Higher-income, easing provisions drive UAE banks’ profitability growth

Top five UAE banks report a combined net profit of $4.4 billion in first half of 2022, up 10 per cent from $3.9 billion in the same period in 2021

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Issac John

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Most banks demonstrated a level of resilience during the period, recording strong growth in net profit (up nine per cent in aggregate) and moving closer to pre-pandemic levels in dollar terms. — File photo
Most banks demonstrated a level of resilience during the period, recording strong growth in net profit (up nine per cent in aggregate) and moving closer to pre-pandemic levels in dollar terms. — File photo

Published: Mon 26 Sep 2022, 5:39 PM

Last updated: Mon 26 Sep 2022, 5:40 PM

The bottom-line profitability of the four largest banks that account for 70 per cent of the total UAE banking assets continued to recover in the first half of 2022, driven by strong interest income, robust noninterest income, and softening loan-loss provisions.

As the operating environment in the UAE continued to recover despite global macro-headwinds, these banks — Frist Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, and Dubai Islamic Bank – reported a combined net profit of $4.4 billion, up 10 per cent from $3.9 billion in the same period in 2021, analysts at Moody’s Investors Service said.

“The performance takes into account the hyperinflationary accounting adjustment for one large UAE bank with a subsidiary operating in Turkiye.’’ said Nitish Bhojnagarwala, vice president- senior credit officer at Moody’s.

Higher interest drove an increase in the net interest margin, which rose 20 basis points to 2.1 per cent compared with the same period a year earlier, and net interest income rose by 15 per cent. Combined non-interest income grew by two per cent year-over-year as exceptional trading gains in the first half of 2021 were not repeated, and were offset by an uptick in lending volumes and fee-generating activity on improving consumer sentiment, said Moody’s.

The recovery to near pre-pandemic levels reflected improving consumer confidence as macroeconomic conditions in the UAE recovered, particularly given loosening pandemic restrictions, a strong vaccination roll-out, recovering oil prices and expectations of a reversal in the benchmark interest rates cycle, according to Badis Shubailat, analyst at Moody’s.

Most banks demonstrated a level of resilience during the period, recording strong growth in net profit (up nine per cent in aggregate) and moving closer to pre-pandemic levels in dollar terms.

The banks' impairment charges fell by a further 25 per cent in the first half of the year following a similar decline in 2021, reflecting the UAE's continued economic recovery. Non-performing loans remained elevated at around 6.5 per cent as of June 2022.

Capital buffers of the big four remain adequate during the period despite regulatory headwinds. The aggregate reported Tier 1 capital ratio was 15.4 per cent as of the same period, well above regulatory minimums.

“We expect the pick-up in bottom-line profitability to further support the banks' already healthy capital buffers and outweigh the decline stemming from increased lending activity in a context of economic recovery,” Shubailat said.

According to S&P Ratings, higher interest rates and lower cost of risk will continue to support banks' profitability in the UAE while across the GCC, earnings for most banks are expected to reach almost pre-pandemic levels by the end-2022.

In the second half, the asset quality of UAE banks will stabilise while non-performing loan increases will remain contained as the economy improves and corporate activity recovers, analysts at S&P Global Ratings said.

The rating agency said the performance of the UAE banking sector improved in first-half 2022 on the back of lower cost of risk and higher interest rates. The 11 national banks listed on the UAE capital markets have registered net profits of $5.69 billion in the first half of this year, reflecting their strong financial solvency, strong revenues, and high liquidity.

The listed banks include First Abu Dhabi Bank, Emirates NBD, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, Emirates Islamic Bank, Sharjah Islamic, Bank, National Bank of Umm Al Quwain, Commercial International Bank, and Ras Al Khaimah National Bank.

The Central Bank of the UAE’s targeted economic support scheme helped the system through a period of stress, limiting the increase in NPLs, according to S&P Global Ratings credit analyst Zeina Nasreddine.

— issacjohn@khaleejtimes.com


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