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Profitability of the ten best UAE banks deteriorated in the third quarter of 2020

Dubai: The profitability of the best UAE banks declined in the third quarter of 2020 due to the low interest rate environment and low lending growth.

Top 10 UAE banks’ total interest income fell for the third consecutive quarterly report, 7.7 percent quarter-on-quarter, according to an analysis by Alvarez & Marsal in its latest UAE Banking Pulse report for Q3 2020.

The report shows that the lower interest rate environment has still put banks’ asset returns under pressure. After a relatively stronger second quarter, net income increased by 3 percent quarter-on-quarter (QoQ) due to lower interest rates and other operating income, which continues to affect profitability.

‘After a surge in performance in the second quarter of 2020, the profitability of the top 10 UAE banks in the third quarter of 2020 showed signs of vulnerability with declining interest income and a larger provision outweighing net profit . We expect that the economic conditions in the UAE and the region in general will remain challenging in the short term, which is likely to limit credit and earnings growth and also lead to higher non-performing loans (NPLs), ”said Asad Ahmed, Managing Director and head of A&M, said of Financial Services in the Middle East.

Flat loan growth

The challenging economic environment affected credit borrowing as loans and advances remained the same in Q3 2020, compared to Q2 2020. On the other hand, deposits increased by 4.2% QoQ, mainly due to the 16% increase in FAB’s deposits . As a result, loans to deposit ratio (LDR) decreased to 84.1 percent compared to 87.7 percent in the second quarter of 2020. Top 10 banks granted lenders access to Dh51.1 billion at the end of the third quarter under the targeted economic support system of the UAE. (TESS).

Operating income fell for the third consecutive quarter. Continued decline in net interest income (-6.7 percent QoQ) weighed on operating income, which decreased 3.4% QoQ. The low interest rate environment continued to put pressure on asset returns among banks and affected net interest income. On the other hand, there was an increase in net fee income (+ 18% QoQ), which limited the decline in total operating income.

Margin pressure

The contraction in net interest margin (NIM) continued in the third quarter. The total NIM fell by about 21 bps to 2.05 percent in the third quarter of 2020, due to the additional decline in interbank rates. NIM declined for the third consecutive quarter as nine of the banks reported lower NIM during the period.

Rising cost-to-revenue

Cost-to-income (C / I) ratio of top 10 banks has increased as the reduced operating income more than offsets the cost-effectiveness measures. The cost-to-revenue ratio increased by 0.9 percentage points to 34.3 percent. C / I ratio increased despite a 0.7 percent drop in QoQ in operating costs.

Seven of the top 10 banks reported an increase in C / I ratio. Emirates NBD, Abu Dhabi Islamic Bank and Sharjah Islamic Bank have reported a decline in their CI ratios. ADIB’s C / I ratio decreased as the bank was able to reduce its customer acquisition expenses, optimize the branch network and implement technologies to streamline processes.

Asset quality

Supply declined further, but the challenging economic environment affected overall asset quality. The total provision for loan losses decreased by 7.2 percent QoQ, but it increased on an annual basis by about 37 percent. Challenging market environment due to COVID-19 wind led to higher NPLs (+ 3.6% QoQ).

The cost of risk dropped 11 percent year-on-year to 1.3 percent, while the coverage ratio rose 1.1 percent to 90.3 percent. In terms of individual banks, Mashreq reported the highest increase in risk costs (approximately 55 bps QoQ to 333.8 bps), providing the bank with 17% QoQ / approximately 2.3 years on year for the first nine months.

Banks are likely to see higher NPLs in the coming period. Although the Central Bank’s recent announcement that it will extend the TESS scheme until 30 June next year should provide a temporary relief to certain sectors of the economy, banks’ balance sheets remain exposed to major credit risks. Once the deferral period ends, banks could have a significant increase in NPLs if the economy did not recover.

‘When the TESS program expires in June 2021, there could be a significant increase in NPLs for the banks if the economy does not recover. However, we remain confident that this initiative will enable the economy to gradually recover from the effects of the pandemic, ”Ahmed said.

Profitability

Profitability deteriorated as the lower income stream weighed on the yield. Total net income decreased by 3 percent QoQ as the lower operating income offsets lower operating expenses and supply. As a result, profitability measures such as return on equity (ROE) are 8.8 percent [0.6 per cent lower QoQ] and return on assets (RoA) 1 percent [0.1 per cent lower QoQ]) decreased compared to Q2’20.

“We note that ROA and ROE within the banking sector continue their downward trend; This could provide banks with the opportunity to explore further consolidation and focus on integrating new technologies to rationalize costs, ”said Ahmed.

Source: Gulf News

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