UAE Banks Improve Profitability Supported by Increase in Operating Income in Q2 of 2023

Alvarez & Marsal (A&M), the leading global professional services firm, on Thursday released its latest UAE Banking Pulse for the second quarter of 2023. The report showed a positive trend in the UAE banking sector’s profitability, primarily driven by an increase in non-interest income and reduced impairment charges.

On a quarter-on-quarter (Q-o-Q) basis, the banking sector was stable and peaking interest rates have slowed the NII growth. The Central Bank of UAE (CBUAE) Credit Sentiment Survey indicated strong loan demand growth and optimistic expectation on credit appetite from financial institutions. CBUAE continues to anchor its benchmark rate to the US fed and increased it by 50bps between Q1 of 2023 to July 2023.

Despite benchmark interest rates reaching their peak, the net interest income (NII) contributed minimally to profitability with a 1.3% Q-o-Q growth. Loans and advances (L&A) experienced a 2.7% Q-o-Q growth, predominantly fuelled by corporate/wholesale loans’ 3.7% Q-o-Q expansion.

Deposits growth moderated at 0.8%, influenced by a decline in time deposits by 2.1%. Net interest margin (NIM) contracted by 4 basis points, and the non-performing loan (NPL) ratio improved marginally by 19 basis points to 5.2%.

The provisioning coverage for Stage 3 loans stood at approximately 63.4% and return on equity (RoE) improved by 99 basis points, while return on assets (RoA) remained steady at 2.2% throughout the quarter, the report said.

A&M’s UAE Banking Pulse examined data from the 10 largest listed banks in the UAE – 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), comparing the Q2-2023 results against Q1-2023 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.

Prevailing Trends

Aggregate L&A increased by 2.7% Q-o-Q in the second quarter and aggregate deposits for top 10 banks grew marginally by 0.8%. Consequently, loan-to-deposit ratio (LDR) increased 1.4% points to 76.3%. All top 10 banks reported an increase in L&A, where CBD reported the highest growth of 5.5% for the same period. A decline in deposits of FAB (-4.6%) slowed the pace of aggregate deposits growth.

Total operating income increased by 3.2% compared with 3.7% in Q1 of 2023. The growth in total operating income was driven by non-interest income which increased by 7.7%. In spite of a rise in the benchmark rates, the NII grew marginally by 1.3%.

Cost-to-income (C/I) ratio improved by 10bps to reach 27.6% in Q2 of 2023 as total operating income growth (+3.2%) outpaced the total operating expense (+2.9%).

Eight out of 10 banks reported an improvement in cost of risk (CoR). The CoR improved by 8bps QoQ to settle at 0.7% and total impairments declined by 8.5% in Q2 odf 2023 to $900 nillion.

Asad Ahmed, A&M Managing Director, and Head of Middle East Financial Services commented said there was sustained resilience in the UAE’s banking sector. Profitability remained robust and was emblematic of the sector’s adaptability, with non-interest income elevation and a reduction in impairment charges steering the positive trajectory.

“The UAE banks continue to stand on firm financial ground and are poised to navigate through the broader macroeconomic landscape. The alignment of the UAE’s interest rates with the US Federal Reserve, marked by a gradual 50bps rise from Q1 of 2023 to July 2023, further assists in this economic stance,” he noted. “Additionally, the upward revision of the non-oil economic growth forecast for 2023, now at 4.5%, reflects the vibrant signals coming from both the buoyant tourism and real estate sectors. In particular to the latter, a sizeable 363% year-on-year surge in Foreign Direct Investment within Abu Dhabi’s real estate sphere, amassing $227.23 million in H1 of 2023, is noteworthy,” he added