Asset quality set to stabilise reflecting a positive outlook for UAE banks
Dubai: The UAE banking sector’s profitability improved in the second quarter on 2021 with the return on equity (RoE) back at Q4-2019 levels as loans and advances increased.
Improved lending was supported by Dubai’s mortgage market that witnessed strong rebound according to an analysis of second quarter financial results of top 10 UAE banks by assets by Alvarez & Marsal (A&M).
The RoE has reached its highest level of 10.9 per cent for the first time in the last five quarters with 13.3 per cent in in the fourth quarter of as economic conditions continue to improve. An increase of +2.8 per cent quarter on quarter in operating income coupled with lower impairment charges of -9.3 per cent were the key drivers for growth in profitability.
Loans and advances increased by 1.9 per cent quarter on quarter, after declining for three consecutive quarters. Dubai’s mortgage market has indicated robust signs of improvement, with the number of mortgage issuances almost doubling between December 2020 and June 2021.
The asset quality of the UAE banks 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.
Banks operating income increased 2.8 per cent quarter on quarter, supported by reduced cost of funding and higher investment income. Major banks including First Abu Dhabi Bank (FAB), and Dubai Islamic Bank (DIB) reported substantial increase in their trading and foreign exchange income, which supported overall operating income.
Aggregate net interest margin (NIM) remained largely stable at 2.05 per cent in Q2-2021. NIM remained flat 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 US Fed’s commitment to maintaining the current low level of interest rates is expected to keep domestic banks’ income streams under pressure. We believe focusing on significant efficiency improvements, continuing to adopt technology, either organic or in partnership with fintechs, and actively managing non-performing portfolios are critical to driving improvements forward,” said Ahmed.
Aggregate asset quality (non-performing loans/net loan ratio) appears to have stabilised after deteriorating for six consecutive quarters to reach 6.2 per cent. Coverage ratio for the banks increased to 92.3 per cent from 91.0 per cent.
The cost of risk decreased by about 13 bps quarter on quarter, as total provisioning decreased about 9.3 per cent to Dh4.8 billion. The lower provisioning by the banks reflects an improving credit outlook on the back of an improving economic situation.
RoE rebounded to reach to double-digit levels of 10.9 per cent from 9.8 per cent. Total net income increased by 11.5 per cent quarter on quarter, primarily due to significant decline in impairment allowances of -9.3 per cent quarter on quarter and rise in net interest income by 3.5 per cent quarter on quarter. Consequently, profitability metrics such as RoE at 10.9 per cent and return on asset (RoA) at 1.2 per cent. have improved. ENBD with 12.5 per cent and CBD with 13.3 per cent reported the highest RoE among the top ten banks.
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