Dubai – Leading global professional services firm Alvarez & Marsal (A&M) today released its latest UAE Banking Pulse for Q3 2019. The report indicates that although the top 10 UAE banks by assets reported a combine 25.5 percent year-on-year increase in the top line during Q3’2019, margins are starting to come under pressure largely due to interest rate cuts, and the impact is expected to continue in the fourth quarter.

The reduction of base rates has led to a mixed trend in net interest margin (NIM) for the coverage universe. The marginal improvement in NIM was supported by stable loans and advances (L&A) and increase in yield on credit. (YoC). Analysts have also noted the nearly 40bps increase in Q3 in banks’ exposure to real estate and construction. Given the challenging market conditions in those sectors, this has inevitably led to the cost of risk going up in Q3 2019, as well as contributing to a 32 percent increase in provisioning.

The report shows that overall operating income across the sector improved, primarily driven by consolidation activity as the acquisition of DenizBank by Emirates NBD was finalised in the summer. Overall, three merger and acquisition deals were proposed or completed during the quarter. Analysts expect the consolidation trend to continue in the region.

Alvarez & Marsal’s UAE Banking Pulse compares the data of the ten largest listed banks in the UAE, looking at the third quarter of 2019 (Q3 2019) against the previous quarter (Q2 2019).

The prevailing trends identified for Q3 2019 were as follows:

The growth in loans and advances (7.8 percent) for the top 10 banks grew marginally faster than in the previous quarter (7.5 percent) due to lower interest rates. Overall, deposits growth declined to 7.5 percent from 8.5 percent in Q2’19, on the back of increased competition. Excluding the impact of Denizbank’s acquisition by Emirates NBD, banks’ quarter-over-quarter (QoQ) growth in terms of L&A is 1.5 percent and deposits 1.6 percent.

Growth in operating income increased substantially, mainly on the back of Emirates NBD, which reported a 54.2 percent QoQ increase in non-interest income (resulting from the integration of DenizBank).

Net interest margin (NIM) continues to improve marginally in the third quarter by 2.3 bps to 2.51 percent over 2.49 percent in Q2’19. Three of the top 10 banks observed an improvement and two of the top 10 banks witnessed stability in NIM during the quarter.

The Cost-to-Income (C/I) ratio worsened marginally by 72.1 bps due to lower operating income. The C/I ratio was higher for six of the top 10 banks. An increased level of Sales & General and Administrative Expenses (SG&A), likely attributable to continued spending in technology, s. Excluding Emirates NBD, C/I ratio was 34.4 percent in Q3’19 as compared to 33.7 percent in the previous quarter

The ascending trend in Cost of Risk (CoR) continues from Q3’18. Though five of the ten top banks showed an improvement in their CoR, the overall number moved up to 1.0 percent as the coverage banks, witnessed an increase in their net loan loss provisions by 32 percent during the third quarter. It is likely that increasing pressure in the real estate and construction sectors, and a softer economy prompted the increase in CoR.

Overall return on equity (RoE) and return on assets (RoA) declined in Q3’19. The RoE was impacted during Q3’19 as pressure on profitability margin continues due to interest rate cuts in Jul’19 and Sept’19. The RoE deteriorated to 13.5%, driven by rise in CoR and higher impairment allowances during Q3’19.

Alvarez & Marsal’s report uses independently sourced published market data and 16 different metrics to assess the banks’ key performance areas, including size, liquidity, income, operating efficiency, risk, profitability and capital.

The country’s 10 largest listed banks analysed 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), Emirates Islamic Bank (EIB), National Bank of Ras Al-Khaimah (RAK) and Sharjah Islamic Bank (SIB).

OVERVIEW

The table below sets out the key metrics:

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

A&M Managing Director and Middle East Office Co-Head , Dr. Saeeda Jaffar, is the lead author of the report. It is co-authored by A&M Managing Director & Head of Financial Services Asad Ahmed, along with Neil Hayward, Managing Director and Middle East Co-Head, who specialises in turnaround and restructuring.

Asad Ahmed commented: “The UAE banking sector maintained a modest growth, even though profitability was impacted by lower gross yields and higher net impairment charges during the quarter, a knock-on effect from the real estate and construction sectors. Looking ahead, we anticipate this pressure will continue as two successive rate cuts by the Fed in September and October 2019, are likely to put further pressure on banks’ margins. We expect that Q4 will not be dissimilar.”

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About Alvarez & Marsal

Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) when conventional approaches are not enough to drive change and achieve results. Privately held since its founding in 1983, A&M is a leading global professional services firm that provides advisory, business performance improvement and turnaround management services.

With over 4,000 people across four 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, help organizations transform operations, catapult growth and accelerate results through decisive action. Comprised of experienced operators, world-class consultants, former regulators and industry authorities, A&M leverages its restructuring heritage to turn change into a strategic business asset, manage risk and unlock value at every stage of growth.

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CONTACT: 

Kiran Makhija, Hanover Middle East, +971 5547 10294

Sandra Sokoloff, Senior Director of Global Public Relations, Alvarez & Marsal, +1 212 763 9853