The profitability of the top ten UAE banks has deteriorated marginally by 0.3% in Q1 2022 and return on asset (RoA) remained flat at 1.4% during the quarter compared to Q1 2021 as the sector braces for a slowdown.

The country’s 10 largest listed banks are 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), Commercial Bank of Dubai (CBD), National Bank of Fujairah (NBF), National Bank of Ras Al-Khaimah (RAK) and Sharjah Islamic Bank (SIB), according to leading global professional services firm Alvarez & Marsal (A&M), which has released its latest UAE Banking Pulse for Q1 2022.

The report suggests that the Q1’22 results for most of the banks in the UAE highlighted an increase in profitability, despite lower non-interest income. The loans and advances (L&A) for the top ten banks in the UAE increased by 2.8% quarter on quarter (QoQ) as the economic environment improved.

LDR increases

The UAE Banking Pulse for Q1’22 noted that the loan-to-deposit ratio (LDR) increased to 84.5% in Q1’22 compared to 82.1% in Q4’21. The aggregate non-interest income (NII) increased by 0.6% QoQ as the overall net interest margin (NIM) remained flat at 2.1%, due to low benchmark rates.

Asset quality of the state-owned banks improved as non-performing loans (NPL) / L&A fell by 0.1% points to 6.1% during the quarter.

A&M’s UAE Banking Pulse examines data of the 10 largest listed banks in the UAE, comparing the Q1’22 results against Q4’21 results. Using independently sourced published market data and 16 different metrics, the report assesses banks’ key performance areas, including size, liquidity, income, operating efficiency, risk, profitability, and capital.

Credit growth revival

The loan-to-deposit ratio (LDR) increased on back of credit growth revival while deposits declined marginally. Aggregate L&A increased 2.8% QoQ in Q1’22 indicating revival in credit growth led by post-pandemic economic recovery.

Meanwhile, deposits fell marginally by 0.1% QoQ during the period after four consecutive quarters of growth. Consequently, aggregate LDR increased from 82.1% in Q4’21 to 84.5% in Q1’22.

Operating income for the top ten banks saw a significant fall, 6.4% QoQ, mainly due to 35.9% QoQ decline in foreign exchange (FX) and investment related income. However, this was partially offset by higher net commission and fee income of +4.6% QoQ.

NIM broadly flat

Aggregate net interest margin (NIM) remained broadly flat at 2.05% in Q1’22 owing to the lower yields from the banks due to broader lower interest rate scenario. Yield on credit declined marginally by 5 bps QoQ while cost of funds remained flat QoQ at 1.0%. Six of the banks have reported flat / contraction in NIM’s while the remaining banks reported marginal expansion.

Cost-to-income (C/I) ratio increased by 90.0 bps QoQ to 34.4% as operating income of -6.4% QoQ, dropped at a higher rate compared to operating expenses of -3.8% QoQ. Half of the top ten banks reported deterioration in cost efficiencies mainly driven by FAB and ADCB.

Cost of risk (CoR) improved for most of the UAE banks; as the aggregate CoR fell by 26.9 bps QoQ, primarily due to significant decrease net impairment charges. The total provisioning decreased to AED3.5 billion ($950 million),- 23.6% QoQ. This resulted from most of the banks reporting lower provisions due to economic improvements along with the extension of the Targeted Economic Support Scheme (TESS).

Aggregate net profit down

Aggregate net profit for the UAE banks increased by 24.3% QoQ. However, excluding the AED2.8 billion gain on sale of stake in Magnati by FAB, the aggregate net profit decreased by 2.6% QoQ. This was primarily due to lower earnings from FAB, ex-stake sale, impacted by a decline in operating profit of -21.7% QoQ along with a +2.8% QoQ increase in operating expenses.

Consequently, the aggregate return on equity (RoE) decreased marginally from 12.3% in Q4’21 to 11.9% in Q1’22, while return on assets (RoA) remained flat at 1.4%.

Asad Ahmed, Managing Director and Head of Middle East financial services at A&M commented: “Rising oil prices, supportive government policies, revival signs in the real estate sector and normalising non-oil activity are expected to accelerate the UAE’s economy in the next quarter. The International Monetary Fund (IMF) has revised the UAE’s gross domestic product (GDP) growth estimates for 2022 from 3.5% to 4.2%. We anticipate domestic lending to grow on the back of revived economic activities, and NIM to improve as benchmark interest rates have increased by 50bp.

“Deposits are also expected to grow underpinned by the projected interest rate increase. However, there are potential asset quality deterioration risks, in later half of the year, when the Central Bank of UAE’s TESS scheme ends in mid-2022.”