A futuristic Emirates NBD branch in Dubai. UAE banks will declare their third quarter results staring next week largely reflecting the improvements in economic conditions in their key metrics such as loan growth, costs, profitability and asset quality. Image Credit: Gulf News Archives

Dubai: UAE banks will declare their third quarter results staring next week, largely reflecting the improvements in economic conditions in their key metrics such as loan growth, costs, profitability and asset quality.

Assets, credit and deposit growth in the UAE’s banking sector in the second quarter of 2021 pointed sustained recovery of the UAE economy and the banking sector, according to the latest Central Bank of UAE (CBUAE) data.

Loan growth

The Quarterly Economic Review of the CBUAE for the second quarter showed total assets of UAE banks increased by 0.6 per cent year on year with the bank lending growth rebounding on a quarter on quarter basis for corporate retail, and SME sectors.

However, aggregate bank credit declined by 1.2 per cent year on year amid contraction on corporate loan portfolio compared to a year ago. Domestic credit decreased by 1.9 per cent driven mainly by reduction in lending to the government and the private sector.

Despite the muted credit growth in the second quarter, analysts expect a gradual rebound in profitability is already underway largely driven by improving operating conditions driven by higher vaccination rates, surging oil prices and the overall positive sentiment driven by Expo 2020, Dubai.

“We expect a slight acceleration in lending in second-half 2021 as UAE economic sentiment continues to improve, especially with the start of Expo 2020. Overall, we believe that credit growth will be slightly higher in 2021 than 2020,” said Mohammed Damak, Senior Director, Financial Services at S&P Global Ratings.


Analysts expect the steady improvement in profitability from the first and second quarter of 2021 to continue into the third and fourth quarter.

UAE banks reported the biggest increase in profits in the GCC during the second quarter of 2021, registering a growth of 11.8 per cent quarter on quarter, according to a recent analysis of data by Kuwait based Kamco Invest.

The second quarter data for the UAE banks showed 9 out of 16 listed banks in the UAE reported an increase in net profits.

FAB reported the biggest absolute growth in profits that reached $783.7 million in Q2-2021 as compared to $674 million n Q1-2021.

ADCB and Dubai Islamic Bank followed in terms of absolute profit growth registering increases of 25.1 per cent and 19.3 per cent quarter on quarter, respectively.

The UAE banking sector’s profitability improved in the second quarter on 2021 with the return on equity (RoE) back at Q4 2019 levels. The RoE has reached its highest level of 10.9 per cent for the first time in the last five quarters with 13.3 per cent in in the fourth quarter of as economic conditions continue to improve.

An increase of +2.8 percent quarter over quarter (QoQ) in operating income coupled with lower impairment charges of -9.3 per cent quarter on quarter were the key drivers for growth in profitability.

Net interest margin
Net interest margin Image Credit: Alvarez & Marsal
Margin squeeze
Aggregate net interest margin (NIM) remained largely stable at 2.05 per cent in Q2’21. NIM remained flat as industry-wide credit yields continued to remain suppressed while cost of funding declined marginally.
“The US Fed’s commitment to maintaining the current low level of interest rates is expected to keep domestic banks’ income streams under pressure. We believe focusing on significant efficiency improvements, continuing to adopt technology, either organic or in partnership with fintechs, and actively managing non-performing portfolios are critical to driving improvements forward,” said Asad Ahmed, Managing Director and Head of Middle East Financial Services at Alvarez & Marsal.

Asset quality

A steady improvement in asset quality indicated by a declining trend in loan loss provisions (LLPs) has been the key driver of improving profitability.

“Improvements in asset quality are helping to drive the UAE banking sector turn around. We look forward to this trend continuing. The UAE’s Central Bank’s Q2 2021 credit sentiment survey notes a strong, ongoing domestic credit demand across all sectors of the economy indicating that a vibrant recovery is on track,” said Ahmed.

Last year, a large chunk of asset quality deterioration were driven by a fraud case at one large corporate and pressure on the construction, real estate, and hospitality sectors.

Some pressure points
Analysts expect with the gradual withdrawal of the CBUAE’s support programme under the Targeted Economic Support Scheme (TESS) and regulatory forbearance measures that significantly reduced provisioning pressures on banks could see elevated levels of non-performing loans (NPLs). However, with most banks taking adequate provisions early into the COVID crisis, they are well-cushioned against any drastic spike in NPLs.
“It may be too early to say that all asset quality issues are behind us. But, a combination of advanced provisioning by banks and the central bank support in loan classifications have given banks enough time to absorb the loan losses in an orderly manner,” said the chief financial officer of a leading UAE bank.
Bankers said most of the of the expected new NPLs are likely to come from struggling small and midsize enterprises and companies in the real estate, construction, hospitality, and consumer-related sectors.

Control on costs

UAE banks have been working to tame operating costs even prior to the Covid crisis through branch and staffing optimisation and consolidation through mergers. The impact of pandemic has accelerated the process with faster technology adoption, reducing branch based banking through digitialisation and moving staff to cost effective locations.

Latest CBUAE data show the number of bank branches in the UAE and the number of bank staff declined in the second quarter of 2021.

Data showed the need for cost effectiveness and digitalization led to the closure of national branches, which decreased from 534 at the end of Q1 2021 to 522 at the end of Q2 2021. Meanwhile, the number of banks’ staff fell by 414 (1.3 per cent quarter quarter) to reach 32,623 employees at the end of June 2021.

Liquidity, funding and capital

The financial soundness indicators of the CBUAE show higher oil prices combined with the economic recovery is supporting the banking sector by improving the overall liquidity and capitalization.

Overall bank deposits improved with the aggregate resident deposits (88.2% of total deposits) up by 1 per cent in the second quarter of 2021, owing mainly to an increase in government and private sector deposits.

Private sector deposits increased by 3.8 per cent year on year (Dh42 billion), while non-resident deposits (11.8 per cent of total deposits) increased by 12.6 per cent (Dh25 billion).

The improved deposits was reflected in a marginal decline in loans to deposits (LTD) ratio for the whole banking system which decreased to 92.7 per cent at the end of the second quarter, slightly below the 93.3 per cent at the end of the previous quarter.

In the second quarter, the CBUAE data shows, the advances to stable resources ratio (ASRR), the key indicator of structural liquidity of the banking system increased from 77.5 per cent at the end of March 2021 to 77.7 per cent at the end of June 2021. Although eligible liquid assets, as a per cent of total liabilities fell to 18.3 per cent, it remained well above the 10 per cent minimum regulatory requirement, constituting an adequate buffer for the banking system.

Total liquid assets at banks at the end of the second quarter of 2021 stood at Dh476.2 billion, increasing by 10.1 per cent year on year (Dh43.8 billion higher compared to the end of June 2020).

Overall, the UAE banking system remained well capitalised, with an average capital adequacy ratio (CAR) at 17.5 per cent, Tier 1 capital ratio at 16.3 per cent, and Common Equity Tier 1 Ratio (CET 1) at 14.5 per cent.