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Top UAE banks signal slow recovery for Q3 2020 – report

Second-quarter net profit for UAE-based top banks jumps 21 per cent

by Zainab Mansoor

August 26, 2020

Top 10 UAE banks posted a 21.2 per cent rise in net profits for the Q2 2020, as a result of lower provisioning and increased cost efficiency, a new report has found.

Likened to their global peers, the UAE’s top lenders are likely to focus more on improving their efficacy in the coming period as the current economic climate demands greater cost optimisation, found Alvarez & Marsal’s (A&M) new UAE Banking Pulse for Q2 2020 report, covering ten listed banks namely First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, National Bank of Fujairah, National Bank of Ras Al-Khaimah and Sharjah Islamic Bank.

The banks also witnessed a fringe surge in loans and advances (L&A), which grew 1 per cent and deposit growth, which scaled 1.1 per cent, as well as a considerable contraction in net interest margins (NIM), the report comparing banks in Q2 2020 against the previous quarter, revealed.

Dubai Islamic Bank outperformed its top peers with L&A growth of 11 per cent, while Mashreq Bank recorded deposit growth of 11 per cent.

Loans to deposit ratio (LDR) remained broadly unchanged at 87.7 per cent. Net interest margin (NIM) fell by about 24 bps to 2.29 per cent in Q2’20, on account of the sharp decline in interest rates.

However, the outlook for the domestic banking sector still remains subdued as a result of the weakened after-effects of Covid-19, in addition to low oil prices, and the postponement of Expo 2020.

Overview

CATEGORY	METRIC	Q1 ’20	Q2’20
Size	Loans and Advances Growth (QoQ)	0.8%	1.0%
Size	Deposits Growth (QoQ)	0.6%	1.1%
Liquidity	Loan-to-Deposit Ratio (LDR)	87.7%	87.7%
Income & Operating Efficiency	Operating Income Growth (QoQ)	-2.3%	-9.2%
	Operating Income / Assets	3.4%	3.0%
	Non-Interest Income / Operating Income	29.9%	28.4%
	Yield on Credit (YoC)	6.7%	5.8%
	Cost of Funds (CoF)	1.9%	1.5%
	Net Interest Margin (NIM)	2.5%	2.3%
	Cost-to-Income Ratio (C/I)	33.8%	33.4%
Risk	Coverage Ratio	94.5%	89.2%
Risk	Cost of Risk (CoR)	2.1%	1.4%
Profitability	Return on Equity (RoE)	9.0%	9.4%
	Return on Assets (RoA)	0.9%	1.1%
	Return on Risk-Weighted Assets (RoRWA)	1.3%	1.6%
Capital	Capital Adequacy Ratio (CAR)	16.2%	17.1%

Source: Financial statements, investor presentations, A&M analysis

Asad Ahmed, A&M managing director and head of Middle East Financial Services, said: “The profitability of the UAE banks in Q2 2020 rebounded as cost optimisation measures and lower provisioning supported income. The UAE lenders are among the most profitable globally, bolstered by a mix of sound liquidity, strong capitalisation, low levels of nonperforming loans and a substantial proportion of non-interest-bearing deposits.

“While the central bank expects a pickup in corporate credit demand for Q3’20, the recovery would likely be fragile. In the forthcoming quarters, it may be beneficial for banks to introduce efficiency boosting measures and increase their focus towards digitisation to save costs and support the bottom-line.”