BUS-190817--Emirates-NBD-(Read-Only)
The Emirates NBD Head Office on Baniyas street in Dubai. In the first half of the year, ENBD’s net profit rose 49 per cent year on year. Image Credit: Ahmed Ramzan/ Gulf News Archives

Dubai: The four largest UAE banks, which account for nearly 70 per cent of the banking assets, reported a combined net profit of Dh19 billion for the first half of 2019, up 16 per cent from the same period in 2018, according to the first half results analysed by rating agency Moody’s.

The combined net profits for the four banks increased by 3 per cent when excluding the large gain at Emirates NBD. Their aggregate return on total assets stood at 2 per cent compared to 1.9 per cent in the first half of 2018. In the first half of the year, ENBD’s net profit rose 49 per cent year on year, but by 8 per cent excluding a Dh2.1 billion gain from the partial disposal of its stake in payment processing company Network International LLC.

Profits at DIB and FAB increased by 13 per cent and 5 per cent, respectively. Profits at ADCB fell by 15 per cent, the result of higher funding costs and a drop in non-interest income.

Higher foreignexchange trading revenues on the back of client activity and gains on trading positions, along with increased investment banking activity, pushed the combined non-interest income of the four banks up by 14 per cent over the first half of 2019.

- Mik Kabeya, Analyst at Moody’s

The rating agency attributed the improved profitability in the first half to solid asset growth, strong non-interest income and a large on-off gain at Emirates NBD.

In the second half of the year, banks are expected experience some moderation on profits. “Over the full year, we expect a slight decline in profitability as provisioning needs rise. Net interest income will increase modestly, as solid credit growth outweighs the impact of competition and the prospect of lower US Fed rates. We expect non-interest income to remain solid, although such income source tends to be more volatile than net interest income,” said Mik Kabeya, an analyst at Moody’s.

Net interest income increased slightly, supported by solid lending growth as credit growth climbed 4 per cent overall and outweighed revenue pressures from price competition and expectations of lower US Federal Reserve interest rate. The combined net interest income of the four banks increased slightly by 2 per cent over the first half of the year.

ENBD reported a solid increase of 10 per cent in net interest income, on asset growth that offset a small decline in net interest margins. DIB’s net financing income increased by 9 per cent, on the back of solid asset growth through its well-established retail franchise. FAB’s net interest income slightly declined (-1 per cent) driven by a combination of competitive pricing pressure, portfolio de-risking and increased short-term liquidity. ADCB’s net interest income was down 6 per cent year-on year.

1.9%

Aggregate return on total assets of the four top UAE banks

Non-interest income of these banks rose materially, thanks to higher foreign-exchange trading revenue and investment banking activity. “Higher foreign-exchange trading revenues on the back of client activity and gains on trading positions, along with increased investment banking activity, pushed the combined non-interest income of the four banks up by 14 per cent over the first half of 2019. DIB fared best, reporting non-interest income up by 35 per cent,” said Kabeya.

Rising costs and cost of risk

Balance sheet data analysed by Moody’s showed operating costs of these banks increased modestly owing to digital and technology investments, international expansion and merger integration expense. The four banks’ aggregated operating costs increased by 4 per cent as of June 2019.

“Their already strong overall efficiency ratio improved, however, because the increase in costs was counterbalanced by strong revenue generation. The four banks’ combined cost-to-income ratio was 30.3 per cent in the first half of 2019 compared to 30.7 per cent in the first half of 2018,” noted Kabeya.

Lower recoveries and problem loan formation materially increased loan-loss provisioning needs of these banks in the first half of 2019. The four banks’ combined loan-loss provisioning needs increased by 23 per cent in the first half of 2019 compared to the first half of 2018, owing to lower write-backs and recoveries, as well as problem loan formation in a challenging environment where the non-oil economy has yet to recover from the oil price shock.

23%

Increase in loan-loss provisioning needs for the top four banks

The combined reported cost of risk (computed as loan-loss provisions as a percentage of gross loans), increased to 69 basis points in the first half of 2019 from 58 bps in the first half of 2018.

Moody’s analysis showed DIB’s impairment charges rose by 85 per cent during the first half of the year, reflecting higher provisioning charges on financing and investing assets, a lower net release on non-financial assets and a slight increase in problem loans. ENBD’s provisioning increased by 63 per cent, due to lower write-backs and recoveries in a softening environment. FAB’s impairment loss increased slightly by 1 per cent, reflecting a slowdown in problem loans formation. ADCB’s impairment charge fell 6 per cent during the first half.

Capital buffers remain strong

Capital buffers at the four banks remained strong, bolstered by the first half’s solid profits. The four banks’ combined Tier 1 capital ratio stood at 16.6 per cent in June 2019, while the combined Tangible common Equity (TCE) to risk-weighted assets stood at 14.3 per cent as of June 2019.