Revealed: How Healthy Is The UAE's Banking Sector?

UAE banks are generating healthy earnings despite tougher economic conditions, according to Alvarez & Marsal's latest UAE Banking Pulse for Q1.

The report said the fundamental theme in the three-month period to the end of March is a surge in profitability, underpinned by increase in loans and advances, and a stabilised yield on credit.

It found that overall operating income has risen significantly from Q4 2018 driven by non-interest income, off-setting decrease in interest income.

Alvarez & Marsal’s research compared the data of the nine largest listed banks in the UAE.

It said loans and advances for the top nine banks grew at a faster rate (1.54 percent) than deposits, which was negative (-0.67 percent) after six consecutive periods of increase.

Overall loans to deposit ratio increased to 88.3 percent with eight of top nine banks in the LDR “green zone” of between 80-100 percent.

Liquidity is expected to continue to be stable in 2019, it said, adding that operating income growth increased significantly on the back of a rise in non-interest income following increased lending activity     

   

The report noted that the upward trend in cost of risk continued from Q4 2018, driven by a corresponding increase in net loan loss provisions, although four banks decreased their cost of risk.

Return on equity maintained high levels despite the increase in cost of funds and a fringe increase in operating income.

The banks analysed in the report were 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 Ras Al Khaimah and the National Bank of Fujairah.

Dr Saeeda Jaffar, A&M managing director and Middle East Office co-head, said: “Overall the profitability for the UAE banks has increased. This stems from increased operating income, reduced costs and increased balance sheet leveraging, offset by an increase in cost of risk.

"This very much reflects the funding cost pressures that continue to impact the banks amid increased competition for deposits and tighter liquidity, consequently leading to lower net interest margins in Q1.

“Whilst it is possible that liquidity could tighten in the coming months, we continue to maintain a balanced view towards the sector, with a focus on asset quality and improving profitability. The tightening could also help banks readjust business models now shaped by new financing-cost realities,” she added.