Alvarez & Marsal‘s (A&M) latest UAE Banking Pulse for Q3 2021 report indicates that while balance sheet growth slowed down, there was a sharp rise in earnings indicating that banks are prioritising profitability over growth.
Third-quarter earnings of the top ten banks pointed towards increasing profitability, higher return ratios and an overall improved credit outlook.
Co-authored by Asad Ahmed, Managing Director and Head of Middle East Financial Services, and Sumit Mittal, Senior Director at Alvarez & Marsal, the UAE Banking Pulse examines the data of the 10 largest listed banks in the UAE, comparing the Q3’21 results against Q2’21 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 details banks’ operational efficiencies that have helped their operating income growth outpace expenses. The C/I ratio decreased to its lowest level since 2018 to 31.8% as banks continue to optimise their expenses and overheads.
The CoR 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% QoQ, driven by 6.8% QoQ growth in net interest income (NII) along with an 8.5% increase in net fee, commission, and other operating income.
The report noted that Net Interest Margin (NIM) increased by ~10 bps QoQ to 2.15% 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% QoQ, primarily driven by an increase in yields to 5.3%.
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)
The prevailing trends identified for Q3 2021 are as follows:
1. Loans and advances (L&A) grew marginally by 0.6%, while deposits growth kept pace with last quarter’s growth of 2.1% QoQ. Deposit growth kept pace with the Q2 level of 2.1% QoQ. Loans to Deposits Ratio (LDR) decreased marginally across the sector.
2. There was strong operating income growth, with 7.4% QoQ in Q3 2021, driven by an increase in NII of +6.8% QoQ and other operating income of +25.4% QoQ. However, this growth was partially offset by a 7.0% QoQ decrease in net fee and commission income. First Abu Dhabi Bank (FAB) (+23.5% QoQ) reported the highest increase in operating income, driven by 12.1% QoQ increase in NII, alongside investment and property-related gains.
3. While NIM expanded by 10 bps QoQ to reach 2.2%, supported by higher asset yields, it remains below the pre-pandemic 2019 NIM average of 2.6%. The yield on credit increased by 24.0 bps QoQ to 5.3%, while the cost of funds remained flat QoQ at 1.1%. NIMs expanded across the board, though ADCB witnessed a decline of 22 bps QoQ driven by a decline in asset yields.
4. Operating efficiency improved as operating income grew twice as fast as costs. Cost-to-income (C/I) ratio improved by 117 bps QoQ to 31.8% in Q3 2021, its lowest level since 2018. Five of the top 10 banks witnessed an overall improvement in the C/I ratio.
5. The asset quality remained stable in Q3 2021 with steady coverage ratios. The aggregate coverage ratio was mostly flat, -0.1% points QoQ, at 92.2%, while the aggregate non-performing loans (NPL) / net loan ratio remained flat at 6.2%.
6. Total net profit for the banks increased by 14.4% QoQ due to a rise in NII of 6.8% QoQ, a significant rise in other operating income of 25.4% QoQ, and a marginal decline in impairment allowances of -0.3% QoQ. Consequently, profitability metrics such as Return on Equity (RoE) at 12.3% and Return on Assets (RoA) at 1.4% increased. FAB with 15.6% and DIB with 14.9% reported the highest RoE among the top ten banks.
The table below sets out the key metrics:
Loans and Advances Growth (QoQ)
Deposits Growth (QoQ)
Loan-to-Deposit Ratio (LDR)
Income and Operating Efficiency
Operating Income Growth (QoQ)
Operating Income / Assets
Non-Interest Income / Operating Income
Yield on Credit (YoC)
Cost of Funds (CoF)
Net Interest Margin (NIM)
Cost-to-Income Ratio (C/I)
Cost of Risk (CoR)
Return on Equity (RoE)
Return on Assets (RoA)
Return on Risk-Weighted Assets (RoRWA)
Capital Adequacy Ratio (CAR)
Source: Financial statements, investor presentations, A&M analysis
Asad Ahmed commented: “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. 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.”