Dubai: The first half results of the UAE banks have reinforced the view that the asset growth, profitability, liquidity and credit quality of the UAE banking sector is softening in the context of prolonged low oil prices impacting the credit demand.
Amid tightening liquidity and subdued credit offtake, banks have been maintaining strong capital and liquidity ratios while higher loan loss provisions are impacting profitability.
Analysts say growth remains soft amid a challenging macro environment, net interest margins (NIM) are under moderate pressure, non-net interest income (NII) on decline while JAW ratio [Income growth rate to expense growth rate] are slightly negative despite operating expense optimisation.
Historically, the UAE had very low deposit rates which boosted the NIMs. With slowing credit growth and a rise in US interest rates, NIMs of the UAE banks are likely to face further pressure.
Analysts say NIMs for the sector is expected to remain compressed in the context of increase in deposit rates while competitive pressures in the market and slowing loan demand has kept a lid on lending rates.
Despite the rising margin pressures, there were a few notable exceptions, such as Emirates NBD, Dubai Islamic Bank (DIB) and Abu Dhabi Islamic Bank (ADIB), which continued to report strong growth in profits and improved credit quality amid sector-wide decline in credit growth and a surge in non-performing loans (NPLs).
Lower investment gains
National Bank of Abu Dhabi (NBAD) reported a 7.8 per cent year on year decline in net its profits for the first half of the year from Dh2.86 billion in the first half of 2015 to Dh2.64 billion in the same period this year. The second quarter net profits also saw 5 per cent year on year decline to Dh1.37 billion reflecting lower investment gains, higher impairment charges and slowing loan growth. Net impairment charges in the second quarter was up 79 per cent year on year reflecting increasing Cost of risk (CoR) at 57 bps in the second quarter nearly double compared to 30 bps in the second quarter of 2015.
Abu Dhabi Commercial Bank’s (ADCB) first half net profit of Dh2.14 billion was 15 per cent lower, primarily on account of higher impairment allowances. Charges for impairment allowances net of recoveries amounted to Dh722 million in the first half compared to Dh333 million in the first half 2015.
FGB saw an 8 per cent decline in 2016 first half net profits to Dh2.64 billion in compared to the Dh2.87 billion in the same period in 2015. In the second quarter the net profit was at Dh1.31 billion, down 10 per cent on the Dh1.45 billion in same quarter in 2015.
Among the Abu Dhabi based banks Union National Bank (UNB) had the sharpest decline profit growth with the bank reporting a first half 2016 net profit of Dh922 million lower by 22 per cent year-on-year.
“Given the generally uncertain global economic outlook, the UNB Group maintained its strategy to selectively pursue growth focusing on good quality assets while managing the downside risks,” said Mohammad Nasr Abdeen, Chief Executive Officer of UNB said in statement.
Summing up the overall mood in the sector UNB said its cautious approach through tighter underwriting standards and selective booking of quality assets led to a more moderate growth in loans and advances impacting revenues.
Credit standards
The latest credit survey by the UAE Central Bank showed demand for both business credit and personal loans slowed down across the UAE in the second quarter of 2016, particularly in Dubai. The survey showed further tightening in credit standards, “suggesting a higher degree of risk aversion in extending loans, especially to Small and Medium Enterprises (SMEs),” the report stated.
Among Abu Dhabi based banks ADIB was lone exception to the trend of declining trend in profits. The bank reported a net profit of Dh989.5 million, for the first half of 2016 up 3.8 per cent compared to the same period last year. The group net profit for the second quarter of 2016 increased by 5.3 per cent to Dh507.5 million. Credit provisions and impairments for the first half increased by 19.2 per cent to Dh450.1 million.
Most Dubai based banks also reflected the pressure on profitability and asset quality. Commercial Bank of Dubai (CBD) reported 20.3 per cent lower net profits for the first half of 2016 at Dh485.8 million compared to Dh609.8 million in the same period last year.
Cautiously optimistic
Mashreq reported a first-half net profit of Dh1.1 billion, compared to Dh1.3 billion in the same period last year. For the second quarter of the year the bank’s net profit was Dh539 million, up 1.4 per cent quarter-on-quarter. Net allowances for impairment for the first half of 2016 were up 97.7 per cent to Dh838 million, compared to Dh424 million in the same period last year.
“We remain cautiously optimistic for the remainder of 2016 and we are conscious of the challenges we may face. Our focus remains on keeping a strong hand on expenses while allowing flexibility to take advantage of opportunities that present themselves over the remainder of the year and into 2017,” said Mashreq’s CEO, AbdulAziz Al Ghurair.
