Banking sector profitability rebounds to pre-pandemic levels

The 10 largest listed banks include FAB, Emirates NBD, ADCB, DIB, Mashreq Bank, ADDIB, CBD, National Bank of Fujairah, National Bank of Ras Al Khaimah and SIB.

The UAE banking sector witnessed a strong comeback as profitability rebounded to pre-pandemic levels with a robust growth in Net Interest Income (NII) and other income, a review of third-quarter earnings of the top ten banks revealed.

The review, the UAE Banking Pulse, released by Alvarez & Marsal shows that while balance sheet growth slowed down, there was a sharp rise in earnings indicating that banks are prioritising profitability over growth.

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.

Comparing the Q3’21 results of the top ten banks against their Q2’21 results, the report pointed out that operational efficiencies have helped these banks’ operating income growth to outpace expenses. The cost-income ratio decreased to its lowest level since 2018 to 31.8 percent as banks continue to optimize their expenses and overheads. Their combined operating ratio declined (-1.8 bps QoQ), as provisioning eased on the back of an improving economic environment.

In Q3’21, operating income increased by 7.4 per cent QoQ, driven by 6.8 per cent QoQ growth in net interest income (NII) along with 8.5 per cent increase in net fee, commission, and other operating income.

Chairman of UAE Banks Federation (UBF), Abdul Aziz Al Ghurair, observed in October that the positive results are an indication that the banking industry is in recovery mode, after having been in decline globally due to Covid-19. He expects UAE banks to maintain their growth momentum in the second half of the year, driven by improvements in operating conditions, cost efficiency, and credit demand.

The Banking Pulse report, co-authored by Asad Ahmed, managing director and head of Middle East Financial Services, and Sumit Mittal, senior director at Alvarez & Marsal, said the Net Interest Margin (NIM) of the 10 largest listed banks increased by 10 bps QoQ to 2.15 per cent with higher yields on loans (+24bps QoQ). However, the current NIM levels of 215bps are still below the pre-pandemic levels (260bps in 2019). The aggregate interest income increased 6.1 per cent QoQ, primarily driven by an increase in yields to 5.3 per cent.

This quarter saw ‘better-than-expected’ profits. However, the growth in profitability appears uneven, and is leaning more towards the larger banks than the mid-sized banks.

Ahmed said sound capital buffers, a stable funding profile, and expected government support should continue to uphold banks’ creditworthiness.

— issacjohn@khaleejtimes.com