What to expect from UAE banks’ third quarter financial results

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

Dubai: UAE banks to release third quarter results from next week, largely reflecting improving economic conditions in their key metrics such as loan growth, costs, profitability and asset quality .

Growth in assets, credit and deposits in the UAE banking sector in the second quarter of 2021 indicated a sustained recovery in the UAE economy and banking sector, according to the latest data from the UAE Central Bank United Arab Emirates (CBUAE).

Loan growth

The CBUAE’s quarterly economic review for the second quarter showed that the total assets of UAE banks grew 0.6% year-on-year, with bank lending growth rebounding on a quarterly basis for sectors of the United Arab Emirates. retail and SME.

However, overall bank lending was down 1.2% year-on-year amid a shrinking corporate loan portfolio compared to a year ago. Domestic credit declined 1.9 percent mainly due to reduced lending to government and the private sector.

Despite weak credit growth in the second quarter, analysts expect a gradual rebound in profitability to be already underway, largely due to improved operating conditions driven by higher vaccination rates. high prices, soaring oil prices and overall positive sentiment about Expo 2020, Dubai.

“We expect lending to accelerate slightly in the second half of 2021 as the UAE’s economic climate continues to improve, particularly with the start of Expo 2020. Overall, we believe credit growth will be slightly higher in 2021 than in 2020, “said Mohammed Damak, Senior Director, Financial Services at S&P Global Ratings.

Profitability

Analysts expect the steady improvement in profitability from Q1 and Q2 2021 to continue into Q3 and Q4.

UAE banks recorded the largest increase in profits in the GCC in the second quarter of 2021, registering 11.8% quarter-on-quarter growth, according to a recent analysis of data from Kuwaiti company Kamco Invest.

Second quarter data for UAE banks showed that 9 out of 16 UAE-listed banks reported an increase in their net profits.

FAB recorded the strongest absolute profit growth, reaching $ 783.7 million in the second quarter of 2021, from $ 674 million in the first quarter of 2021.

The ADCB and Dubai Islamic Bank followed in terms of absolute profit growth, posting increases of 25.1% and 19.3% quarter-on-quarter, respectively.

The profitability of the UAE banking sector improved in the second quarter compared to 2021, as return on equity (RoE) returned to levels in the fourth quarter of 2019. RoE reached its highest level of 10. 9% for the first time in the last five quarters with 13.3% in the fourth quarter as economic conditions continue to improve.

A + 2.8% increase quarter over quarter (QoQ) in operating income coupled with a decrease in depreciation charges of -9.3% quarter over quarter were the main drivers of profitability growth.

Net interest margin

Net interest margin
Image Credit: Alvarez & Marsal

Margins compression

The aggregate net interest margin (NIM) was broadly stable at 2.05 percent in Q2’21. The NIM remained stable as industry-wide credit yields continued to remain low while the cost of funding declined slightly.
“The US Fed’s commitment to keep interest rates low today should keep domestic bank revenue streams under pressure. We believe it is essential to focus on significant efficiency improvements, continue to embrace technology, organic or in partnership with fintechs, and actively manage non-performing portfolios to drive improvements forward, ”said 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 (LLP) was the main driver of improved profitability.

“Improving asset quality is helping revive the UAE banking sector. We hope this trend will continue. The UAE Central Bank’s credit sentiment survey in the second quarter of 2021 notes continued strong domestic demand for credit across all sectors of the economy, indicating that a dynamic recovery is in good shape way, ”Ahmed said.

Much of the deterioration in asset quality last year was due to a fraud case at a large corporation and pressure on the construction, real estate and hospitality industries.

Some pressure points

Analysts expect that with the phasing out of the CBUAE’s support program under the Targeted Economic Support Program (TESS) and regulatory forbearance measures that significantly reduce provisioning pressures on banks, high levels of non-performing loans (NPLs) are observed. However, with most banks making adequate arrangements at the onset of the COVID crisis, they are well protected against any drastic increase in NPLs.
“It may be too early to say that all of the asset quality issues are behind us. But, a combination of advanced provisioning by banks and support from the central bank in classifying loans gave banks enough time to absorb loan losses in an orderly fashion, ”said the chief financial officer of a large bank. of the United Arab Emirates.
Bankers said most of the expected new NPLs are likely to come from small and medium-sized businesses and struggling businesses in the real estate, construction, hospitality and consumer sectors.

Cost containment

Banks in the UAE have been striving to keep operating costs under control even before the Covid crisis through branch and staff optimization and consolidation through mergers. The impact of the pandemic has accelerated the process with faster adoption of technology, reducing branch banking through digitization and moving staff to profitable locations.

The latest data from the CBUAE shows the number of bank branches in the UAE and the number of bank employees declined in the second quarter of 2021.

The data showed that the need for profitability and digitization led to the closure of domestic branches, which increased from 534 at the end of the first quarter of 2021 to 522 at the end of the second quarter of 2021. At the same time, the number of bank employees decreased by 414 (1.3 per hundred quarter quarter) to reach 32,623 employees at the end of June 2021.

Liquidity, financing and capital

The CBUAE’s financial soundness indicators show that the rise in oil prices combined with the economic recovery is supporting the banking sector by improving overall liquidity and capitalization.

Overall, bank deposits improved, with total residents’ deposits (88.2% of total deposits) increasing by 1% in the second quarter of 2021, mainly due to an increase in government deposits and from the private sector.

Private sector deposits grew 3.8 percent year-on-year (Dh42 billion), while non-resident deposits (11.8 percent of total deposits) increased 12.6 percent (25 billion Dh).

The improvement in deposits resulted in a marginal drop in the loan-to-deposit (LTD) ratio for the entire banking system, which fell to 92.7% at the end of the second quarter, slightly below 93, 3% at the end of the previous quarter.

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

Total liquid assets of banks at the end of the second quarter of 2021 stood at MAD 476.2 billion, up 10.1% year-on-year (MAD 43.8 billion more than at the end of June 2020 ).

Overall, the UAE banking system has remained well capitalized, with an average capital adequacy ratio (CAR) of 17.5%, a Tier 1 capital ratio of 16.3% and a category 1 equity ratio (CET 1) of 14.5%.

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