UAE bank profits grow on greater lending and higher interest

Reuters

• Income up 5.6% for top 10 banks
• Interest income grew 11.4%
• Customers opting to save

The UAE’s top 10 banks expanded their combined net profits in the third quarter versus the previous three months thanks to growing demand for corporate and retail borrowing, improved lending margins and lower impairments.

A report by consultants Alvarez & Marsal studied the country’s biggest homegrown lenders by assets including leading duo First Abu Dhabi and Dubai’s Emirates NBD, plus Abu Dhabi Commercial Bank, Dubai Islamic Bank and Mashreq.

Combined third-quarter net income was AED 20.27 billion ($5.52 billion), up 5.6 percent versus the second quarter, Alvarez & Marsal wrote. Interest income grew by 11.4 percent over the same period.

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“Lenders are benefitting from healthy liquidity conditions supported by high oil prices, foreign capital inflows and moderate credit demand amid rising interest rates,” Asad Ahmed, Alvarez & Marsal’s managing director and head of middle east financial services, said in a statement accompanying the report. He describes UAE banks as having a “robust” third quarter.

Total loans and advances expanded 2.4 percent quarter on quarter, slightly slower than the second quarter’s 2.7 percent expansion. Deposits grew 3.9 percent in the third quarter, substantially more than the 0.8 percent increase three months earlier.

These trends suggest UAE retail and corporate customers are opting to save more money,  perhaps to take advantage of higher returns on savings accounts following the sustained increase in UAE interest rates from near-zero in early 2022 to 5.4 percent currently.

Banks’ low-cost deposits fell to 49.5 percent of the total, from 50.3 percent as of June 20.

This also led banks’ aggregate loan-to-deposit ratio to decline to 75.2 percent in the third quarter from 76.3 percent in a previous quarter.

Nevertheless, quarterly yield on credit rose to 12 percent from 11 percent over the same period as net interest margins edged 9 basis points higher to 2.8 percent.

“UAE banks are benefitting from healthy liquidity conditions supported by high oil prices, foreign capital inflows and moderate credit demand amid rising interest rates,” the report states.

“Major central banks (including the UAE’s) are likely to be near the end of hiking interest rates in line with the US Federal Reserve. With inflation still above the target levels, we expect rate cuts only after mid-2024.”

Corporate and wholesale lending expanded 2.5 percent quarter on quarter and now represents about 55.8 percent of banks’ combined loan books, Alvarez & Marsal estimates. Government borrowing fell slightly.

Third-quarter net interest income rose 5.5 percent higher than the preceding three months to AED 23.5 billion, outpacing a 2.4 percent increase in net fees and commissions to AED 10.7 billion.

Combined, these enabled UAE banks’ aggregate quarterly operating income to hit AED 34.2 billion – up 4.5 percent quarter-on-quarter and 29.1 percent higher year-on-year.

Banks’ quarterly net loan loss provisions fell 11.7 percent to AED 2.9 billion, enabling their aggregate cost-of-risk to decline for a third straight quarter.