Will investors look beyond UAE banks' disappointing 2020 numbers?

Of the UAE's 19 listed banks, 12 have announced their 2020 results.

Except for Bank of Sharjah, National Bank of Umm Al Qaiwan, United Arab Bank and National Bank of Ras Al Khaimah, all major banks have announced results. Let us have a glance at how they performed.

The 12 listed banks' revenue on an aggregate basis declined 10 per cent from Dh135.24 billion to Dh121.14 billion. And combined net profit slid sharply by 44 per cent to Dh25.53 billion from Dh45.25 billion in 2019. The fall was due to low operating leverage.

Capping costs

In plain English, it means firms did not reduce their costs like salaries in tune with the revenue decline. Commercial Bank of Dubai, Emirates Islamic Bank, Mashreq Bank and National Bank of Dubai saw their bottom-line turn red in 2020. In terms of profits, First Abu Dhabi Bank (down 16 per cent), Commercial Bank of Dubai (20 per cent), Abu Dhabi Commercial Bank (21 per cent) and Sharjah Islamic Bank (26 per cent) were relatively better performers.

The worst performers from a revenue perspective were Emirates Islamic Bank (down 55 per cent), National Bank of Fujairah (23 per cent), Ajman Bank (18 percent) and Commercial Bank International (17 per cent). Quite unsurprisingly, none of the UAE listed banks showed a positive growth.

Nevertheless, Emirates NBD (down 1 per cent), Dubai Islamic Bank (4 per cent), Sharjah Islamic Bank (5 per cent) and Commercial Bank of Dubai (6 per cent) had marginal declines. 

So, which bank stocks would perform well in 2021? One yardstick can be cost reduction. The banks that reduced their selling, general and administrative expenses the most were Commercial Bank International (down 29 per cent), Abu Dhabi Islamic Bank (18 per cent) and First Abu Dhabi Bank (8 per cent).

Check the expenses

Among banks to have announced their results so far, Commercial Bank of International and Abu Dhabi Islamic Bank are the only ones to have reduced their selling, general and administrative expenses more than a decline in revenues. So they should have high operating leverage, and profits should get a bump in 2021.

Companies with high operating leverage have higher profit margins since they don't have to increase costs to produce more sales.

In the US, talk of another stimulus even before the Senate passes its first bill has given a leg up to treasury yields. With governments  hooked on stimulus, the yield curve is expected to steepen, and it augurs well for net interest margin of banks. Commercial Bank of International and Abu Dhabi Islamic Bank are the banking stocks to watch in this favourable macro environment.

- Vijay Valecha is Chief Investment Officer at Century Financial.