UAE banking sector profitability improves in Q2-2021

Dubai: The UAE banking sector’s profitability improved in the second quarter  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, which witnessed a strong rebound according to an analysis of second quarter results of Top 10 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 as economic conditions continue to improve. 

Loan growth

Loans and advances increased by 1.9 per cent quarter-on-quarter, after declining for three consecutive quarters. Mortgage issuances in Dubai almost doubled between December 2020 and June 2021.

The asset quality of the UAE banks has stabilised after deteriorating in 2020. Three out of the Top 10 largest banks  have a coverage ratio of over 100 per cent.

Improvements in asset quality are helping to drive the UAE banking sector turn around. We look forward to this trend continuing

- Asad Ahmed, Managing Director and Head of Middle East Financial Services at A&M

The banks have shown that they are better positioned in managing stress in their balance-sheets in view of higher capital buffers, improvement in recoveries and improving profitability. Banks' operating income increased 2.8 per cent quarter-on-quarter, supported by reduced cost of funding and higher investment income. Major banks such as First Abu Dhabi Bank and Dubai Islamic Bank reported substantial increase in their trading and foreign exchange income.

Stable net interest margins

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 Fed’s commitment to maintaining the current low level of interest rates is expected to keep domestic banks’ income streams under pressure," said Ahmed. "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.”

Asset quality

Aggregate asset quality (non-performing loans/net loan ratio) appears to have stabilised after deteriorating for six consecutive quarters to 6.2 per cent. Coverage ratio 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 reflects an improving credit outlook from an improving economic situation.

Return on equity rebounded to double-digit levels of 10.9 per cent from 9.8 per cent. Total net income increased by 11.5 per cent, primarily due to significant decline in impairment allowances of 9.3 per cent and rise in net interest income by 3.5 per cent. 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 10 banks.