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Are UAE banks really on the ‘path to profitability’?

Improved interest growth and strong income from fees and commissions are setting the UAE’s banks on the path to profitability, suggests a recent report by ratings agency Moody’s Investor Service.

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Primarily, the data reveals that, in spite of increasing costs, the country’s four biggest banks – ADCB (Abu Dhabi Commercial Bank), DIB (Dubai Islamic Bank), Emirates NBD and FAB (First Abu Dhabi Bank) – reported a cumulative eight per cent growth in profit during the final quarter of 2017 compared to the same period one year ago.

Also, as of December 2017, these four lenders together accounted for more than 60 per cent of the UAE banking sector’s assets, the agency revealed.

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Solid rise

Nitish Bhojnagarwala, a vice president at Moody’s, said: “The four largest UAE banks delivered a solid rise in net profits in the final quarter of 2017.”

He added: “This was largely driven by higher business volumes and recent interest rates hikes, which generated higher recurring income, both in the form of net interest income and fees and commissions.”

In February, Emirates NBD announced its valuation as the country’s most valuable banking brand on the back of a whopping $3.534 billion in the annual brand valuation league table produced by The Banker, a reputed international finance publication. In keeping with this win, the bank also saw its net profits soar by 15 per cent in 2017 to reach AED8.35bn.

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In January 2018, DIB reported that its net profit for 2017 was AED4.5bn, an increase of 11 per cent over net profits in 2016. Meanwhile, the bank’s net operating revenue for 2017 was AED7.68bn, while total income stood at 10.19bn for the year.

Meanwhile, ADCB saw its net profit for 2017 increase by three per cent, standing at AED4.28bn as opposed to AED4.15bn the year before that.

In contrast, the overall net profit of FAB for 2017 fell by 3.5 per cent year on year, standing at AED10.9bn. It is believed that decline is due to merger-related costs, as FAB was created by the merger of First Gulf Bank (FGB) and NBAD (National Bank of Abu Dhabi), with the new entity becoming operational in April last year.

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Investing in growth

At the same time, the Moody’s analysis also showed that the banks were investing more and more in technology, digitisation and innovation in a bid to improve operational efficiency. This was borne out by the fact that operational expenses also rose sharply by seven per cent in 2017 over 2016.

The report also went on to note that these are all signs of an economic rebound in the UAE after a period of low oil prices, adding that stabilising operating expenses will underpin core profitability, which is expected to remain stable over the next 12 to 18 months.

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Breathing easier

Meanwhile, another recent report, released by S&P Global Ratings, also echoes similar sentiments, predicting that 2018 will be the year when GCC banks breathe a little easier, with financial profiles and performance stabilising after two years of pressure.

The report elaborates that the stabilisation of the UAE banking sector would mirror that of the country’s economy. However, it noted that growth, while present, will be muted because current economic performance remains below what was achieved during a period of record-high oil prices a few years ago.

At the same time, loan growth in the GCC region will remain muted over 2018 and 2019, S&P Global Ratings expects, averaging three or four per cent, due in part to cuts in government spending. Analysts also note that, for the overall GCC region as well, the profitability of lenders will stabilise at levels slightly lower than historically seen.

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