Top UAE banks face ‘sizeable’ surge in NPLs
The total interest income of these banks continued to decline for the third consecutive quarter.
Net income of the top 10 UAE listed banks declined by 3.0 per cent in the third quarter of 2020 after a rebound in the preceding quarter due to lower interest and other challenging conditions which continued to impact profitability, a leading global professional services firm said on Sunday.
The total interest income of these banks continued to decline for the third consecutive quarter reporting, 7.7 per cent q-o-q, as lower interest rate environment continued to pressure banks’ asset yield, Alvarez & Marsal said in its latest “UAE Banking Pulse for Q3 2020.”
“Challenging macroeconomic conditions, low oil prices and effects of Covid-19 have severely impacted overall asset quality and resulted in higher non-performing loan reporting, at 3.6 per cent QoQ increase,” said the report.
The top ten banks also reported that loans and advances remained broadly flat during the third quarter, which was the slowest growth in the last six quarters, while deposit growth improved to 4.2 per cent QoQ. Furthermore, cost to income ratio increased after improving in the last two quarters to reach 34.3 per cent in Q3’20 as decline in operating income outplayed cost optimization, the report co-authored by Dr. Saeeda Jaffar, A&M managing director and head of Middle East, and Asad Ahmed, A&M managing director and head of Middle East Financial Services.
The banks reviewed in the report included 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.
“After a rebound in performance in in the second quarter, profitability of the top 10 UAE banks showed signs of vulnerability with declining interest income and increased provisioning weighing on the net profit in the third quarter. We expect the economic conditions in the UAE and the region generally to remain challenging in the near term, which would likely limit credit and earnings growth and also result in higher NPLs,” said Ahmed.
He warned that when the Central Bank’s TESS program expires in June 2021, there could be a sizeable increase in NPLs for the banks, should the economy fail to recover. “However, we remain confident that this initiative will allow the economy to gradually recover from the effects of the pandemic.”
Top 10 banks have provided borrowers access to Dh51.1billion at the end of Q3’20 under the TESS programme.
Ahmed said it is likely that dirham interest rates would continue to track US dollar rates. These are not expected to show a major increase in the near future, and hence NIMs will continue to be compressed. “We note that Return on equity (ROE) and return on assets (ROA) within the banking sector continue their downward trend. This may provide an opportunity for banks to look into further consolidation, and focus on integrating new technologies to rationalize costs.”
Global rating agency S&P in its recent forecast that higher cost of risk and lower margins will reduce the profitability of banks in the UAE for 2020-2021, but most of them are expected to remain profitable.
“We believe UAE banks’ reduced profitability will last longer due to the high proportion of non-interest-bearing deposits in their funding structures and lower revenue on the asset side,” said S&P said. “Margins have tightened by 30-40 basis points (bps) due to lower interest rates. Lower margins and higher,” S&P said.
A&M’s report said loans & advances remained flat, while deposits increased by 4.0 per cent. “The challenging economic environment impacted credit uptake as L&A remained flat in Q3’20 compared to Q2’20. On the other hand, deposits increased 4.2 per cent QoQ, largely on the back of 16 per cent increase in First Abu Dhabi Bank’s deposits. Consequently, loans to deposit ratio decreased to 84.1 per cent compared to 87.7 per cent in Q2’20. — email@example.com
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