Dubai: The top four UAE banks that account for more than 60 per cent of the banking system assets in the country have maintained stable profitability supported by higher yields and stable funding costs generating higher net interest income according to rating agency Moody’s.

Analysis of second quarter banking sector financial data by Arqaam Capital and Alvarez & Marsal (A&M) also showed that leading UAE banks have managed to maintain their profitability, despite challenging macroeconomic conditions.

Moody’s analysis show the overall net profitability of the top 4 banks such as First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB) was broadly flat year on year, but 3.5 per cent lower quarter on quarter. These banks’ second quarter performance was underpinned by higher net interest, which was up by 3 per cent when compared with both second quarter of 2016 and first quarter of 2017.

“The higher net interest reflected higher yields on loans and stable funding costs, despite sluggish growth. The increase is driven by the banks’ ability to reprice existing loans and effectively pass on the increases in funding costs which arose in the previous quarter,” said Nitish Bhojnagarwala, a Vice President at Moody’s.

The banks also benefited from US interest rate increases, owing to the peg between the UAE local currency, the dirham, and the US dollar, which lifted the benchmark rate (EIBOR) for domestic lending. This generated higher interest income. This increase offset the pressure on interest income from sluggish lending volumes to some extent.

Lending volumes were only modestly higher for all the banks except FAB, which experienced a 7 per cent decline when compared with the first quarter of 2017. “Looking ahead, we expect asset yields to stabilise and, combined with stable funding costs, to result in flat net interest income,” said Bhojnagarwala.

Modest growth

Fee and commission income is declining due to the slowing economy and weak credit growth Fee and commission income declined by 8.6 per cent on average relative to the second quarter of 2016 although it increased marginally when compared with the first quarter of 2017. The decline was largely driven by FAB and DIB. Both ENBD and ADCB achieved modest growth of around 2 per cent, although even this is decelerating. The reduction in fee and commission income can be explained by overall slowing economic growth and trade volumes and associated weak credit growth.

Operating expenses have declined and are expected to stabilise over the next 12 to 18 months. Analysts expect broadly stable cost to income ratios as the banks continue to invest in technology which will offset cost-cutting gains. The banks’ are however reaping the benefits of cost reductions made in 2016, with operating costs down by almost 6 per cent compared to the second quarter of 2016 for these banks, with the exception of ADCB. ADCB reported a marginal 1 per cent year-on-year increase in costs.

The largest drop in operating costs was reported by FAB, at around 9 per cent, driven by the synergies of the merger between First Gulf Bank and National Bank of Abu Dhabi. Also as a result of the merger, FAB’s cost to income ratio at 29 per cent is the lowest in the peer group. Overall, the peer group reported a drop in cost-to-income ratio to 30 per cent for the second quarter of 2017, from 32 per cent for the second quarter of 2016.

Mixed performance

Provisioning charges are modestly up, although performance was mixed Provisioning expense at a consolidated level increased by 1 per cent and 6 per cent when compared to both first quarter of 2017 and second quarter of 2016. However, this overall increase does not accurately reflect the mixed performance of the peer group, with ENBD and FAB showing an improving trend and ADCB and DIB a weakening trend.

Combined deposits at the four banks marginally declined by 1 per cent to Dh1 trillion relative to the first quarter of 2017. The decrease was primarily driven by FAB, whose deposit base declined by 4 per cent due to consolidation as a result of the merger. For ENBD and ADCB, deposits were flat, while DIB’s deposit base grew by 3 per cent compared the previous quarter.

“The UAE banks generally reported good second quarter results, driven by improving credit environment and some margin expansion, with Dubai banks showing relatively better balance sheet growth than Abu Dhabi banks,” Jaap Meijer, Director of Equity Research at Arqaam Capital.