Leading global professional services firm Alvarez & Marsal (A&M) has released its latest UAE Banking Pulse for Q2 2021. The report highlights that the top ten UAE banks managed a healthy rebound in profitability and balance sheet metrics.
The RoE has reached its highest level of 10.9% for the first time in the last five quarters with 13.3% in Q4’19 as economic conditions continue to improve. An increase of +2.8% quarter over quarter (QoQ) in operating income coupled with lower impairment charges of-9.3% QoQ were the key drivers for growth in profitability.
The L&A increased by 1.9% QoQ, after declining for three consecutive quarters. Dubai’s mortgage market has indicated robust signs of improvement, with the number of mortgage issuances almost doubling between December 2020 and June 2021.
The asset quality of the UAE banks has stabilized overall after deteriorating in 2020. Three out of UAE’s top ten largest banks, including Emirates NBD, Mashreq, and RAK Bank, have a coverage ratio of over 100%. The banks have shown that they are better positioned than before in managing stress in their balance sheets in view of higher capital buffers, improvement in recoveries, and improving profitability. The lower provisioning by banks underlines an improved credit outlook for the sector.
The prevailing trends identified for Q2 2021 are as follows:
- L&A growth turned positive, while deposits further increased. The aggregate L&A for top ten UAE banks increased by 1.9% QoQ while the deposits increased by 2.1% QoQ. Deposit growth outpaced loans at most banks through the second fiscal quarter of 2021 as consumers and businesses cut spending amid economic uncertainty, bolstering already robust liquidity.
- Operating income increased 2.8% QoQ, supported by the reduced cost of funding and higher investment income. Major banks including FAB, and DIB reported a substantial increase in their trading and foreign exchange income, which supported overall operating income.
- Aggregate net interest margin (NIM) remained largely stable at 2.05% in Q2’21. NIM remained flat as industry-wide credit yields continued to remain suppressed while the cost of funding declined marginally. While ADCB, CBD, and NBF reported NIM expansion by 10-20 bps, the remaining banks largely remained unchanged.
- Cost-to-income (C/I) ratio remained largely unchanged at 33%, despite an increase in operating expenses of +2.5% QoQ. Among the top ten banks, FAB’s C/I ratio improved 2.1% QoQ, as the bank deployed cost-saving initiatives and generated synergies from Bank Audi Egypt’s integration. Seven of the top ten banks reported improvement in C/I ratio on a QoQ basis.
- Aggregate asset quality (NPL / net loan ratio) appears to have stabilized after deteriorating for six consecutive quarters to reach 6.2%. The coverage ratio for the banks increased to 92.3% from 91%. The cost of risk decreased by ~13 bps QoQ, as total provisioning decreased ~9.3% to 4.8bn dirhams. The lower provisioning by the banks reflects an improving credit outlook on the back of an improving economic situation.
- RoE rebounded to reach double-digit levels of 10.9% from 9.8%. Total net income increased by 11.5% QoQ, primarily due to a significant decline in impairment allowances of -9.3% QoQ and a rise in net interest income by 3.5% QoQ. Consequently, profitability metrics such as RoE at 10.9% and return on asset (RoA) at 1.2% have improved. ENBD with 12.5% and CBD with 13.3% reported the highest RoE among the top ten banks.
The table below sets out the key metrics:
Ahmed Asad, Head of ME Financial Services, ALVAREZ & MARSAL, commented: “Improvements in asset quality are helping to drive the UAE banking sector turn around. We look forward to this trend continuing. The UAE’s Central Bank’s Q2’21 credit sentim
ent survey notes a strong, ongoing domestic credit demand across all sectors of the economy indicating that a vibrant recovery is on track.
However, the U.S. Fed’s commitment to maintaining the
current low level of interest rates is expected to keep domestic banks’ income streams under pressure. We believe focusing on significant efficiency improvements, continuing to adopt technology, either organic or in partnership with fintech’s, and actively managing non-performing portfolios are critical to driving improvements forward.”