• UAE’s top 10 banks’ profitability soars to 15.1 percent; Net interest income (NII) grew 12.2 percent as interest rates hike 
• Total interest income grew significantly by 27.5 percent 
• Sharp uptick in credit yields have boosted net interest margins (NIM)
   

Dubai – November 17, 2022 – Leading global professional services firm Alvarez & Marsal (A&M) has released its latest United Arab Emirates (UAE) Banking Pulse for Q3 2022. The top ten UAE banks reported an increase in profitability driven by higher core interest income despite a slowdown in loans and advances (L&A) growth. Aggregate NII surged by 12.2 percent quarter-on-quarter (QoQ) and NIMs improved by 18bps QoQ supported by higher credit yield on back of rising benchmark rates. Asset quality improved as non-performing loans (NPL)/ L&A fell by 0.2 percent to 5.5 percent during the quarter.

L&A growth was marginally up by 0.7 percent QoQ, while deposits increased by 5.2 percent QoQ. On balance, while Q3’22 interest rate increase have positively impacted banks, the impact on borrowing is more subdued, despite positive economic activity in the GCC as the; IMF revised its UAE GDP forecast upwards from 4.2 percent to 5.1 percent in October 2022. 

Overall, banks reported higher profitability as return on equity (RoE) improved by 1.3 percent QoQ to 15.1 percent and return on assets (RoA) improved by 0.1 percent QoQ to 1.7 percent during the quarter, thanks to stronger economic activity, higher interest rates, and elevated oil prices. 

A&M’s UAE Banking Pulse examines data of the 10 largest listed banks in the UAE, comparing the Q3’22 results against Q2’22 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 country’s 10 largest listed banks analyzed 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 2022 are as follows:

1. Customer deposit growth, led by FAB, significantly outpaced L&A growth in Q3’22. FAB reported the highest increase in deposits of 15.1 percent QoQ, growing to AED 746bn in Q3’22. Aggregate L&A increased by 0.7 percent QoQ in Q3’22 while the deposits for top 10 banks grew at 5.2 percent QoQ. Consequently, the loan-to-deposit ratio (LDR) slipped 3.5 percent QoQ to 78.9 percent. 
2. The operating income grew significantly by 8.3 percent QoQ primarily driven by increased NII for the UAE banks. The NII increased substantially by 12.2 percent QoQ. The increase in other operating income of 8.0 percent QoQ was offset by decrease in net fees and commission income of 7.8 percent QoQ. As a result, the aggregate non-interest income marginally declined by 0.1 percent QoQ. 
3. NIM expanded as asset yield exceeded the increase in the funding cost. Aggregate NIM’s improved by 18bps QoQ to 2.5 percent supported by higher yield on credit of 7.4 percent QoQ. Most of the top ten banks in UAE witnessed an expansion in NIM. Cost of funds (CoF) increased by 66bps QoQ at 1.9 percent in Q3’22 as interest expense increased +61.1 percent QoQ on back of higher rates. 
4. Operational cost efficiencies improved for the top ten UAE banks for the second consecutive quarter. The cost-to-income (C/I) ratio improved by 1.0 percent QoQ to reach 30.5 percent. This was primarily due to an operating income increase of 8.3 percent QoQ which exceeded the 5.0 percent QoQ growth of operating expenses. 
5. Cost of risk (CoR) deteriorated by 19bps QoQ as the banks, for the first time after six consecutive quarters. reported higher provisions of 27.8 percent QoQ. This was mainly due to a impairment charges increase of 27.8 percent QoQ in Q3’22 to AED 4.1bn. Six out of ten banks reported increased provisions for impairments following an increased cost of risk. 
6. The RoE increased by 1.3 percent QoQ to 15.1 percent while RoA improved to 1.7 percent in Q3’22; attributed to an increase in profitability levels of 7.3 percent QoQ.

Overview

The table below sets out the key metrics: 

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

Mr. Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services commented: “With the tailwinds of stronger economic growth and higher interest rates, UAE banks reported improved profitability. The Q3’2022 earnings momentum gathered pace with elevated margins, and asset quality pickup. We expect the improving trend to continue in the fourth quarter, but remain cautious of the effect of higher rates on retail and corporate borrowers”.

About Alvarez & Marsal

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With over 7,000 people across five continents, we deliver tangible results for corporates, boards, private equity firms, law firms and government agencies facing complex challenges. Our senior leaders, and their teams, leverage A&M’s restructuring heritage to help companies act decisively, catapult growth and accelerate results. We are experienced operators, world-class consultants, former regulators and industry authorities with a shared commitment to telling clients what’s really needed for turning change into a strategic business asset, managing risk and unlocking value at every stage of growth.

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