loan-to-Deposit Ratio (LDR)||74.9%||76.3%|
|Income & Operating Efficiency||Operating Income Growth (QoQ)||3.7%||3.2%|
|Operating Income / Assets||3.8%||3.8%|
|Non-Interest Income / Operating Income||30.7%||32%|
|Yield on Credit (YoC)||10.3%||11%|
|Cost of Funds (CoF)||3.2%||3.7%|
|Net Interest Margin (NIM)||2.8%||2.7%|
|Cost-to-Income Ratio (C/I)||27.7%||27.6%|
|Cost of Risk (CoR)||0.8%||0.7%|
|Profitability||Return on Equity (RoE)||19.3%||20.3%|
|Return on Assets (RoA)||2.2%||2.2%|
|Return on Risk-Weighted Assets (RoRWA)||3.4%||3.5%|
|Capital||Capital Adequacy Ratio (CAR)||17.2%||17.6%|