UAE bank deferments
Banks will continue to reap benefits from some of the cost saving measures introduced following the COVID-19 crisis and rapid adoption of digitalisation. Image Credit: Gulf News Archives

Dubai: UAE banks could report strong profit growth in the first quarter of 2022 with a continued improvement in margins, asset quality and gains in operational efficiencies.

The strong recovery in the operating conditions in the UAE economy will be reflected in bank earnings, matched by lower loan loss provisions and improving loan yields despite sluggish loan growth.

The top 10 UAE banks accounting for nearly 80 per cent of banking assets in the country had reported an aggregate net income of Dh37.8 billion in 2021, 48.6 per cent higher year-on-year, mainly driven by higher operating income (+5.2 per cent) along with lower impairments (-30.1 per cent).

While the impact of declining operating costs and loan loss provisions is expected to directly reflect on net profits of banks in the upcoming results, the decision by the UAE Central Bank to continue some elements of its Targeted Economic Support Programme (TESS) will likely support loan growth.

“The CBUAE’s decision will reduce pressure on banks in terms of liquidity and regulatory compliance resulting in some cost savings,” said a chief financial officer at a bank. “The continuation of support will mean more elbow room for banks to manage liquidity and impairments in a phased manner while scaling up lending.”

Cost savings

Banks will continue to reap benefits from some of the cost saving measures introduced following the COVID-19 crisis and rapid adoption of digitalisation.

Rationalisation of staffing and branch operations - aided by digitalisation - has brought down operating costs, and bank profits will continue to benefit from lower costs.

Cost-to-income (C/I) ratio dipped by 1.7 per cent year-on-year to 32.8 per cent last year. The operating efficiency (C/I ratio) improved, supported by a 5.2 per cent increase in operating profits. The lower C/I ratio can be partially attributed to stringent cost control measures.

“The UAE’s banking sector assets are expected to grow on the back of anticipated economic recovery and the digital transformation,” said Asad Ahmed, Managing Director and Head of Middle East financial services at Alvarez & Marsal (A&M).

Impact of rate increase

Although the recent increase of interest rates by quarter of a per cent is unlikely to reflect in Q1 profits, it will be major factor on profitability going forward.

Banks continue to benefit from a large proportion of current account and saving account (CASA), which accounted for two-thirds of total deposits at system level.

“Over the past three years, the contribution of these (CASA) to the total deposit base of UAE banks continued to increase. Banks’ balance sheets have been positioned in a manner that makes them benefit from the increase in interest rates -- with a higher amount of repricing assets (loans) than liabilities (deposits),” said Mohamed Damak, a senior director in financial services at S&P Global Ratings.

Supportive economy

The steady improvement in the local economy is seen as the key driver of gains in banking sector profitability driven by improving asset quality and loan growth.

While the CBUAE has forecast the UAE economy to grow 4.2 per cent, a much higher rate of growth is expected this year in the light of steady rise in oil prices and easing of travel restrictions.

Some of the high frequency indicators such as the purchasing managers’ index (PMI), job creation and consumer spending point to a steady recovery of the UAE economy. February’s PMI data pointed to a sharp improvement in the health of the UAE non-oil private sector economy, with a further strong uplift in market demand.

According to the latest assessment by the CBUAE, the financial soundness indicators of UAE banks remain robust on the back of a gradual and steady recovery of the economy.