Leading UAE banks have reported robust improvement in performance with overall profitability and return on equity (RoE) higher in the third quarter of 2017, according to an analysis of key performance metrics by global professional services firm Alvarez & Marsal (A & M).
Almost all of the metrics applied by A & M in their analysis have risen quarter on quarter, suggesting that banks have successfully adapted to the market conditions created by a lower oil price environment, growing their loan books and are continuing to manage their costs sensibly.
The UAE Banking Pulse report analysed quarterly data of the 10 largest listed UAE banks in the third quarter of 2017 against the second quarter of 2017, and identifies prevailing trends throughout the intervening period.
The report uses independently-sourced published market data and 16 different metrics to assess the key performance areas including size, liquidity, income, operating efficiency, risk, profitability and capital.
The banks analysed include First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB), Dubai Islamic Bank (DIB), Mashreq Bank (Mashreq), Abu Dhabi Islamic Bank (ADIB), Union National Bank (UNB), Commercial Bank of Dubai (CBD), National Bank of Ras Al-Khaimah (RAKBank), and the National Bank of Fujairah (NBF).
The underlying theme this quarter is a rise in profitability, on the back an increase in loans and advances, and a rise in yield on credit. The result was higher levels of interest income and, with costs remaining steady and a lower cost of funding, banks saw higher returns on equity.
“The return to growth which we previously anticipated has now started to be seen, as banks have steadily adapted to the new normality of the current oil price environment. The housekeeping measures which we saw many banks implement last year were on the back of fears that the operating environment would worsen significantly, but it has not turned out to be as bad as was expected,” said Dr. Saeeda Jaffar, a managing director of A & M.
Loans and advances (L & A) for the top 10 banks grew at a faster rate of 1.26 per cent than deposits at 0.6 per cent, meaning that 8 of the top 10 banks increased their loan-to-deposit ratios. Operating income growth increased on the back of a rise in interest income following increased lending activity; all 10 banks reported growth in interest income.
Net interest margin (NIM) of these ten banks increased from 2.52 per cent to 2.61 per cent on the back of an increase in yield on credit and improved loans to deposit ratio, and also driven by the rise in interest rates; 8 of the top 10 banks improved their NIM.
Yield on credit increased by 8 basis points (bps) in the third quarter compared to the second quarter due to recent rise in interest rates.
Banks’ cost-to-income ratio remained relatively flat from 32.9 per cent to 32.8 per cent, as banks continued to manage their cost bases sensibly; 7 of the top 10 banks reduced their C/I compared to the second quarter of 2017. Overall cost of risk declined, driven by lower provisioning and increased loan portfolios, although four banks actually increased their cost of risk. RoE increased as a result of higher levels of interest income and increased income margins and leverage.