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ADIB expects profits to keep rising after stellar year

ADIB headquarters building ADIB’s earnings increased by almost half during the first nine months of 2023 ADIB
ADIB’s earnings increased by almost half during the first nine months of 2023
  • Boost from lending repricing
  • Profit margin up 113 points
  • 15% share of UAE bank sector

Abu Dhabi Islamic Bank’s net profit margin will expand further, according to its group chief financial officer Mohamed Abdelbary.

The sharia-compliant lender has enjoyed a bumper first nine months of 2023 in which its earnings increased by nearly half.

“We’ve managed to capitalise on the increase in interest rates in the market because of the positioning of our portfolio, which reprices quite frequently, hence we were able to enhance our net profit margin,” Abdelbary told AGBI.

Islamic banks such as Abu Dhabi Islamic Bank (ADIB) do not charge or pay interest. Instead, they levy or pay a profit rate on borrowings and savings that are closely correlated to central bank benchmark interest rates.

ADIB’s wholesale lending reprices every three months “so immediately is able to capture that upside”, Abdelbary explained. Retail loans, in contrast, are often fixed rate, so older loans will remain at lower profit rates while newer ones will be costlier to borrowers.

UAE interest rates, which track US rates due to the dirham’s dollar peg, have surged from near-zero in early 2022 to 5.4 percent currently, according to Trading Economics.

These increases have helped ADIB’s profit margin reach 4.48 percent as of September 30, up 113 basis points year on year. Most of this year-on-year rise – 83 basis points – came from wholesale financing, while the bank’s funding costs fell 174 points over the same period.

“As we go into next year, we will see a higher net profit margin… maybe another 20, 30 basis points higher,” said Abdelbary.  

“That’s where it will probably stay for some time. We know rates will come down, so it’s a matter of when, not if, but probably they will stay at these higher levels for the majority of next year before they start to ease in again in 2025.”

Mohamed Abdelbary Group Chief Financial Officer ADIBADIB
Mohamed Abdelbary: ‘As we go into next year, we will see a higher net profit margin… maybe another 20, 30 basis points higher’

Founded in 1997, ADIB has operations in the UAE, Egypt, Saudi Arabia, Sudan, Iraq and the UK.

ADIB’s net customer financing totalled AED 112.6 billion as of September 30, up from AED 98.2 billion a year earlier, which ADIB said was largely due to “strong volumes from (the) retail, government and public sector”.

About 30 percent of ADIB’s deposits are in profit-paying accounts, Abdelbary estimates. 

ADIB – the Middle East and Africa’s 20th largest bank by market capitalisation according to S&P Global – made a nine-month net profit of AED 3.58 billion ($975 million), up from AED 2.45 billion a year earlier.

Islamic financing income from customers surged 81 percent over the same period to AED 5.50 billion, while total deposits rose to AED 151.5 billion from AED 118.8 billion.

As of June 30, ADIB had a 15 percent share of the UAE retail banking sector, according to a company presentation. Abdelbary predicts the bank will expand its domestic market share further; 513,000 UAE nationals have retail accounts at ADIB.

ADIB’s impairments rose to AED 571 million as of September 30, from AED 352 million a year earlier, largely due to higher provisions from associates and subsidiaries.

Abdelbary said ADIB had upped its provisions as a precautionary measure following sustained interest rate hikes.

Rate rises tend to lead to more loan defaults as some borrowers struggle to afford larger repayment installments.

Yet ADIB’s non-performing loan ratio fell to 6.6 percent from 8.3 percent over the same period. Abdelbary forecast this would decline further to 5.0-5.5 percent in the next 12 to 18 months.

ADIB’s domestic business provides about 88 percent of its operating income. The remainder is derived from its foreign units, Abdelbary explained, noting ADIB Egypt was the most important of these.

Listed on Cairo’s bourse, the subsidiary made a nine-month net profit of EGP 3.42 billion ($111 million), up from EGP 1.54 million a year earlier.

“The Egypt business itself has done phenomenally well,” said Abdelbary. Egypt, as a country, “is going through some challenging times… but we always take a medium to long-term view and we remain cautiously optimistic that this cycle will turn. It is one of the markets (in which) we’ll continue investing” he said.

The bank is listed on Abu Dhabi’s bourse. Its shares are up about 12.4 percent this year, outperforming the UAE capital’s main stock index which is down 6.3 percent in 2023.