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Improved financial results of leading banks point to a steady recovery in the overall economic conditions in the UAE. Image Credit: File photo

Dubai: Financial results of top two banks in the UAE showed sharp decline in provisions, improvement in non-interest incomes, consistent decline in costs and improvement in operating profits pointing a steady improvement in the overall economic conditions in the UAE.

Earlier this week Emirates NBD Group reported net profits of Dh2.32 billion for the first quarter, a 12 per cent year-on-year gain and 76 per cent up quarter-on-quarter, supported by lower provisions, lower costs and higher income from improved economic conditions.

First Abu Dhabi Bank (FAB), the UAE’s largest bank, on Wednesday reported a group net profit of Dh 2.5 billion in the first quarter of 2021, up 3 per cent compared to Dh2.4 billion in the first quarter of 2020.

First quarter results of both banks indicate an overall recovery in the economy supporting loan growth, non-interest income streams, improvement in asset quality and costs.

“Emirates NBD’s increase of Q1-21 reflects the resilience and gradual economic recovery following the global disruption in 2020,” said Hesham Abdulla Al Qassim, Vice-Chairman and Managing Director.

Improved income

The ENBD Group’s total income for the first quarter amounted to Dh6.16 billion, a sharp 25 per cent spike compared with Dh4.93 billion in the preceding quarter.

Net interest income was up 1 per cent over the quarter with net interest margin improving four basis points.

Non- interest income shot up by 133 per cent quarter-on-quarter with increased contribution from all lines and up 6 per cent year-on-year on improved fee and investment securities income.

For FAB, although total operating income at Dh 4.4 billion was down 4 per cent year-on-year due to lower net interest income resulting from rate cuts in 2020, was partially offset by higher other income.

“FAB's strong foundations and competitive strengths continue to support the bank's ability to achieve a resilient performance in a challenging quarter characterised by a slower than expected recovery in business activity,” said Hana Al Rostamani, Group Chief Executive Officer of FAB.

Lower impairments

Both banks reported lower loan impairments driven by improving loan repayments and prudent advanced provisioning.

Emirates NBD’s impairment allowances in the first quarter at Dh1.76 billion was down 31 per cent year-on-year following proactive provisioning. The non-performing loan ratio improved to 6.1 per cent while the coverage ratio strengthened to 125.1 per cent.

At the close of the quarter, FAB’s non-performing loans (NPL) ratio was at 4 per cent, provision coverage at 96 per cent.

FAB’s impairment charges at Dh470 billion was down 36 per cent year-on-year, reflecting improving economic conditions and adequate provision buffers.

Costs under control

Substantial cost control measures implemented by banks following the aftermath of COVID-19 have started yielding results in terms of improved profitability.

Emirates NBD’s expenses for the first quarter - at Dh1.86 billion - was a 9 per cent improvement over the preceding quarter and year-on-year as the earlier cost management actions took effect. The cost-to-income ratio at 30.3 per cent remains well within management guidance.

While FAB’s operating expenses were down 3 per cent year on year as the group maintained strong cost discipline, the bank continues to invest in digital and strategic initiatives to achieve further efficiencies.

Strong outlook

In its latest World Economic Outlook, the International Monetary Fund (IMF) has forecast the UAE to grow 3.1 per cent in 2021 against estimated contraction of 5.9 per last year. For 2021 and 2022, the Central Bank of UAE (CBUAE) foresees non-hydrocarbon real GDP to grow by 3.6 per cent and 3.9 per cent, respectively.

Real non-oil GDP growth is expected to be driven by increasing fiscal spending, pick up in credit and employment, relative stabilisation of the real estate market, boosted by recovery in confidence and the Dubai EXPO in 2021.

Financial soundness

The financial soundness indicators remain healthy, supported by strong capialisation and liqudity. Overall liquidity in the banking system has been enhanced by the CBUAE's Targeted Economic Support Scheme (TESS). The CBUAE recently extend loan re-payment deferrals up to the end of this year and the Dh50 billion zero cost funding to banks up to the end of 2022, enabling banks to advance new loans to companies and individuals.