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UAE banks’ profitability rose 35% in the first quarter from the previous quarter on the back of improved cost efficiencies, lower impairment charges and higher non-core income, a report said.
Leading global professional services firm Alvarez & Marsal (A&M) added that incremental deposit growth outpaced credit growth for the first time since 1Q22 amid tightening monetary conditions.
L&A rose 2.0% QoQ, while deposits rose 6.2% QoQ.
Total net interest income (NII) increased slightly by 0.4% quarter-on-quarter, and overall net interest income was stable at 2.8% for the quarter. Overall asset quality improved, with the non-performing loan (NPL)/net loan ratio falling by 16 basis points (bps) to 5.4%.
Overall, top banks’ profitability and return on equity (RoE) improved 5.9 percentage points quarter-on-quarter to 19.3%, while return on assets (RoA) increased to 2.2%, returning to new levels not seen in the past four years.
A&M’s UAE Banking Pulse examined data from the 10 largest listed banks in the UAE, comparing 1Q23 results with 4Q22 results. The report uses independent sources of published market data and 16 different indicators to assess banks’ key performance areas, including size, liquidity, revenue, operating efficiency, risk, profitability and capital.
The report also outlines key developments affecting the UAE banking sector. Starting with this question, A&M further increased the granularity of the analysis with a segmented view of loans and assets, deposit portfolios, and a staged breakdown of the loan book.
In A&M’s UAE Bank Pulse analysis, the top 10 listed banks in the country are First Abu Dhabi Bank (FAB), Emirates National Bank (ENBD), Abu Dhabi Commercial Bank (ADCB), Dubai Islamic Bank (DIB) , Mashreq Bank (Mashreq), Abu Dhabi Islamic Bank (ADIB), Commercial Bank of Dubai (CBD), National Bank of Fujairah (NBF), National Bank of Ras Al Khaimah (RAK) and Sharjah Islamic Bank (SIB).
The main trends identified for the first quarter of 2023 are as follows:
1. Money tightened, bank lending picked up, and deposits grew. Deposits grew 6.2% qoq – faster than L&A’s growth which grew 2.0% qoq in 1Q23. Corporate/wholesale loans rose 3.0% MoM (about 55.6% of total loans and assets), followed by retail loans (up 2.6% MoM); while government loans reported a decline (-0.6% QoQ). Rising interest rates led to growth in term deposits, which accounted for 43.5% in 1Q23 (up from 43.2% in 4Q22 and 39.0% in 1Q22). As a result, the loan-to-deposit ratio (LDR) dropped 3.1 ppts QoQ to 74.9%.
2. 1Q23 total operating income increased by 3.8% qoq, while 4Q22 increased by 15.0% qoq. The increase in operating income was driven by non-core income, which increased 12.5% sequentially. Despite the rise in benchmark interest rates, the NII only edged up 0.4% mom, indicating pressure on funding costs.
3. Overall, banks’ NIM was stable at 2.8% as credit yields rose slightly (0.8 ppt QoQ) to 10.3% in 1Q23. Total NII (0.4% MoM) increased slightly due to a 75 basis point hike in the Central Bank of the United Arab Emirates (CBUAE) policy rate year-to-date (YTD). The cost of funds increased by 48 basis points to 3.2%. Average NIM was stable this quarter; the decline was mainly due to the impact of LDR below spread compression.
4. Most banks are seeing reductions in operating expenses and improvements in cost efficiencies. Cost-to-income (C/I) QoQ improved by 352bps to 27.7% in 1Q23 due to lower operating expenses (-7.9% QoQ). Overall, operating income rose 3.8% sequentially.
5. In the first quarter of 2023, the cost of risk (CoR) increased by 61 basis points quarter-on-quarter to close at 0.8%. Gross impairments fell 42.6% QoQ to AED3.6bn in 1Q23. Seven in 10 banks reported an improvement in the cost of risk.
6. Total net income increased slightly by 35.3% qoq, while earnings growth was supported by lower impairment charges. As a result, ROE and ROA increased significantly in 1Q23 to 19.3% and 2.2% (on an annualized basis), respectively.
Asad Ahmed, Managing Director and Head of Middle East Financial Services, A&M, commented: “This has been a very strong quarter for UAE banks. We expect the UAE banking sector to maintain its first quarter earnings for the rest of the year. Stable NIM, improved cost efficiencies and reduced impairments led to record profits for UAE banks in the quarter, although we saw mixed performance by some banks on margins.
“Growth is expected to moderate moderately on the back of the agreed oil production cuts and higher interest rates. Higher margins should boost bank profitability, although there will be a slight moderation in the rise in provisions – which tend to accompany interest rates. Rising. UAE banks are well funded and well capitalized to maintain capital adequacy ratio (CAR) levels well above regulatory requirements.” – trade arab news agency
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