KHALEEJ TIMES, Thursday, Apr 1, 2021 | Shaaban 18, 1442
UAE banking sector may remain less volatile in 2021
Emirates:
The UAE banking sector is expected to remain less volatile in 2021
compared to last year, but banks might witness the deterioration of their
asset quality after the completion of the Central Bank of the UAE’s deferral
program in June 2021, according to Alvarez & Marsal.
Aggregate net profit of the top 10 UAE banks declined by 38.3 per cent year on
year, on the back of lower operating income and increased provisions, A&M said
in its UAE Banking Pulse report.
Net interest income (NII) decreased two per cent year on year, as system-wide
rates decreased substantially after the Central Bank of the UAE slashed rates to
counter the effects of the Covid-19 pandemic. However, NIM improved as banks
were able to reduce their funding costs further.
The report noted that the UAE banking sector showed signs of instability due to
the low-interest environment and sluggish economic conditions, which weighed on
overall profitability and return metrics.
Operating efficiency (C/I ratio) also deteriorated, as operating income
decreased at a higher rate compared to operating expenses. Despite a challenging
business environment, the aggregate capital adequacy ratio of the UAE banks
remained robust at 17.6 per cent at the end of December 2020, compared to 17.3
per cent at the end of December 2019.
Aggregate net profit of these banks declined by 38.3 per cent YoY, on the back
of lower operating income and increased provisions. Thus, profitability ratios
declined.
Total loan loss provisions increased by 79 per cent YoY to Dh28.1 billion, as
challenging economic environment and exposure of banks on several high-profile
publicly disclosed cases resulted in higher impairments. Cost of risk increased
sharply by 69 bps YoY to 1.71 per cent. The coverage ratio also declined to 91.9
per cent from 97 per cent a year ago. The aggregate NPL ratio increased to 6.1
per cent at the end of 2020 from 4.6 per cent at the end of 2019.
According to KPMG, during 2020 the net profit of the top 10 banks in the UAE
dropped by 41 per cent on average compared with 2019 and this calls for greater
innovations.
Global ratings agency S&P recently reported that the Covid-19 pandemic, lower
oil prices, and continued pressure on the real estate sector have increased
risks for UAE banks but banking authorities' response to the crisis reporting
requirements have reinforced oversight and transparency.
The ratings agency expects rated UAE banks' asset-quality indicators to
deteriorate further once regulatory forbearance measures are lifted, although
some will be protected by their strong capitalization and earning capacity.
“Although forbearance measures could be extended from their current mid-year
2021 expiry date, we expect their removal to be gradual and managed. Despite
this support, banks with a structural orientation to sectors where prospects
remain weakest are expected to book further significant credit losses,” S&P
said.
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