Mashreq and First Abu Dhabi winning bank efficiency race

March 5, 2025, 12:16 PM

Mashreq Group CEO Ahmed Abdelaal. Mashreq has the highest dividend yield among UAE banks

UAE banks cut cost-to-income ratio
Slight rise across whole sector
Emirates’ banks outperforming EU

Dubai’s Mashreq bank, the UAE’s fifth-largest by assets, slashed its cost-to-income ratio, an important banking metric, last year thanks to the partial sale of a subsidiary and more customers switching to non-interest-bearing accounts.

The cost-to-income ratio shows the relation between income and the cost of acquiring that income. A declining ratio suggests that a bank is managing its expenses more efficiently relative to its income.

This can give it a competitive advantage over rival lenders that have higher cost-to-income ratios, because it should boost profitability, enhance financial stability and potentially make the bank more attractive to equity investors.

Mashreq’s cost-to-income ratio was 27.5 percent in 2024, down 3.4 percentage points versus 2023, despite its operating expenses rising 11 percent year on year, its financial statements show.

First Abu Dhabi Bank’s cost-to-income ratio also fell in 2024, down 1.3 percentage points to 24.6 percent, the international consultancy Alvarez & Marsal wrote in a report. The cost-to-income ratio at Abu Dhabi Commercial Bank (ADCB) also fell 1.3 percentage points, although the ratio remained above the national average at 31 percent.

The UAE banking sector’s overall cost-to-income ratio was 28.9 percent in 2024, up from 28.7 percent in 2023, Alvarez & Marsal estimates.

Even with this slight increase, UAE banks have remarkably low cost-to-income ratios from a global perspective. In the European Union, the average was 52 percent in the second quarter of 2024, according to Statista, for example.

In contrast to Mashreq and First Abu Dhabi, Emirates NBD, Dubai’s largest bank by assets, reported a 4-percentage-point rise in its cost-to-income ratio in 2024, to 31.2 percent.

This is the highest among the UAE’s six largest lenders, with the increase down to a large wage bill, increased professional fees and “accelerated depreciation of completed projects”, according to Alvarez & Marsal.

Overall, relatively low costs have helped UAE banks provide bigger dividend yields than most of the country’s other blue-chips stocks.

At 8.1 percent, Mashreq, Dubai Islamic Bank (5.8 percent), First Abu Dhabi (5.2 percent) and ADCB (5 percent) are among the standouts in dividend yield.

Mashreq improved its cost-to-income ratio partly thanks to the sale of a 65 percent stake in IDFAA Payment Services for AED845.8 million in December. Also significant was its changing deposit mix, which ran counter to banking industry trends.

After the rapid rise in interest rates from near-zero in early 2022 to a 24-year peak of 5.3 percent in mid-2023, bank customers have transferred increasing amounts of their money from current account savings accounts to time deposit accounts.

Time deposit accounts pay relatively high interest to compensate customers for not withdrawing money for a fixed period, whereas current account savings accounts pay no or little interest and so are a form of cheap funding for banks.

Among rival lenders such as First Abu Dhabi, ADCB and Emirates NBD, time deposits as a percentage of total deposits increased year on year.

As a result, the sector’s general cost of funds jumped to 4.6 percent from 3.9 percent in 2023, and was more than triple that of 2021, when interest rates were near-zero.

Banks have passed on those additional costs to borrowers, with the industry achieving an annual net interest margin of 2.7 percent in 2024, down 0.1 of a percentage point versus 2023 after two interest rate cuts since last September, but still the second highest this decade.

The banking sector’s loan-to-deposit ratio rose to 76.2 percent in 2024 from a historical low of 74.9 percent as loans and advances grew faster than deposits, Alvarez & Marsal wrote.

This is in contrast to the figure of more than 100 percent in Saudi Arabia’s banking sector, which suggests that UAE banks have sufficient deposits to expand their lending.