UAE banking stocks will have to deal with bursts of voaltility
Banks redoubled efforts to pare down costs will take time to deliver results
An analysis of the various statistics released by UAE Central Bank gives us insights into the performance of listed banks and other financial institutions.
The COVID-19 pandemic and the resultant economic distress has seen the UAE Central Bank relax the reserve requirements significantly. From Dh129.73 billion in December, total reserves of banks with the Central Bank came down drastically to Dh70.95 billion in May.
Meanwhile, Certificate of Deposits, the major tool for monetary policy transmission in UAE, saw their aggregate value rise from Dh160.18 billion to Dh194.32 billion. The Central Bank had reduced the reserve requirements to boost lending and thereby boost the local economy.
Not enough risk taking
Nevertheless, the relaxation of reserve requirements doesn’t seem to have had the required impact with banks choosing to park part of their funds back with Central Bank in the form of Certificate of Deposits. Banks seem to be writing off part of the non-performing loans as the Common Equity Tier 1 Capital Ratio has fallen from 14.7 per cent in December to 13.9 per cent in May 2020.
Reflecting the weak economy, the average cost on bank deposits dropped from 1.6 per cent at the end of last year to 1.4 per cent in May, but average yield on credit fell far more drastically from 5 per cent to 4.7 per cent. This implies net interest margins (NIMs) of UAE banks have dropped, impacting profitability.
In for a hit
Shares of listed UAE banks are in for some tough times. Nevertheless, UAE banks are taking measures to reduce costs. The number of branches had come down to 629 in May from 656 at the end of last year from 733 in March 2019. The number of bank employees are at 28,591 as of May when compared to 29,673 in December 2019.
The good thing is that productivity of UAE banks is improving, with aggregate domestic credit of all banks rising marginally from Dh1,592 billion in December 2019 to Dh1,611 billion in May. The rise in credit, in spite off reduction in branches and employees, shows an effective utilization of technology.
However, it will be a long time before these gains get reflected in the bottom-line. For now, the next six months will be very challenging for UAE banks.
- Vijay Valecha is Chief Investment Officer at Century Financial.