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Alvarez & Marsal (A&M) said net income of the UAE’s top ten banks rose 24.4% to AED12.6 billion ($3.43 billion) in the second quarter (Q2), driven by improved asset quality, profitability and margins.
The 10 largest 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 ), Abu Dhabi Islamic Bank (ADIB), Commercial Bank of Dubai (CBD), National Bank of Fujairah (NBF), Ras Al Khaimah (RAK) and Sharjah Islamic Bank (SIB).
A&M, the world’s leading professional services firm, said in its latest 2Q22 UAE Banking Pulse that the bank’s total interest income grew significantly by 19.5% QoQ in 2Q22, driven by higher interest income.
Loans and Deposits
The push and pull between loans and deposits reveals an improvement in a customer’s personal financial situation. The increase in interest income was driven by a substantial increase in advances and deposits. Gross advances grew by 1.8%, while deposits grew faster at 4.5%.
Total non-interest income (NII) surged 15.1% mom and overall net interest margin (NIM) jumped 26.1bps mom due to higher benchmark rates. Overall asset quality improved as non-performing loans (NPL)/loans and advances (L&A) fell 0.4% to 5.7% in the quarter.
A&M’s UAE Bank Pulse examined data from the 10 largest listed banks in the UAE, comparing 2Q22 results with 1Q22 results. Using published market data from independent sources and 16 different metrics, the report assesses banks’ key performance areas, including size, liquidity, revenue, operational efficiency, risk, profitability and capital.
trend
The key trends identified for the second quarter of 2022 are as follows:
* Customer deposits growth outpaced L&A in 2Q22. Total L&A of the UAE’s top 10 banks increased by 1.8% QoQ in 2Q22, while deposits increased by 4.5% QoQ. As a result, total loan-to-deposit ratio (LDR) dropped to 82.4% qoq in 2Q22, compared to 84.5% qoq in 1Q22.
*Operating income growth was mainly due to higher interest income (19.5% MoM) supported by NII such as foreign exchange income and investment income. Total operating income increased 13.6% QoQ compared to -6.4% in 1Q22. Growth was mainly driven by NII, which saw a substantial 15.1% quarter-on-quarter increase, and foreign exchange and investment-related income increased by 24.1% quarter-on-quarter.
* Net interest margins in UAE banking sector improved as benchmark interest rates rose. Although the net interest margin increased to 2.3%, it was still below the pre-pandemic level of 2.6%. Net interest margin improved by 26.1 basis points sequentially as total net interest margin increased by 15.1% sequentially, while net interest-bearing assets increased by 3.9%. Credit yield in 2Q22 increased by 84bps qoq to 5.9%, mainly due to a sharp rise in interest income +19.5% qoq due to higher interest rates. In 2Q22, the cost of capital decreased by 26.2bps QoQ to 1.3%.
Operational efficiency
*Operating efficiency improved in 2Q22 despite higher operating expenses. The cost-to-income ratio (C/I) increased by 2.9 basis points sequentially to 31.5%. The lower C/I ratio was due to the 13.6% sequential increase in operating income, which grew faster than the 4.1% sequential increase in operating expenses. Eight out of ten UAE banks reported improved C/I ratios in 2Q22.
* Cost of Risk (CoR) improved as total impairment charges continued to decline for the sixth consecutive quarter. Total CoR in 2Q22 decreased by around 9.7bps QoQ to 0.72%, the decline was mainly due to a decrease in total provisions from AED3.5 billion in Q1 to -9.7% to 3.1 billion in 2Q22 Dirham 22.
*Returns improved in 2Q22 as profitability improved across the board. Total net profit increased by 24.4% month-on-month, so returns such as return on equity (ROE) and return on assets (ROA) increased by 1.9 percentage points and 0.3 percentage points quarter-on-quarter, respectively.
Strong profitability
Asad Ahmed, Managing Director and Head of Financial Services Middle East, A&M commented: “The regional banking sector, including the UAE, is expected to report continued strong profitability against the backdrop of rising interest rates, improving credit quality and strong economic growth.
“While inflation is clearly a global concern now, against a backdrop of firmer oil prices, stronger consumer confidence and robust economic activity, we expect less impact in the region. Broad public participation in the latest wave of country-related IPOs is also a key factor. A key factor in quarterly positive sentiment.” – arab trade news agency
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