UAE banks boost lending, revenues

Banks in the UAE boosted their loan books and revenues in the first quarter marking a significant revival to lending while liquidity remained healthy, latest data shows.
Leading 11 banks in the UAE grew their loan books by 2.13 per cent compared with the previous quarter while net interest margins remained under pressure, global professional services firm Alvarez & Marsal (A&M) said in its UAE Banking Pulse report.
The increase in lending between the first quarter of 2017 and the final quarter of 2016 came after these banks' loan books fell 0.13 per cent between third and fourth quarter of 2016, signalling the end of a period of flat lending growth.
"The underlying theme is that while net interest margins remain under pressure, banks have grown their loan books with a significant return to lending. Liquidity remains healthy and cost of risk has decreased," said the report.
Overall, the emerging signs of recovery, which were detected in the inaugural Banking Pulse report, are again visible and recent upgrades of the UAE's credit ratings are also contributing to the growing air of confidence. "There is every reason to believe we will see this trend continuing during the rest of this year."
Eight of the top 11 banks had Loan to Deposit Ratios (LDRs) of between 80 per cent and 100 per cent, the industry's so called "green zone". However, with deposits growing at a faster rate, the net effect has been an overall reduction in LDRs, said A&M. The combination of this, together with lower yield on credit and increasing cost of funds, has led to a decline in net interest margins.
The increase in lending has contributed to an overall increase in revenues and with banks also continuing to monitor their cost bases, in some case delaying investment and hiring decisions. Return on Equity has also increased. This has been driven primarily by a reduction in capital base due to payment of dividends to shareholders, which takes place in the first quarter of the year.
A majority of banks took a balanced approach of growing their loan books and deposit bases simultaneously. Risk metrics continued to strengthen, with cost of risk continuing to decrease, noted the report.
Dr Saeeda Jaffar, A&M managing director and lead author of the report, said banking revenues have risen on the back of increased lending, which has been a key area of focus for the sector and means that liquidity as measured by LDR remains at healthy levels. "However, this has in turn contributed to a more competitive environment, leading to a reduction in interest income, reducing yields on credit. When combined with increased cost of funding incurred in growing loan books, this has impacted net interest margins," said Jaffar. While banks have certainly been careful with their costs, in some cases delaying investment and hiring decisions, these investments may be made during the year, and that could drive C/I ratios up.
"The de-risking of the sector has continued, with cost of risk continuing to decrease, and this is an encouraging trend. The UAE banks also continue to deliver returns on equity that are significantly higher than the global average," said the report.
A Central Bank survey showed that demand for business credit and personal loans in the UAE increased modestly in the January-March quarter because of higher oil prices and more moderate government austerity measures. The net balance measure for business lending - the weighted percentage of respondents reporting an increase in demand for loans minus those reporting a fall in demand - was plus 7.6 in the latest quarter, up from minus 1.3 in the previous quarter. The UAE's banking sector topped the GCC region in terms of asset volume, with a total value of about $711 billion in 2016.
The banks analysed in A&M's UAE Banking Pulse include National Bank of Abu Dhabi, Emirates NBD, Abu Dhabi Commercial Bank, First Gulf Bank, Dubai Islamic Bank, Union National Bank, RAKBank, Commercial Bank of Dubai, Abu Dhabi Islamic Bank, Mashreq Bank - and a new addition - National Bank of Fujairah. - issacjohn@khaleejtimes.com