Profits at large UAE banks rose during the first six months of 2021 after a modest improvement in the operating environment led to lower loan-loss provisions. 

 

Moody’s said in a new report that the largest four banks in the system, First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank, accounting for 77% of UAE banking assets, reported a combined net profit of $4 billion for the first half of 2021, up 17% compared to last year.

 

‘’The UAE’s four largest banks profits rose in the first half of 2021 as they booked lower loan-loss provisions. We expect bottom-line profitability to gradually improve over the next 12 to 18 months as banks ease their provisioning efforts. However, provisioning could potentially pick up once again when the central bank’s loan repayment deferral programme ends,’’ says Nitish Bhojnagarwala, VP-Senior Credit Office.

 

Lower interest rates pushed down net interest income. Net interest income for the four banks fell by 12% for the six months as lower interest rates drove a fall in asset yields. 

 

The decline was slightly offset by lower interest expenses as banks retired expensive deposits in an effort to reduce funding costs.

 

Non-interest income surged. Income from investment securities, fee-based activities and market trading rose 17% year-on-year as economic activity in the UAE picked up and one-off fee waivers granted last year ended.

 

Operating efficiency improved further. The four banks are focused on cost-efficiency and reduced operating expenses for the period by 6% year-on-year when excluding the cost of integrating acquisitions, supporting their bottom-line profitability.

 

Loan-loss provisions eased, Moody’s said. The banks provisioning fell by 38% in the first half of 2021, as the economy recovered. While the full impact of the pandemic on banks' asset quality will not be clear until the central bank's Targeted Economic Support Scheme (TESS) is withdrawn, combined non-performing loans of the four banks have increased from to 6.2% as of June 2021 from 5.2% as of June 2020. At the same time, coverage moderately declined to still solid levels of 83%.

 

Profitability will remain below pre-pandemic levels this year. The aggregate return on assets of the four banks was 1.2% for the first half of the year, up 10 basis points year-on-year, but lower than the 1.7% they achieved in 2019. Lower interest income, combined with precautionary provisioning will keep net profit below pre-pandemic levels over the coming quarters.

 

Capital buffers remain adequate. The banks maintained Basel III Tier 1 capital at15.9% of risk-weighted assets (RWAs) in aggregate. Sound capital levels are the result of lower dividend payouts and muted growth in risk-weighted assets, Moody’s said.-- TradeArabia News Service