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Capital position of top ten UAE banks remain robust

Although interest rates remained stable, NII grew by 2.0 per cent QoQ

Underpinned by high profits, the UAE’s top ten banks’ capital position remains robust while their asset quality further improved in the quarter ending June 2024, according to the latest Banking Pulse report.

Profitability increased to Dh21.5 billion for the second quarter on the back of higher net interest income (NII) and lower impairment charges (-35.4 per cent QoQ), the report released by Alvarez & Marsal (A&M) said.

“The UAE banks’ performance continues to remain strong on the back of lending growth and improvement in asset quality. The sector is well capitalised with aggregate CAR levels at 17.6 per cent and reported continued growth in Q2,” Asad Ahmed, A&M managing director and head of Middle East Financial Services, said.

Ahmed noted that the Central Bank of the UAE (CBUAE) maintained its benchmark interest rate at 5.4 per cent at the end of Q2 of 2024 with no movement as the rate is anchored to the US Fed rate. Recent Fed comments indicate that the first rate cut is imminent – market expectations are that this may occur in September.

“Banks are expected to take some precautionary provisioning as asset quality remains sensitive at the peak of the interest rate cycle. Banks are also expected to emphasise the growth of non-interest income as net interest margins (NIM) come under some pressure with the rate cuts. We see, for example, a number of banks refocusing on their transaction banking offering. Further, we expect the UAE banks to show increased benefits from their investments in digital initiatives leading to improved cost efficiency,” said Ahmed.

The report noted that although interest rates remained stable, NII grew by 2.0 per cent QoQ due to a higher loan-to-deposit ratio (LDR). Non-interest income was slightly lower (-2.9 per cent QoQ) to bring the growth in total operating income to a nominal +0.4 per cent (QoQ) in an expansion of return on equity (RoE) by 48bps QoQ. However, return on assets (RoA) remained stable at 2.2 per cent in the same period.

Loans and advances (L&A) grew moderately (+3.2 per cent QoQ), as retail lending witnessed a surge of 8 per cent QoQ. However, deposit mobilization slowed down (+0.4 per cent QoQ) mainly due to decline in time deposits by 2.5 per cent. Consequently, LDR increased by 2.0 per cent QoQ.

Banking trends noted by the report during Q2 include credit demand outpacing deposits mobilization as aggregate L&A grew by 3.2 per cent QoQ for the top 10 UAE banks outpacing deposits growth of 0.4 per cent QoQ. Consequently, LDR increased by 2 per cent QoQ to 75.8 per cent. Total operating income moderated due to lower non-core income offsetting NII growth. Operating income increased marginally by 0.4 per cent QoQ as non-interest income declined by 2.9 per cent QoQ. The aggregate non-interest income / total operating income ratio stood at 32.5 per cent in Q2.

NIM remained mostly flat in Q2 as the benchmark interest rates were stable. Aggregate NIMs contracted slightly by 1bp QoQ to 2.65 per cent during Q2. Yield on credit increased by 8bps QoQ to reach 12.3 per cent, whereas cost of funds increased by 13bps QoQ to 4.6 per cent in Q2. Faster growth in L&A as compared to deposits led the increase in LDR. Eight out of ten banks reported NIM contraction.

Six out of the top ten banks reported a deterioration in the cost efficiencies. Cost to income ratio (C/I) deteriorated by 19bps QoQ to 28.1 per cent in Q2. Cost efficiencies deteriorated as aggregate total operating income (+0.4 per cent QoQ) increased slower than the total operating expense (1.0 per cent QoQ) in Q2.

“Cost of risk (CoR) continued to improve for the UAE banks reaching a multi-year low. CoR improved by 16bps QoQ to settle at 0.3 per cent for Q2. Total impairments declined by 35.4 per cent QoQ in Q2 to Dh1.3 billion. Six out of the top ten banks reported an improvement in CoR. Profitability increased on the back of higher NII and lower impairment charges,” it said.