The UAE banking sector profitability jumped 9.3 per cent quarter-on-quarter to Dh20.8 billion in the first quarter on the back of “plummeting impairment charges” and surging operating income. Non-core income and lower operational costs also supported the profitability, Alvarez & Marsal said.
The banks also saw their deposits jumping 5.1 per cent in Q1 2024 compared to the previous quarter, the global professional services firm said in its UAE Banking Pulse report.
Asad Ahmed, A&M managing director and head of Middle East financial services, said the top 10 UAE banks were profitable due to improved cost efficiencies, lower provisions and higher non-operating income. “Against the backdrop of a static benchmark interest rate, now likely at its peak, the sector has demonstrated ongoing resilience,” he said.
“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 maintains the bank rate at 5.4 percent,” Ahmed said.
Banks analysed for the report include First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, National Bank of Fujairah, National Bank of Ras Al Khaimah and Sharjah Islamic Bank.
According to the Central Bank of the UAE, the UAE banking sector is set for further vibrant growth in 2024 despite global headwinds with the total assets of banks operating in the country surging by 11 per cent year-on-year to a record Dh4.1 trillion in 2023.
Analysts at Fitch Ratings said the UAE banking sector growth will be driven by robust credit demand stemming from dynamic non-oil sectors and comprehensive economic diversification programs in both countries.
A&M report said the UAE banking sector’s net interest income declined marginally by 1.1 per cent compared to Q4 of 2023. However, non-core income increased substantially by 18.9 per cent. In turn, this supported the total operating income, which rose 4.8 per cent.
The banking sector’s loans and advances grew 3.4 per cent, reaching their highest level post-Covid-19.
Impairment charges plummeted 47.9 per cent quarter-on-quarter while deposit mobilization across the sector continued to outpace credit demand. Aggregate deposits grew by 5.1 per cent, outpacing loans and advance growth of 3.4 per cent. The loan-to-deposit ratio saw a 1.2 per cent decline to 73.8 per cent. Total operating income saw a 4.8 per cent increase in Q1 compared to a decline of 0.8 per cent in Q4 of 2023 due to a surge in non-core income. In addition, net fees and commission income increased by 19.4 per cent, while other operating income increased by 18.5 per cent.
Net interest margin of the 10 banks declined due to the lower loan-to-deposit ratio and shrinking spreads. The aggregate net interest margin declined to 2.7 per cent, the yield on credit decreased to 12.2 per cent, and the cost of funds decreased to 4.4 per cent. The sector’s cost-to-income ratio rose substantially by 3.6 per cent to 27.9 per cent in the quarter, remaining within its average range after a surge to 31.5 per cent in Q4 of 2023. As a result, the overall cost efficiency in the banking sector improved with none of the top 10 banks reporting a deterioration.
More than 50 per cent of banks reported an improvement in the cost of risk, which overall improved by 39bps settling at 0.4 per cent. In addition, total impairments saw a decline of 47.9 per cent to Dh2.0 billion.