The majority of banks in the UAE saw an increase in operating income (+3.2% QoQ) in the second quarter (Q2) on the back of moderate increase in non-interest income (+7.7% QoQ) and lower impairment charges.

 

All top 10 banks reported increase in loans and advances (+2.7% QoQ), mainly driven by growth in corporate and wholesale loans, according to leading global professional services firm Alvarez & Marsal (A&M), which has released its latest UAE Banking Pulse for Q2, 2023. 

 

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). 

 

Increase in NII

The report shows a positive trend in the UAE banking sector's profitability, primarily driven by an increase in non-interest income and reduced impairment charges. 

 

On a quarter-on-quarter (QoQ) basis, the banking sector was stable. Peaking interest rates have slowed the NII (net interest income) growth. The Central Bank of UAE (CBUAE) Credit Sentiment Survey indicated strong loan demand growth and optimistic expectation on credit appetite from financial institutions. CBUAE continues to anchor its benchmark rate to the US fed and increased it by 50bps between Q1’23 to July’23. 

 

Despite benchmark interest rates reaching their peak, NII contributed minimally to profitability with a 1.3% QoQ growth.  Loans and advances (L&A) experienced a 2.7% QoQ growth, predominantly fueled by corporate/wholesale loans' 3.7% QoQ expansion. 

 

Deposits growth moderated at 0.8% QoQ, influenced by a decline in time deposits by 2.1% QoQ. Net interest margin (NIM) contracted by 4 basis points, and the non-performing loan (NPL) ratio improved marginally by 19 basis points to 5.2%. The provisioning coverage for Stage 3 loans stood at approximately 63.4%. Return on equity (RoE) improved by 99 basis points, while return on assets (RoA) remained steady at 2.2% throughout the quarter.

 

16 different metrics

A&M’s UAE Banking Pulse examines data from the 10 largest listed banks in the UAE, comparing the Q2’23 results against Q1’23 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 report also offers an overview of the key developments affecting the banking sector in the UAE. Starting with this issue, A&M has added further granularity to the analysis with a segment view of loans & assets, deposit mix and a stage–wise breakdown of the lending book.

 

Prevailing trends identified for Q2 2023

Aggregate L&A increased by 2.7% QoQ in Q2’23. Aggregate deposits for top 10 banks grew marginally by 0.8% QoQ. Consequently, loan-to-deposit ratio (LDR) increased 1.4% points QoQ to 76.3%. During Q2’23, all top 10 banks reported an increase in L&A, where CBD reported the highest growth of 5.5% QoQ. A decline in deposits of FAB (-4.6% QoQ) slowed the pace of aggregate deposits growth.

 

Total operating income increased by 3.2% QoQ in Q2’23 compared with 3.7% QoQ in Q1’23. The growth in total operating income was driven by non-interest income which increased by 7.7% QoQ. In spite of a rise in the benchmark rates, the NII grew marginally by 1.3% QoQ.

 

NIMs narrowed by 4bps as the lag effect in the declining trend in LDR reflected in contraction of NIMs besides decline in spread differential QoQ. Yield on credit increased (+76bps QoQ) to 11.0%, slower than cost of funds (+48bps QoQ) to 3.7% in Q2’23. Aggregate net interest income (+1.3% QoQ) grew marginally due to an increase in the CBUAE policy rate by 25bps for the quarter. 

 

Cost-to-income ratio

Cost-to-income (C/I) ratio improved by 10bps QoQ to reach 27.6% in Q2’23 as total operating income growth (+3.2% QoQ) outpaced the total operating expense (+2.9% QoQ). 

 

Eight out of 10 banks reported an improvement in cost of risk (CoR). The CoR improved by 8bps QoQ to settle at 0.7% for Q2’23. Total impairments declined by 8.5% QoQ in Q2’23 to AED3.3 billion ($900 million). 

 

Marginal growth of NII (+1.3% QoQ) along with non-interest income (+7.7% QoQ) and reduction in impairment charges (-8.5% QoQ); resulted in 4.8% QoQ growth in aggregate net income. Consequently, RoE expanded by 99bps QoQ to 20.3%; however, RoA remained stable at 2.2% for the quarter.

 

Sustained resilience

Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services, commented: “We are continuing to witness sustained resilience in the UAE’s banking sector. Profitability remains robust and is symbolic of the sector’s adaptability, with non-interest income elevation and a reduction in impairment charges steering the positive trajectory. UAE banks continue to stand on firm financial ground and are poised to navigate through the broader macroeconomic landscape. The alignment of the UAE’s interest rates with the US Federal Reserve, marked by a gradual 50bps rise from Q1’23 to July’23, further assists in this economic stance. 

 

“Additionally, the upward revision of the non-oil economic growth forecast for 2023, now at 4.5%, reflects the vibrant signals coming from both the buoyant tourism and real estate sectors. In particular to the latter, a sizeable 363% year-on-year surge in Foreign Direct Investment within Abu Dhabi's real estate sphere, amassing AED834.6 million ($227 million) in H1’23, is very noteworthy.”--TradeArabia News Service