Dubai: Improved yield on credit saw a significant rise in profitability for the top 10 UAE banks in the second quarter of 2018, according to an analysis of data by global professional services firm Alvarez & Marsal (A&M).
Net interest margin (NIM) of these banks again increased by 2.61 per cent, at a higher rate than 2.55 per cent in the first in the first quarter. The increase was driven by a rise in yield on credit, which more than offset a parallel increase in cost of funds. Only three of the top 10 banks reported a decrease in NIM.
Data showed the UAE banks’ profitability continued to increase, with operating income and net interest margins significantly higher than in the previous quarter.
Deposits grew at faster rate of 2.18 per cent than loans and advances at 1.75 per cent, resulting in a slightly reduced average loan-to-deposit (LDR) ratio for the second quarter of 2018.
Despite this, eight of the top 10 banks remained in the LDR “green zone” of between 80 per cent and 100 per cent. Four of the top banks grew their loans and advances market share, and two banks increased market share in both loans and advances and deposits.
“The second quarter saw good, steady performance by the UAE’s leading banks, with no major surprises or causes for concern. The most striking feature of the sector’s overall performance was the rise in operating income, the result of increased lending activity and a higher return on credit,” Dr Saeeda Jaffar, a managing director at Alvarez & Marsal.
At the aggregate level, operating income growth increased significantly by 2.25 per cent in the second quarter, reversing the 1.37 per cent decline of the previous quarter.
This was driven by an increase in interest income, which grew by 3.11 per cent in the second quarter supported by growth in loans and advances and higher yield on credit.
Overall, costs continued to move up in the second quarter of 2018 with the cost-to-income ratio to 33.0 per cent, up 70 basis points higher than in the first quarter of 2018 (32.3 per cent).
Data shows an increased level of sales, general and administrative expenses was the main reason for the increase.
Loan loss provisions saw a significant decline in the second quarter of this year reflecting in reduced cost of risk to 0.78 per cent in the second quarter from 0.81 per cent in the first quarter.
Seven out of 10 banks showed an increase in return on equity due to a decrease in cost of risk and an increase in operating income.
“There are increasing levels of confidence being displayed by the banks, which is also reflected by the reduced cost of risk, continuing the trend we have seen since the beginning of 2018,” Jaffar said.
“Overall, the sector continues to perform well. Profitability is maintaining its upward trend while growing returns on equity and liquidity remain at healthy levels. It has been a good first half for the sector and signs indicate these trends will continue in the second half.”
