Top 10 UAE banks record healthy Q2 rebound

The top ten UAE banks recorded a healthy rebound in profitability and balance sheet metrics in the second quarter with the Return on Equity (RoE) reaching its highest level of 10.9 per cent for the first time since 2019.

In the last quarter of 2019, the RoE was 13.3 per cent in Q4’19. As economic conditions continue to improve, the top 10 banks could post a RoE at Q4 2019 levels, leading professional services firm Alvarez & Marsal said in its “UAE Banking Pulse for Q2 2021.”

The report said the banks under review recorded an increase of 2.8 per cent quarter over quarter (QoQ) in operating income coupled with lower impairment charges of 9.3 per cent QoQ, which were the key drivers for growth in profitability.

Co-authored by Asad Ahmed, managing director and head of Middle East Financial Services, and Sumit Mittal, senior Director at Alvarez & Marsal, the UAE Banking Pulse, examines the data of the 10 largest listed banks in the UAE, comparing the Q2’21 results against Q1’21 results.

“Improvements in asset quality are helping to drive the UAE banking sector turn around. We look forward to this trend continuing,” said Ahmed.

The UAE’s Central Bank’s Q2’21 credit sentiment survey notes a strong, ongoing domestic credit demand across all sectors of the economy indicating that a vibrant recovery is on track. However, the US Fed’s commitment to maintaining the current low level of interest rates is expected to keep domestic banks’ income streams under pressure, said Ahmed.

“We believe focusing on significant efficiency improvements, continuing to adopt technology, either organic or in partnership with fintech’s, and actively managing non-performing portfolios are critical to driving improvements forward,” he said.

The 10 largest listed banks analysed in the report are First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, National Bank of Fujairah, National Bank of Ras Al Khaimah, and Sharjah Islamic Bank.

Loans & advances increased by 1.9 per cent QoQ, after declining for three consecutive quarters as Dubai’s mortgage market indicated robust signs of improvement, with the number of mortgage issuances almost doubling between December 2020 and June 2021, said the report.

The second quarter saw deposit growth outpacing loans at most banks as consumers and businesses cut spending amid economic uncertainty, bolstering already robust liquidity.

Operating income increased 2.8 per cent QoQ, supported by reduced cost of funding and higher investment income. Major banks including FAB, and DIB reported substantial increase in their trading and foreign exchange income, which supported overall operating income.

The aggregate net interest margin (NIM) remained largely stable at 2.05 per cent in Q2’21 as industry-wide credit yields continued to remain suppressed while cost of funding declined marginally. While ADCB, CBD, and NBF reported NIM expansion by 10-20 bps, the remaining banks largely remained unchanged.

The asset quality of these banks also has stabilised overall after deteriorating in 2020. Three out of UAE’s top ten largest banks, including Emirates NBD, Mashreq and RAK Bank, have a coverage ratio of over 100 per cent. “The banks have shown that they are better positioned than before in managing stress in their balance sheets in view of higher capital buffers, improvement in recoveries and improving profitability. The lower provisioning by banks underlines an improved credit outlook for the sector,” said the report. — issacjohn@khaleejtimes.com

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.