Top UAE banks record 35% fall in net profit to $6.7b

Profitability of top banks in the UAE will remain under pressure in 2021 as pressure on net interest income, the main source of revenue, persists and provisions increase further, Moody’s Investors Service said.

In 2020, the four largest banks in the UAE saw a sharp, but manageable, decline in their net profit for 2020.

However, the profitability of these banks will continue to benefit this year from their large market shares, strong ties with domestic governments, extensive retail franchises and broad geographical spread.

“Pressure on net interest income, their main revenue source, will persist through 2021, however, reflecting prolonged low interest rates. The impact of this will be softened by higher lending volumes as coronavirus-related restrictions ease and the vaccination rollout helps lower infection rates. Provisioning will increase further,” said Moody’s.

First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank, accounting for 76 per cent of UAE banking assets, reported a combined $6.7 billion net profit for 2020, down 35 per cent from a very strong $10.2 billion in 2019.

Moody’s said the decline reflected high loan-loss provisions related to the pandemic, lower interest rates and a non-recurring gain in 2019.

Moody’s outlook forecast is in line Alvarez & Marsal’s view that the pandemic would continue to affect profitability for banks in the early quarters of 2021, after a sharp drop in return on equity last year. The UAE banks’ return on equity fell to 7.7 per cent in 2020 from 13.3 percent the previous year, A&M said in a report on the UAE’s top 10 banks.

“Net interest income was boosted by acquisitions, which when excluded, dropped by 8.0 per cent in 2020,” says Francesca Paolino, an analyst at Moody’s Investors Service. “The increase in loan-loss charges was related to the pandemic and to the weakening of some large corporate names in the domestic market beforehand.”

Paolino said the banks’ combined reported net interest income rose 1.0 per cent year-on-year after recent acquisitions by two of the four banks.

All four banks reported a double-digit drop in net profit. At ENBD, net profit declined by 52 per cent (by 60 per cent excluding Denizbank) or by 31 per cent if excluding the one-off gain reported in 2019 for the Network International disposal. The drop was primarily caused by prudent loan-loss provisioning charges related to the coronavirus outbreak. DIB’s bottom line declined by 38 per cent, led by higher precautionary provisions, higher operating costs for the Noor Bank acquisition and lower non-interest income.

Net profit at ADCB fell 27 per cent, hit by impairments on distressed local corporates4 and low net interest income. FAB’s net income declined by 16 per cent due to an increase in provisioning charges and a drop in operating income driven by lower interest rates, said Moody’s.

Excluding acquisitions, net interest income dropped 8% due to declining margins driven by lower interest rates, but remained solid. Non-interest income fell. Income from investment securities, fee-based activities and market trading dropped 10 per cent. Operating costs were flat but declined excluding acquisitions.

Despite significant rise in provisions in 2020, the coverage ratio declined to 86 per cent from 99 per cent at year-end 2019 and we expect further higher provisioning during 2021 as asset quality deteriorates. Capital buffers remained strong.

According to A&M, total loan-loss provisions of top ten banks jumped 79 per cent year-on-year to Dh28.1 billion in 2020 as a challenging economic environment and banks’ exposure to several high-profile cases boosted impairments.

UAE banks have been hurt by their exposure to hospital operator NMC Health, which disclosed more than $4 billion in hidden debt after short-seller Muddy Waters questioned its financial reporting. — issacjohn@khaleejtimes.com