UAE Banks Are Prioritising Profits Over Growth in Q3 Finds Alvarez & Marsal

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The UAE Banking Pulse for Q3 2021 has been released by Alvarez & Marsal (A&M), the global professional services firm. The report highlights companies’ desire to end the year on a high as many prioritise profit over growth.

Co-authored by Asad Ahmed, Managing Director and Head of Middle East Financial Services, and Sumit Mittal, Senior Director at Alvarez & Marsal, the UAE Banking Pulse, examines the data of the ten largest listed banks in the UAE, comparing the Q3’21 results against Q2’21 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.

The report details banks’ operational efficiencies have helped their operating income growth outpace expenses. The C/I ratio decreased to its lowest level since 2018 to 31.8 per cent as banks continue to optimise their expenses and overheads. The CoR declined (-1.8 bps QoQ), as provisioning eased on the back of an improving economic environment. In Q3’21, operating income increased by 7.4 per cent QoQ, driven by 6.8 per cent QoQ growth in net interest income (NII) along with 8.5 per cent increase in net fee, commission, and other operating income.

The report noted that Net Interest Margin (NIM) increased by ~10 bps QoQ to 2.15 per cent with higher yields on loans (+24bps QoQ). However, the current NIM levels of 215bps are still below the pre-pandemic levels (260bps in 2019). The aggregate interest income increased 6.1 per cent QoQ, primarily driven by an increase in yields to 5.3 per cent.

The country’s ten largest listed banks analysed in A&M’s UAE Banking Pulse 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).

The prevailing trends identified for Q3 2021 are as follows:

Loans and advances (L&A) grew marginally by 0.6 per cent, while deposits growth kept pace with last quarter’s growth of 2.1 per cent QoQ. Deposit growth kept pace with the Q2 level of 2.1 per cent QoQ. Loans to Deposits Ratio (LDR) decreased marginally across the sector. There was strong operating income growth, with 7.4 per cent QoQ in Q3 2021, driven by increase in NII of +6.8 per cent QoQ and other operating income of +25.4 per cent QoQ. However, this growth was partially offset by a 7.0 per cent QoQ decrease in net fee and commission income. First Abu Dhabi Bank (FAB) (+23.5 per cent QoQ) reported the highest increase in operating income, driven by 12.1 per cent QoQ increase in NII, alongside investment and property-related gains. While NIM expanded by 10 bps QoQ to reach 2.2 per cent, supported by higher asset yields, it remains below the pre-pandemic 2019 NIM average of 2.6 per cent. The yield on credit increased by 24.0 bps QoQ to 5.3 per cent, while the cost of funds remained flat QoQ at 1.1 per cent. NIMs expanded across the board, though ADCB witnessed a decline of 22 bps QoQ driven by a decline in asset yields. Operating efficiency improved as operating income grew twice as fast as costs. Cost-to-income (C/I) ratio improved by 117 bps QoQ to 31.8 per cent in Q3 2021, its lowest level since 2018. Five of the top 10 banks witnessed an overall improvement in the C/I ratio. The asset quality remained stable in Q3 2021 with steady coverage ratios. The aggregate coverage ratio was mostly flat, -0.1 per cent points QoQ, at 92.2 per cent, while the aggregate non-performing loans (NPL) / net loan ratio remained flat at 6.2 per cent. Total net profit for the banks increased by 14.4 per cent QoQ due to a rise in NII of 6.8 per cent QoQ, a significant rise in other operating income of 25.4 per cent QoQ, and a marginal decline in impairment allowances of -0.3 per cent QoQ. Consequently, profitability metrics such as Return on Equity (RoE) at 12.3 per cent and Return on Assets (RoA) at 1.4 per cent increased. FAB with 15.6 per cent and DIB with 14.9 per cent reported the highest RoE among the top ten banks.


The table below sets out the key metrics:

Size Loans and Advances Growth (QoQ) 1.9% 0.6%
Deposits Growth (QoQ) 2.1% 2.1%
Liquidity Loan-to-Deposit Ratio (LDR) 84.4% 83.2%
Income and Operating Efficiency Operating Income Growth (QoQ) 2.8% 7.4%
Operating Income / Assets 2.9% 3.1%
Non-Interest Income / Operating Income 34.4% 34.8%
Yield on Credit (YoC) 5.1% 5.3%
Cost of Funds (CoF) 1.1% 1.1%
Net Interest Margin (NIM) 2.0% 2.2%
Cost-to-Income Ratio (C/I) 33.0% 31.8%
Risk Coverage Ratio 92.3% 92.2%
Cost of Risk (CoR) 1.2% 1.1%
Profitability Return on Equity (RoE) 10.9% 12.3%
Return on Assets (RoA) 1.2% 1.4%
Return on Risk-Weighted Assets (RoRWA) 1.8% 2.0%
Capital Capital Adequacy Ratio (CAR) 17.0% 17.2%

Source: Financial statements, investor presentations, A&M analysis

Ahmed commented, “This quarter saw ‘better-than-expected’ profits. However, the growth in profitability appears uneven, and is leaning more towards the larger banks than the mid-sized banks.

“Sound capital buffers, a stable funding profile, and expected government support should continue to uphold banks’ creditworthiness. However, asset quality may deteriorate over the medium term as forbearance measures are gradually withdrawn. It is expected that the economic boost from Expo 2020, continued economic recovery and digital transformation will continue to drive the UAE banking sector growth. An interesting outcome of the current IPOs would be to see how they impact the earnings of the local banks; it is probable that this may highlight the need for some of the banks to build better capabilities that broaden their fee income capabilities and hence diversify their income streams.”

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