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The UAE banking sector looks back to a strong 2022, with net profit up more than 25% year-on-year. Despite the looming risk of an international banking crisis, UAE banks are expected to weather the storm successfully with a stable outlook for 2023. That’s according to a new industry report from KPMG.
In its annual ‘UAE Banking Outlook’ report, the KPMG Evaluates the performance of the 10 largest local banks in the UAE and provides insight into the future state of the banking industry.
Looking back, the results are encouraging. Overall, total assets rose 10% last year, and return on assets and return on equity — two key financial measures of performance — improved. Combined net income jumped more than $3 billion to $1.5+ billion.
At the same time, the cost-to-income ratio improved by an average of 1.8% during the year, and banks maintained adequate capital levels, well above minimum regulatory requirements.
Abbas Basrai, Partner and Head of Financial Services, Lower Bay Region, KPMG, said: “The improvement in performance was mainly due to higher net interest income due to higher benchmark interest rates compared to last year, before lower impairment charges due to borrower The asset quality and creditworthiness of the company have been improved.”
The positive financial performance was also driven by a “favorable business environment, significant foreign investment and an influx of capital from high-net-worth clients”.
Basrai also praised the government’s role in ensuring that the UAE banking sector operates in a safe harbour. “The government’s commitment to regulatory reform of the industry has ensured market stability. The measures taken by the UAE Central Bank to strengthen the governance framework have increased transparency and accountability.”
Key indicators
KPMG’s report includes a detailed overview of the performance of each indicator. Summary of 5 charts:
loan-to-deposit ratio
The loan-to-deposit ratio (LDR) is calculated by dividing loans and advances to customers (financing assets in the case of an Islamic bank) by customer deposits (including unrestricted investment accounts in the case of an Islamic bank):
capital adequacy ratio
The capital adequacy ratio (CAR) is calculated by dividing total eligible capital by total risk-weighted assets:
Return on Assets/Return on Equity
Return on assets (ROA) is calculated as net profit attributable to equity holders divided by average assets. Return on equity (ROE) is calculated as net profit attributable to shareholders divided by average equity:
Market Cap/Net Worth
Market capitalization of banks calculated as total assets minus total liabilities (net assets):
Payout ratio
The dividend payout ratio is calculated as dividend per share (for the year recommended by the board) divided by basic earnings per share:
Commenting on the potential risk of contagion from the global banking crisis to the UAE, Basrai said: “Despite the turmoil in international markets, UAE banks are relatively well-positioned to manage the resulting contagion risk due to limited lending activity in the US. Most of the assets are likely to be in high credit quality instruments or deposited with the Federal Reserve Bank of the United States.”
“Given their strong funding and liquidity positions, and expected government support should the need arise, the likelihood that UAE banks will have to sell significant amounts of investment securities appears limited.”
“All in all, the UAE is well-positioned to weather the effects of a prolonged recession due to its strong liquidity and capital position.”
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