• UAE banking sector profitability recovered significantly in 2021
• Banks continue to remain cautious in originating new loans, despite higher liquidity
• Net interest margins (NIM) compressed to six-year lows of 2.1 percent

Dubai – March 8, 2022 – Leading global professional services firm Alvarez & Marsal (A&M) has released its latest UAE Banking Pulse for FY 2021. The report suggests that the profitability of the UAE’s banking sector recovered significantly in 2021 as the economy continued to bounce back from COVID-19. Overall, the banks have performed well on key income categories related to the markets, which continue to show elevated activity.

The UAE Banking Pulse for FY 2021 notes aggregate net income increased substantially by 48.6 percent year-on-year (YoY) to AED 37.8bn, mainly driven by higher operating income (+5.2 percent YoY) along with lower impairments (-30.1 percent YoY). However, the UAE banks remained cautious in originating new loans in 2021, despite higher liquidity. It is likely that the banks are holding reserves considered too high for the risk profile of their portfolio, given recent credit trends.

A&M’s UAE Banking Pulse examines data of the 10 largest listed banks in the UAE, comparing the FY’21 results against FY’20 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 FY 2021 are as follows:

1. Growth in aggregate loans and advances (L&A) increased by 26 bps to 1.7 percent in FY’21, while deposits grew by 6.7 percent YoY alongside the UAE’s economy recovery from the COVID-19 pandemic. However, growth is still below pre-pandemic levels. The aggregate loan-to-deposit ratio (LDR) fell to 82.1 percent from 86.2 percent, as deposits grew at a higher pace compared to loans.

2. Total operating income increased by 5.2 percent in 2021, despite a 3.0 percent fall in net interest income. The growth in operating income was supported by a higher fee and commission income (+9 percent YoY) and income from investments and gains from foreign exchange (+43.7 percent YoY).

3. NIM deteriorated further to a six-year low of 2.1 percent during FY’21, as compared to 2.3 percent in FY’20, largely due to a low interest rate environment. Aggregate yield on credit and cost of funds declined this year across the banks by 68 bps and 42 bps, respectively.

4. Cost-to-income (C/I) ratio decreased by 1.7 percent YoY to 32.8 percent, as banks managed to control cost while increasing the operating income. The operating efficiency (C/I ratio) improved, supported by a 5.2 percent YoY increase in operating profits. The lower C/I ratio can be partially attributed to cost control measures implemented by some banks like ADCB, Mashreq Bank and ADIB.

5. Provisioning decreased substantially, with cost of risk (CoR) contracting by 54 bps YoY to 1.17 percent. Total loan loss provisions decreased by 30.1 percent to AED 19.6bn in FY’21, as the economy has started to recover amid continued stimulus provided by the Central Bank along with the government’s Targeted Economic Support Scheme (TESS).

6. The UAE banks noted a strong earnings growth supported by lower provisioning and higher operating income. Aggregate net profit increased by 48.6 percent YoY, on the back of higher operating income and lower provisions. Overall, profitability ratios such as return on equity (RoE) and return on assets (RoA) improved to 11.1 percent and 1.3 percent from 7.7 percent and 0.9 percent, respectively.

OVERVIEW

The table below sets out the key metrics:

Mr. Asad Ahmed, Managing Director and Head of Middle East financial services at A&M commented: “In 2022, the UAE’s banking sector assets are expected to grow on the back of anticipated economic recovery and the digital transformation of the banking industry. Broader profitability is expected to be driven by net-interest income (NII) growth as interest rates in the UAE are expected to increase in tandem with rate hikes by the US Federal Reserve.

Further, the Central Bank of UAE (CBUAE) predicts that the economy will grow at 4.2 percent in 2022, compared to their previous forecast of 3.8 percent. Higher oil prices, supportive government spending and normalizing of non-oil sector activity is expected to support gross domestic product (GDP) growth and reinforce the UAE lender’s creditworthiness.

The UAE government has extended forbearance measure, TESS scheme up to June 2022 to support economic recovery. However, post the end of the loan forbearance period, banks might have to book additional provisions which could affect their asset quality and profitability.”

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