Top UAE banks benefit from better margins, but asset quality may decline in H2

The UAE’s top banks benefitted from better margins in the first quarter of 2022, but there is a risk of deterioration of asset quality in the second half of the year as the government’s economic support scheme, which was rolled out in March 2020 is coming to an end by mid-2022, according to global professional services firm Alvarez & Marsal (A&M).

Aggregate net profit for the top UAE banks increased by 24.3 per cent quarter-on-quarter (QoQ) basis. However, excluding the Dh2.8 billion gain on the sale of a stake in Magnati by First Abu Dhabi Bank, the aggregate net profit decreased by 2.6 per cent QoQ, A&M said in its Banking Pulse report for Q1.

The top 10 banks had also seen increased lending and improved asset quality during the first quarter. Cost of risk (CoR) improved for most UAE banks during the quarter, falling by 26.9 basis points (bps) quarter-on-quarter, primarily due to a significant decrease in net impairment charges, resulting from lower provisions due to economic improvements along with the extension of the targeted economic support scheme (TESS), A&M said.

Asad Ahmed, managing director and head of Middle East financial services at A&M, said rising oil prices, supportive government policies, revival signs in the real estate sector, and normalising non-oil activity are expected to accelerate the UAE’s economy in the next quarter.

“The International Monetary Fund has revised the UAE’s gross domestic product growth estimates for 2022 from 3.5 per cent to 4.2 per cent,” he said.

He said domestic lending will grow on the back of revived economic activities, and NIM will improve as benchmark interest rates have increased by 50bp.

“Deposits are also expected to grow underpinned by the projected interest rate increase. However, there are potential asset quality deterioration risks, in the later half of the year, when the Central Bank of UAE’s TESS scheme ends in mid-2022,” said Ahmed.

The report, which examined data of the 10 largest listed banks in the country, said the aggregate non-interest income (NII) increased by 0.6 per cent QoQ as the overall net interest margin (NIM) remained flat at 2.1 per cent, due to low benchmark rates.

“Asset quality of the state-owned banks improved as non-performing loans (NPL) / L&A fell by 0.1 percent points to 6.1 per cent during the quarter. In general, the profitability of the top ten banks has deteriorated marginally by 0.3 percent and return on asset (RoA) remained flat at 1.4 per cent during the quarter.”

The loan-to-deposit ratio (LDR) increased on the back of credit growth revival while deposits declined marginally. Aggregate L&A increased 2.8 per cent QoQ in Q1’22 indicating a revival in credit growth led by the post-pandemic economic recovery.

Meanwhile, deposits fell marginally by 0.1 per cent QoQ during the period after four consecutive quarters of growth. Consequently, aggregate LDR increased from 82.1 per cent in Q4’21 to 84.5 per cent in Q1’22, said the report.

Operating income for the top ten banks saw a significant fall, 6.4 per cent QoQ, mainly due to 35.9 per cent QoQ decline in foreign exchange and investment-related income. However, this was partially offset by a higher net commission and fee income of +4.6 percent QoQ, said the report.

— issacjohn@khaleejtimes.com