The UAE’s top banks’ capital position remains robust, supported by high profits, and their asset quality further improved in the quarter ending June 2024. 

 

Profitability increased to AED21.5 billion ($5.85 billion) for Q2’24 on the back of higher net interest income (NII) and lower impairment charges (-35.4% QoQ), leading global professional services firm Alvarez & Marsal (A&M) said in its latest UAE Banking Pulse for the second quarter of 2024. 

 

Although interest rates remained stable, NII grew by 2% QoQ due to a higher loan-to-deposit ratio (LDR). Non-interest income was slightly lower (-2.9% QoQ) to bring the growth in total operating income to a nominal +0.4% (QoQ) in an expansion of return on equity (RoE) by 48bps QoQ. However, return on assets (RoA) remained stable at 2.2% in the same period.  

 

Loans and advances

Loans and advances (L&A) grew moderately (+3.2% QoQ), as retail lending witnessed a surge of 8% QoQ. However, deposits mobilisation slowed down (+0.4% QoQ) mainly due to decline in time deposits by 2.5%. Consequently, LDR increased by 2% QoQ. 

 

Prevailing trends

Credit demand outpaced deposits mobilisation in Q2’24. Aggregate L&A grew by 3.2% QoQ for the top 10 UAE banks outpacing deposits growth of 0.4% QoQ. Consequently, LDR increased by 2% QoQ to 75.8%. 

 

Total operating income moderated due to lower non-core income offsetting NII growth. Operating income increased marginally by 0.4% QoQ as non-interest income declined by 2.9% QoQ. The aggregate non-interest income / total operating income ratio stood at 32.5% in Q2’24. 

 

NIM remained mostly flat in Q2’24 as the benchmark interest rates were stable. Aggregate NIMs contracted slightly by 1bp QoQ to 2.65% during Q2’24. Yield on credit increased by 8bps QoQ to reach 12.3%, whereas cost of funds increased by 13bps QoQ to 4.6% in Q2’24. Faster growth in L&A as compared to deposits led the increase in LDR. Eight out of ten banks reported NIM contraction. 

 

Six out of the top ten banks reported a deterioration in the cost efficiencies. Cost to income ratio (C/I) deteriorated by 19bps QoQ to 28.1% in Q2’24: still below ~30% level. Cost efficiencies deteriorated as aggregate total operating income (+0.4% QoQ) increased slower than the total operating expense (1% QoQ) in Q2’24.

 

Cost of risk

Cost of risk (CoR) continued to improve for the UAE banks reaching a multi-year low. CoR improved by 16bps QoQ to settle at 0.3% for Q2’24. Total impairments declined by 35.4% QoQ in Q2’24 to AED1.3 billion. Six out of the top ten banks reported an improvement in CoR.

 

Profitability increased on the back of higher NII and lower impairment charges. UAE banks remain well capitalised with aggregate capital adequacy ratio (CAR) levels at 17.6%age (+0.34%age points QoQ).

 

Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services, commented: “The UAE banks’ performance continues to remain strong on the back of lending growth and improvement in asset quality. The sector is well capitalised with aggregate CAR levels at 17.6% and reported continued growth in Q2’24. 

 

“The Central Bank of the UAE (CBUAE) maintained its benchmark interest rate at 5.4% at the end of Q2’24 with no movement as the rate is anchored to the US Fed rate. Recent Fed comments indicate that the first rate cut is imminent – market expectations are that this may occur in September. Banks are expected to take some precautionary provisioning as asset quality remains sensitive at the peak of the interest rate cycle. Banks are also expected to emphasise the growth of non-interest income as net interest margins come under some pressure with the rate cuts. 

 

“We see, for example, a number of banks refocusing on their Transaction Banking offering. Further, we expect the UAE banks to show increased benefits from their investments in digital initiatives leading to improved cost efficiency.”--TradeArabia News Service