UAE banks see strong start to 2024: credit outlay and deposits increase

By Puja Sharma

• Loans and advances reach the highest level in the post COVID-19 period.
• The interest rates are likely to be at peak and the cycle reversion is expected to begin in H2’24.

Global professional services firm Alvarez & Marsal (A&M) has released its latest United Arab Emirates (UAE) Banking Pulse for the first quarter of 2024. The report shows that the banking sector witnessed profitability growth of AED 20.8 billion, mainly due to non-core income, lower operational costs, and declining impairment charges of 47.9% quarter on quarter (QoQ).

Loans and advance (L&A) grew 3.4%, reaching the highest level in the post COVID-19 period, while deposits grew at a faster rate of 5.1% QoQ.

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 Q1 2024 are as follows:

1. Deposits mobilization continued to outpace credit demand. Aggregate deposits for top 10 UAE banks grew by 5.1% QoQ outpacing L&A growth of 3.4% QoQ. Consequently, Loan-to-Deposit Ratio (LDR) decreased 1.2% points QoQ to 73.8%.
2. Total operating income increased by 4.8% QoQ in Q1’24 as compared to a decline of 0.8% QoQ in the previous quarter on the back of non-core income of the banks (+18.9% QoQ). Net fees and commission income increased for the quarter by 19.4% QoQ, and other operating income increased by 18.5% QoQ. Although, NII witnessed a decline of 1.1% QoQ.
3. NIMs contracted with a combined effect of lower LDR and shrinking spreads. Aggregate NIMs contracted 12bps QoQ to 2.7% for the quarter. Yield on credit decreased for the first time in two years by 56bps QoQ to reach 12.2%, whereas cost of funds decreased by 28bps QoQ to 4.4% in Q1’24. Most banks reported a contraction in NIM during the quarter.
4. Cost-to-income (C/I) ratio improved substantially by 3.6% points QoQ to reach 27.9% in Q1’24 – within its average range (after a bump to 31.5% in Q4’23). The overall cost efficiency in the UAE banking sector was improved as none of the banks out of the top ten reported a deterioration.
5. More than half of the top ten banks reported an improvement in cost of risk (CoR). Cost of risk improved by 39bps QoQ to settle at 0.4% for Q1’24. Total impairments declined by 47.9% QoQ to AED 2.0bn.
6. Banks in Q1’24 were profitable due to improved cost efficiencies, loan recoveries and non-operational income. Aggregate Return on Equity (RoE) improved by 1.2% points QoQ to 20.3 percentage in Q1’24. This was due to increase in net income by 9.3% QoQ.

Mr. Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services commented: “Banks in Q1’24 were profitable due to improved cost efficiencies, lower provisions s and higher non-operational income. Against the backdrop of a static benchmark interest rate, now likely at its peak, the sector has demonstrated ongoing resilience.”

Asset quality remains sensitive to the continued high interest rate environment, The Central Bank of the UAE continues to anchor its benchmark rate to the US fed and maintained the bank rate at 5.4 percent. Rate reversal is expected to begin in the second half of the FY’24 – likely in the autumn, and expected to have a gradual impact on NIMs, but not in the short-term.

“Barring any regional issues, the sector has reason to remain optimistic as we anticipate continued steady growth in the UAE banking sector.” Ahmed added.