KHALEEJ TIMES, Saturday, Sep 4, 2021 | Muharram 27, 1443
Easing provisions drive solid recovery in UAE banks’ profits
Emirates:
Profits at large UAE banks surged during
the first six months of 2021 after a modest improvement in the operating
environment led to lower loan-loss provisions, Moody’s Investor Service said.
The largest four banks in the system, First Abu
Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB) and
Dubai Islamic Bank PJSC (DIB), accounting for 77 per cent of UAE banking assets,
reported a combined net profit of $4 billion for the first half of 2021, up 17
per cent compared with the same period last year, Moody’s I said in its report
titled “Easing provisions drive solid recovery in half-year profits.”
The profit surge is subsequent to booking of lower
loan-loss provisions by the banks, reflecting the pick-up in economic activity
and consumer confidence. “Easing pandemic restrictions, a strong vaccination
roll-out, renewed real-estate activity (particularly within the villa segment),
and increased optimism regarding upcoming projects such as Expo 2020 all helped
to boost confidence,” said the report.
All four banks achieved double-digit growth in
bottom-line profits, delivering an aggregate return on assets of 1.2 per cent in
the six months to June 2021, up from 1.1 per cent in the same period last year
(1.0 per cent excluding acquisitions impact).
The result remains well below pre-pandemic levels,
however. “We expect bottom-line profitability to gradually improve over the next
12 to 18 months as banks ease their provisioning efforts, analysts at Moody have
said.
Net interest income declined during the first half
of 2021, largely due to a combination of low interest rates and muted loan
growth. Combined net interest income for the four banks was Dh21 billion ($5.8
billion) as of June 2021, down 12 per cent year-on-year.
“Lower interest rates pushed down net interest
income. The decline was slightly offset by lower interest expenses as banks
retired expensive deposits in an effort to reduce funding costs. Non-interest
income surged. Income from investment securities, fee-based activities and
market trading rose 17 per cent year-on-year as economic activity in the UAE
picked up and one-off fee waivers granted last year ended. Operating efficiency
improved further,” said the report.
The four banks are focused on cost-efficiency and
reduced operating expenses for the period by 6.0 per cent year-on-year when
excluding the cost of integrating acquisitions, supporting their bottom-line
profitability.
The banks’ provisioning fell by 38 per cent in the
first half of 2021, as the economy recovered. While the full impact of the
pandemic on banks’ asset quality will not be clear until the central bank’s
Targeted Economic Support Scheme (TESS) is withdrawn, combined non-performing
loans of the four banks have increased from to 6.2 per cent as of June 2021 from
5.2 per cent as of June 2020. At the same time, coverage moderately declined to
still solid levels of 83 per cent.
The report noted that profitability will remain
below pre-pandemic levels this year. The aggregate return on assets of the four
banks was 1.2 per cent for the first half of the year, up 10 basis points
year-on-year, but lower than the 1.7 per cent they achieved in 2019.
Lower interest income, combined with precautionary
provisioning will keep net profit below pre-pandemic levels over the coming
quarters. Capital buffers remain adequate. The banks maintained Basel III Tier 1
capital at 15.9 per cent of risk-weighted assets (RWAs) in aggregate. Sound
capital levels are the result of lower dividend payouts and muted growth in
risk-weighted assets.