UAE banks remain strong and well positioned to weather contagion risks – News

Profitability of top 10 UAE banks to rise 31.7% yoy in 2022 as higher rates boost earnings

The performance of the UAE’s largest bank demonstrated improved profitability, asset quality ratios, return on equity and assets, while strengthening capital positioning.

Thanks to a notable surge in profitability, UAE banks remain strong, well capitalized and well positioned to weather contagion from the global banking crisis, including the recent failure of two US banks.

Profitability of the top 10 banks in the UAE will increase by 31.7% YoY in 2022 as higher interest rates boost earnings. Deposits rose 11.3% year-on-year, faster than loans and advances (L&A), according to Alvarez & Marsal, a leading global professional services firm.

The performance of the UAE’s largest bank demonstrated improved profitability, asset quality ratios, return on equity and assets, while strengthening capital positioning.

Total net income increased to AED 49.8 billion, mainly due to a 26.7% surge in net interest income (NII). A&M said L&A grew 5.7%, faster than FY21 (1.6% YoY). Deposit growth also rose 11.3% YoY, faster than the previous year (6.7%).

Asad Ahmed, managing director and head of financial services for the Middle East at A&M, said the overall performance of the banking sector was encouraging.

Asad Ahmed, managing director and head of financial services for the Middle East at A&M, said the overall performance of the banking sector was encouraging.

“We can see the impact of the rate hike; certain profitability and operating ratios are now at pre-pandemic levels,” he said.

“Profitability and NIM improved in FY22 even with rising interest rates. In 2023, albeit slowly, the UAE banking sector could pick up as the non-oil private sector expands. Due to Rising interest rates have led to lower demand for credit, and non-performing loans and risk costs are expected to increase slightly due to higher provisions. However, UAE banks are well-capitalized to maintain capital adequacy ratio (CAR) levels well above regulatory requirements,” said Ahmad De said.

In A&M’s UAE Bank Pulse analysis, the top 10 listed banks in the country are 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, National Bank Ras Al Khaimah and Sharjah Islamic Bank.

Total operating income increased by 17.5% year-over-year, mainly due to a 26.7% increase in net interest income. In FY22, customer deposit growth significantly outpaced L&A growth.

The aggregate deposits of the top 10 banks grew by 11.3% YoY, while aggregate L&A increased by 5.7% in FY22. Rising interest rates lead to slower lending and higher deposits. As a result, the total loan-to-deposit ratio slipped 4.1 percentage points to 77.9%.

Data from the UAE Central Bank showed that large deposits (over AED20 million) accounted for 59% of total deposits held by UAE banks at AED2.222 trillion by the end of 2022.

S&P Global said in a report that a slowing economy and a higher interest rate environment could lead to an increase in problem loans by UAE banks in sectors such as construction and trading, as well as some small and medium enterprises, in 2023. Still, the cost of risk for banks will rise only slightly.

“While banks will face higher funding cost pressures, we believe higher policy rates will help UAE banks improve margins. They will also continue to benefit from stable and strong capital buffers, sound funding positions and expected Government support,” S&P Global said in its report.

The A&M report noted that while significant increases in interest rates have helped boost profitability, the inevitable cycle of reduced loan demand was evident in 4Q22.

“This could lead to pressure on asset quality in 2023. Gross net interest margin increased by 37 basis points in FY2022 due to higher earnings income for banks due to higher interest rates,” the report said.

— issacjohn@khaleejtimes.com