The profitability of the UAE’s banking sector recovered appreciably in 2021 and will grow further in 2022 on the back of anticipated economic recovery and the digital transformation of the banking industry, said a report.

 

“Broader profitability is expected to be driven by net-interest income (NII) growth as interest rates in the UAE are expected to increase in tandem with rate hikes by the US Federal Reserve,” said Asad Ahmed, Managing Director and Head of Middle East financial services at Alvarez & Marsal (A&M), a leading global professional services firm, which has released its latest UAE Banking Pulse for FY 2021. 

 

“Further, the Central Bank of UAE (CBUAE) predicts that the economy will grow at 4.2% in 2022, compared to their previous forecast of 3.8%. Higher oil prices, supportive government spending and normalising of non-oil sector activity is expected to support gross domestic product (GDP) growth and reinforce the UAE lender’s creditworthiness,” he said. 

 

The UAE government has extended forbearance measure through the Targeted Economic Support Scheme (TESS) up to June 2022 to support economic recovery. However, post the end of the loan forbearance period, banks might have to book additional provisions which could affect their asset quality and profitability, said Ahmed.

 

Going back to 2021, overall, banks have performed well on key income categories related to the markets, which continue to show elevated activity.

 

The UAE Banking Pulse for FY 2021 notes aggregate net income increased substantially by 48.6% year-on-year (YoY) to AED37.8 billion ($10.29 billion), mainly driven by higher operating income (+5.2% YoY) along with lower impairments (-30.1% YoY). 

 

However, the UAE banks remained cautious in originating new loans in 2021, despite higher liquidity. It is likely that the banks are holding reserves considered too high for the risk profile of their portfolio, given recent credit trends. 

 

A&M’s UAE Banking Pulse examines data of the 10 largest listed banks in the UAE, comparing the FY’21 results against FY’20 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 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) and Sharjah Islamic Bank (SIB). 

 

The trends identified for FY 2021 included growth in aggregate loans and advances (L&A) increased by 26 bps to 1.7% in FY’21, while deposits grew by 6.7% YoY alongside the UAE’s economy recovery from the Covid-19 pandemic. However, growth is still below pre-pandemic levels. The aggregate loan-to-deposit ratio (LDR) fell to 82.1% from 86.2%, as deposits grew at a higher pace compared to loans.

 

Total operating income increased by 5.2% in 2021, despite a 3.0% fall in net interest income. The growth in operating income was supported by a higher fee and commission income (+9% YoY) and income from investments and gains from foreign exchange (+43.7% YoY). 

 

NIM deteriorated further to a six-year low of 2.1% during FY’21, as compared to 2.3% in FY’20, largely due to a low interest rate environment. Aggregate yield on credit and cost of funds declined this year across the banks by 68 bps and 42 bps, respectively. 

 

Cost-to-income (C/I) ratio decreased by 1.7% YoY to 32.8%, as banks managed to control cost while increasing the operating income. The operating efficiency (C/I ratio) improved, supported by a 5.2% YoY increase in operating profits. The lower C/I ratio can be partially attributed to cost control measures implemented by some banks like ADCB, Mashreq Bank and ADIB.

 

Provisioning decreased substantially, with cost of risk (CoR) contracting by 54 bps YoY to 1.17%. Total loan loss provisions decreased by 30.1% to AED19.6 billion in FY’21, as the economy has started to recover amid continued stimulus provided by the Central Bank along with the government’s TESS. 

 

The UAE banks noted a strong earnings growth supported by lower provisioning and higher operating income. Aggregate net profit increased by 48.6% YoY, on the back of higher operating income and lower provisions. Overall, profitability ratios such as return on equity (RoE) and return on assets (RoA) improved to 11.1% and 1.3% from 7.7% and 0.9%, respectively.-- TradeArabia News Service