Net Interest Income Growth Boosts Profitability Of UAE Lenders

Dubai: Higher business volumes and an increase in interest rates helped UAE banks to improve their profits last year. The underlying economic fundamentals are supportive of higher profitability in 2018, according to analysts.

The four largest banks — First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB), representing more than 60 per cent of total assets — reported strong growth in operating incomes. The gains were largely driven by higher business volumes and recent interest rates hikes, which generated higher recurring income, both in the form of net interest income and fees and commissions.

These banks’ combined net interest income grew by 2 per cent compared to the third quarter 2017 and by 7 per cent compared to the fourth quarter of 2016. The positive performance was shared across the board in the last quarter of 2017, but year-on-year ENBD and DIB outperformed their peers, delivering double-digit growth driven by loan growth of 5 per cent and 16 per cent respectively. Aggregate loan growth for all four banks accelerated to 4 per cent for 2017 from a 0.3 per cent contraction in 2016.

The banks benefited from US interest rate increases, owing to the peg between the dirham, and the US dollar, which lifted the benchmark rate (the Emirates Interbank Offered Rate or Eibor) for domestic lending. This generated higher interest income.

“We expect improving non-oil economic activity to propel real GDP growth to 3.3 per cent in 2018, after an expected slowdown to 1 per cent in 2017 from 3 per cent in 2016. Consequently, we expect credit growth to positively influence interest income for the large banks in 2018,” said Nitish Bhojnagarwala, a vice-president at Moody’s.

Last year, fee and commission income also improved on the back of increased economic activity and credit growth. Net fee and commission income improved in the fourth quarter, rising 2 per cent and 11 per cent relative to the fourth quarter of 2016 and third quarter of 2017 respectively. The 11 per cent quarterly increase was bolstered by rising business volumes and robust credit growth across all four banks.

Analysts expect sustaining profitability will be a function of improvements in the economic fundamentals while factors such as higher cost of risks and operating costs are likely to result in profitability moderating.

Growth in private sector lending across the banking sector continued to drop and reached an annualised 2.6 per cent on average in the first nine months of 2017, compared with 5.7 per cent in 2016. The UAE Central Bank Data on credit growth released in December showed weak credit demand in 2017. Gross loans fell 0.9 per cent month-on-month in December, resulting in an annual growth of just 1.7 per cent. Annual growth in deposits remained strong at 4.1 per cent in December 2017. The UAE Central Bank’s latest credit sentiment survey showed a marginal increase in business loans, mainly attributable to the strengthening in demand in Dubai. On the other hand, demand for personal loans in aggregate was flat, with most respondents reporting no change.

In terms of outlook, demand for both personal and business lending was expected to increase only on modest scales.

For the GCC as a whole, analysts expect sluggish loan growth in 2018 and 2019 and the UAE too will be impacted.

“In 2018-2019, we expect this situation to continue due to reduced government spending [except in Kuwait],” said Mohammad Damak, Senior Director, Financial Services at S&P Global Ratings.

“We expect private-sector lending growth to reach 3 to 4 per cent in 2018-2019, supported by strategic initiatives such as Dubai Expo 2020, Saudi Vision 2030, the World Cup 2022 in Qatar, and higher government spending in Kuwait led by Kuwait 2035, a long-term development plan announced in early 2017.”

Lower loan growth, combined with lower loan demand and higher deposits are expected to keep the banking sector highly liquid. The loans-to-deposit ratio declined to 97.1 per cent in December 2017, as compared to 99.6 per cent in December 2016. The top four banks reported a full-year deposit growth of around 6.5 per cent for 2017, suggesting the easing of liquidity pressures.