Dubai: The UAE banking sector has seen margins remain under pressure despite a number of banks witnessing improved lending and revenues in the first quarter of 2017, global professional services firm Alvarez & Marsal (A&M) said.
A comparison of the quarterly data of the country’s 11 largest listed lenders reveals that while net interest margins (NIM) remained under pressure, banks had grown their loan books during the first quarter of 2017, as compared to the last quarter of 2016, with the significant return to lending signalling a recovery.
In addition, recent upgrades to the UAE’s credit ratings are also contributing to a growing air of confidence in the sector.
“Banking revenues have risen on the back of increased lending, which has been a key area of focus for the sector and means that liquidity, as measured by loan-to-deposit ratios (LDR), remains at healthy levels,” Dr Saeeda Jaffar, managing director of the Financial Institutions Advisory Services Practice at A&M, said.
“However, this has in turn contributed to a more competitive environment, leading to a reduction in interest income, reducing yields on credit.”
NIM fell by about 4 basis points (bps) quarter on quarter, with an overall decrease of about 24 bps since the first quarter of 2016. The cost of funds increased further by 4 bps quarter-on-quarter, with an overall increase of 24 bps year on year.
LDR decreased by 1.2 percentage points quarter-on-quarter as deposits outgrew loans, while the yield on credit fell by about 4 bps in the same period after increasing throughout the second half of 2016. The rate of decline is expected to stabilise towards the end of the year.
Pressure on yield on credit, combined with an increased cost of funding, impacted net interest margins (NIMs).
Eight of the top 11 banks had LDRs of between 80 per cent and 100 per cent, the industry’s so called ‘green zone’. However, with deposits growing at a faster rate, the net effect has been an overall reduction in LDRs.
The combination of this, together with lower yield-on-credit (YoC) and an increasing cost of funds (CoF), led to a decline in NIMs.
The increase in lending has contributed to an overall increase in revenues, with banks also continuing to monitor their cost bases and, in some cases, delaying investment and hiring decisions.
Cost/income (C/I) ratios have also shown an overall improvement.
“We noted in our previous report that cost/income ratios were improving, and that continued to be the case in the last quarter,” Dr Jaffar said. “Again, though this is a revenue story more than a cost one, we cannot be certain at this stage of that trend continuing. While banks have certainly been careful with their costs, in some cases delaying investment and hiring decisions, these investments may be made during the year, and that could drive C/I ratios up.”
Overall the sector’s return on equity (RoE) also increased, driven primarily by a reduction in the capital base due to dividend payouts, which normally take place in the first quarter of the year.
The capital adequacy ratio (CAR) decreased quarter-on-quarter as a result of the equity reduction, but remained higher than what it was in the first quarter of 2016.