Major banks' profits to remain solid

Profitability at the four largest UAE banks will remain solid in the next 12 to 18 months on the back of solid interest income, despite pressure on fee and commission income, says Moody's Investors Service in a new report.
The four banks, First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank, reported a combined net profit of Dh6.7 billion in second quarter 2017 supported by higher net interest income.
The rating agency said aggregate net profitability was broadly flat versus second quarter 2016, but fell 3.5 per cent quarter on quarter also partially driven by a decline in fee and commission income.
"Profitability was supported by higher yields on loans and stable funding costs, which drove higher net interest income, despite sluggish economic growth due to current oil prices," said Nitish Bhojnagarwala, vice-president at Moody's.
Operating expenses across the four banks were down by six per cent relative both to the previous quarter and to second quarter 2016. "Over the next 12 to 18 months, we expect broadly stable cost to income ratios as the banks continue to invest in technology offsetting cost-cutting gains. However, provisioning charges showed a mixed trend with ENBD and FAB showing an improving trend, while ADCB and DIB posted weakening trends," Moody's said.
"We expect a modest rise in provisioning charges in the coming quarters, driven by the sluggish economic growth," added Bhojnagarwala. In general, the UAE banks reported resilient earnings in the second quarter. Earnings benefited from an improvement in credit cost, as well as modest loan growth. Second-quarter results of the UAE banks point to improving profitability, modest balance sheet growth, margin expansion and improving costs, according to banking sector analysts. Jaap Meijer, head of Equity Research at Arqaam Capital, said the UAE banks generally reported good second-quarter results, driven by improving credit environment and some margin expansion, with Dubai banks showing relatively better balance-sheet growth than Abu Dhabi banks.
"We expect earnings to further improve in the second half of 2017 supported by increased credit appetite, [a] consistent decline in credit costs and [a] June rate hike," said Meijer. Moody's said combined deposits at the four banks declined marginally by one per cent to Dh1 trillion in second quarter compared to first quarter of 2017. This slight drop was after solid deposit growth in previous quarters for the UAE banking system, which suggest that liquidity pressure has been easing. Nevertheless, the oil price levels will continue to weigh on deposit growth for the next few quarters.
The banks' combined Tier 1 capital ratio improved modestly to 16.7 per cent from 16.2 per cent relative to the previous quarter.
Data disclosed by the 13 listed banks until July 20, 2017, indicated that their assets have surged to Dh1.41 trillion by the end of the first half of 2017, a growth of 6.8 per cent from Dh1.31 trillion in the corresponding period in 2016.The 13 banks recorded increase to Dh963 billion in deposits by the end of the same period, 8.2 per cent up from Dh890 billion in the same period last year. 
- issacjohn@khaleejtimes.com