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Large UAE banks post solid Q2 profitability as interest income rises

Profitability at the four largest UAE banks will remain solid in the next 12 to 18 months, underpinned by solid interest income, despite pressure on fee and commission income, says Moody’s Investors Service in a new report.

The four banks, First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB), reported a combined net profit of AED6.7 billion ($1.8bn) in Q2 2017, supported by higher net interest income.

Flat profitability

Aggregate net profitability was broadly flat versus Q2 2016, but fell 3.5 per cent quarter on quarter also partially driven by a decline in fee and commission income.

“Profitability was supported by higher yields on loans and stable funding costs, which drove higher net interest income, despite sluggish economic growth due to current oil prices,” said Nitish Bhojnagarwala, a Vice President at Moody’s.

Expenses down

Operating expenses across the four banks were down by six per cent relative both to the previous quarter and to Q2 2016. Over the next 12 to 18 months, Moody’s expects broadly stable cost to income ratios as the banks continue to invest in technology offsetting cost-cutting gains.

“However, provisioning charges showed a mixed trend with ENBD and FAB showing an improving trend, while ADCB and DIB posted weakening trends. We expect a modest rise in provisioning charges in the coming quarters, driven by the sluggish economic growth,” adds Bhojnagarwala.

Deposits decline

Combined deposits at the four banks declined marginally by one per cent to AED1 trillion compared to Q1 2017.

This slight drop was after solid deposit growth in previous quarters for the UAE banking system, which suggests that liquidity pressure has been easing.

Nevertheless, the oil price levels will continue to weigh on deposit growth for the next few quarters, the credit rating agency adds.