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Mon, Dec 23, 2024 | Jumada al-Aakhirah 22, 1446 | DXB
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UAE banking sector may remain less volatile in 2021
Dubai - Aggregate net profit of the top 10 UAE banks declined by 38.3 per cent year on year, on the back of lower operating income and increased provisions, A&M said in its UAE Banking Pulse report
A broker monitors stock prices on a screen at the Saudi Investment Bank in Riyadh September 5, 2013. REUTERS/Faisal Al Nasser (SAUDI ARABIA - Tags: BUSINESS) - RTX138FU
The UAE banking sector is expected to remain less volatile in 2021 compared to last year, but banks might witness the deterioration of their asset quality after the completion of the Central Bank of the UAE’s deferral program in June 2021, according to Alvarez & Marsal.
Aggregate net profit of the top 10 UAE banks declined by 38.3 per cent year on year, on the back of lower operating income and increased provisions, A&M said in its UAE Banking Pulse report.
Net interest income (NII) decreased two per cent year on year, as system-wide rates decreased substantially after the Central Bank of the UAE slashed rates to counter the effects of the Covid-19 pandemic. However, NIM improved as banks were able to reduce their funding costs further.
The report noted that the UAE banking sector showed signs of instability due to the low-interest environment and sluggish economic conditions, which weighed on overall profitability and return metrics.
Operating efficiency (C/I ratio) also deteriorated, as operating income decreased at a higher rate compared to operating expenses. Despite a challenging business environment, the aggregate capital adequacy ratio of the UAE banks remained robust at 17.6 per cent at the end of December 2020, compared to 17.3 per cent at the end of December 2019.
Aggregate net profit of these banks declined by 38.3 per cent YoY, on the back of lower operating income and increased provisions. Thus, profitability ratios declined.
Total loan loss provisions increased by 79 per cent YoY to Dh28.1 billion, as challenging economic environment and exposure of banks on several high-profile publicly disclosed cases resulted in higher impairments. Cost of risk increased sharply by 69 bps YoY to 1.71 per cent. The coverage ratio also declined to 91.9 per cent from 97 per cent a year ago. The aggregate NPL ratio increased to 6.1 per cent at the end of 2020 from 4.6 per cent at the end of 2019.
According to KPMG, during 2020 the net profit of the top 10 banks in the UAE dropped by 41 per cent on average compared with 2019 and this calls for greater innovations.
Global ratings agency S&P recently reported that the Covid-19 pandemic, lower oil prices, and continued pressure on the real estate sector have increased risks for UAE banks but banking authorities' response to the crisis reporting requirements have reinforced oversight and transparency.
The ratings agency expects rated UAE banks' asset-quality indicators to deteriorate further once regulatory forbearance measures are lifted, although some will be protected by their strong capitalization and earning capacity. “Although forbearance measures could be extended from their current mid-year 2021 expiry date, we expect their removal to be gradual and managed. Despite this support, banks with a structural orientation to sectors where prospects remain weakest are expected to book further significant credit losses,” S&P said.
— issacjohn@khaleejtimes.com
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