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Bottom line boosted by improved margins after higher interest rate regime, asset quality recovery
Loan and asset growth in UAE banks edged up 0.7%, while deposits rose 5.2% quarter-on-quarter. Photos for illustration purposes. – Profile photo
Profitability of the top 10 UAE banks jumped in the third quarter of 2022 on the back of higher core interest income, despite slower growth in loans and advances, according to a leading global professional services firm.
Gross net interest income (NII) soared 12.2% quarter-on-quarter, while net interest margin (NIM) improved 18 basis points (bps) quarter-on-quarter, driven by higher credit yields from rising benchmarks Alvarez & Marsal (A&M) in its According to the UAE Banking Pulse report.
Gross interest income rose notably by 27.5% as asset quality improved, while non-performing loans (NPL)/L&A declined by 0.2% to 5.5% in the quarter.
“UAE banks reported improved profitability, driven by strong economic growth and rising interest rates. Earnings momentum accelerated in Q3 2022 with margin improvement and asset quality recovering. We expect to continue in Q4 improving trends, but remain cautious about the impact of higher interest rates on retail and corporate borrowers,” said Asad Ahmed, managing director and head of Middle East financial services at A&M.
Abdulaziz Al Ghurair, Chairman of the Federation of UAE Banks, forecast positive and strong growth in the UAE banking sector and predicted that the banking sector will grow faster than the macroeconomy, with bank revenues after risk provisions reaching over US$25 billion by 2030 , a 50% increase over current income, establishing a sound financial position. He noted that UAE banks are well-capitalized and profitable, which is a prerequisite for enhancing the long-term stability of the sector.
The 10 largest listed banks analyzed by A&M include First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Dubai Commercial Bank, Fujairah National Bank, Ras Al Khaimah National Bank and Sharjah Islamic Bank.
Loan and asset growth edged up 0.7%, while deposits rose 5.2% quarter-on-quarter. Overall, while the Q3 rate hike had a positive impact on banks, the impact on borrowing was more muted, although as the IMF raised its UAE GDP forecast from 4.2% to 5.1% in October 2022 , economic activity in the GCC was positive, the report said.
“Overall, bank profitability improved during the quarter, with return on equity improving by 1.3% to 15.1% quarter-on-quarter and return on assets by 0.1% to 1.7% quarter-on-quarter due to strong economic activity, rising interest rates and higher oil prices, “it says.
Banking operating income rose sharply by 8.3% quarter-on-quarter, mainly driven by the increase in UAE banks’ NII. NII surged 12.2% quarter-on-quarter. Other operating income rose 8.0% sequentially, offset by a 7.8% sequential decrease in net fee and commission income. As a result, total non-interest income fell slightly by 0.1% quarter-on-quarter.
Operating cost efficiency improved for the second consecutive quarter. The cost-to-income ratio improved by 1.0% to 30.5%, mainly due to an 8.3% sequential increase in operating income that outpaced a 5.0% sequential increase in operating expenses, the report said.
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