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UAE’s Leading Banks Showcase Positive Profitability Trends

Profitability In a notable upswing for the UAE banking sector, analysts at Alvarez & Marsal have identified encouraging trends in profitability.

Key Highlights

  • Steady Increase in Total Operating Income: The sector’s top lenders are witnessing enhanced financial performance, propelled by a robust 15.4% quarter-on-quarter increase in total operating income.
  • Non-Core Income Uptick: A 2.4% uptick in non-core income has contributed to the positive trajectory, further solidifying the sector’s profitability.
  • Impairment Charges Decline: A significant 11.7% reduction in impairment charges has been a key factor in driving improved profitability for UAE banks.

Fitch Ratings echoes this positive sentiment, predicting that the performance metrics of UAE banks for 2023 are poised to reach historically high levels.

Fitch Ratings Report

  • Historically High Performance: Fitch Ratings predicts that the performance metrics of UAE banks for 2023 are set to be historically high.
  • Net Profit Surge: The combined net profit reported by Fitch-rated banks stands at Dh38 billion, translating into a healthy annualized return on average equity of 20.3%.
  • Net Interest Margin Improvement: The improvement in the sector’s average net interest margin (NIM) by 50 basis points to a healthy 3.3% in H1 2023 is a key driver of positive performance.

Asad Ahmed, Managing Director and Head of Middle East Financial Services at A&M, points out that the report underscores a robust third quarter for UAE banks, marked by a higher interest rate environment and a substantial reduction in impairment charges.

Insights from A&M

  • Higher Interest Rate Environment: A higher interest rate environment has played a crucial role in boosting the financial performance of UAE banks.
  • Reduction in Impairment Charges: Meaningful reduction in impairment charges has contributed to the sector’s enhanced profitability.
  • Stable NIMs: Despite expectations of rate cuts after mid FY’24, NIMs of UAE banks are expected to remain stable for the balance of 2023.

Examining specific financial indicators, the report notes that while benchmark interest rates are peaking, net interest income (NII) saw a robust growth of 5.5% for the quarter.

Financial Indicators: Profitability

  • Robust NII Growth: Net interest income (NII) witnessed a robust growth of 5.5% for the quarter.
  • Corporate/Wholesale Loans Expansion: Loans and advances (L&A) experienced a 2.4% quarter-on-quarter growth, primarily fueled by a 2.5% expansion in corporate/wholesale loans.

The 10 largest listed banks in the UAE, including 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, reported that deposits continued to outpace credit demand in Q3.

Top 10 Banks’ Performance

  • Deposit Outpacing Credit Demand: Aggregate deposits grew by 3.9% quarter-on-quarter, surpassing L&A growth of 2.4% quarter-on-quarter.
  • Total Operating Income Growth: The total operating income increased by 4.5% quarter-on-quarter, with NII contributing to a 5.5% quarter-on-quarter growth and non-interest income seeing a 2.4% quarter-on-quarter increase.

Net interest margins (NIMs) expanded by 8 basis points as the yield on credit increased by 95 basis points quarter-on-quarter to 12%, outpacing the cost of funds, which rose to 4.2% in Q3’23.

NIM Expansion

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