Economic Rebound Supports UAE Bank Profitability

Dubai: Leading UAE banks reported a strong set of results for 2017, aided by higher core earnings such as net interest incomes, fee and commissions incomes.

The second half of the year witnessed a steady improvement in performance, with leading banks sustaining the momentum in the fourth quarter of the year despite an uptick in provision charges and cost-to-income ratios.

According to an analysis of fourth-quarter financial data by Moody’s, First Abu Dhabi Bank (FAB), Emirates NBD, Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB) — four leading banks that account for around 62 per cent of banking assets — reported a 7 per cent year-on-year combined increase in profitability in the fourth quarter.

Emirates NBD reported a 15 per cent year-on-year gain in full-year profits while DIB reported an 11 per cent gain. While FAB reported a 3 per cent decline in profits, attributed to merger costs, ADCB reported 3 per cent higher profits.

“The four largest UAE banks delivered a solid rise in net profits in the final quarter of 2017,” said Nitish Bhojnagarwala, a vice-president at Moody’s. “This was largely driven by higher business volumes and recent interest rates hikes, which generated higher recurring income, both in the form of net interest income and fees and commissions.”

These four banks reported a solid combined net profit of Dh7.3 billion ($2.0 billion) in the fourth quarter of 2017, underpinned by higher core income, suggesting an economic rebound is already under way. Their aggregate net profitability compared positively with both the fourth quarter of 2016 and the third quarter of 2017, increasing 7.7 per cent and 2 per cent respectively.

Net interest income was the largest contributor, up 2 per cent in the fourth quarter of 2017 from the third quarter of 2017, and it offset increased loan-loss provisions and operating costs. Operating expenses at the large UAE banks rose 10 per cent quarter-on-quarter and 7 per cent from a year ago. The increases were mainly related to investments in technology to drive digitisation and to improve operational efficiency.

Combined provisioning charges increased by 4 per cent for the quarter and 13 per cent over the year. The increase was due to lower recoveries in the fourth quarter of 2017 as a result of a reduced stock of problem loans.

Customer deposits at these four banks increased 2 per cent quarter-on-quarter in 2017 to Dh1 trillion. Deposits grew fastest at FAB and DIB, up 4.5 per cent and 2.5 per cent respectively for the quarter, reflecting their solid deposit franchises as the largest UAE bank (FAB) and the oldest Islamic bank (DIB).

“We expect core profitability to remain solid over the next 12-18 months. We expect provisioning charges to continue to increase, albeit modestly, but operating expenses will stabilise. Although deposit growth has picked but we expect funding costs to rise in line with rising interest rates,” said Bhojnagarwala.

Deposit growth picks up momentum

Dubai: Deposit growth in the UAE banking sector picked up momentum in the second half of 2017, supported by an increase in oil price levels, which is expected to continue to drive growth over the next few quarters.

Over the last quarter of 2017, deposits grew 2 per cent to Dh1 trillion at four banks — First Abu Dhabi Bank (FAB) Emirates NBD, Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB). All the banks benefited from the rise, with the exception of ADCB where deposits remained fairly stable.

After a 4 per cent decline in the second quarter of 2017, FAB registered the highest increase at 4.5 per cent in the fourth quarter, reflecting their solid deposit franchises as the largest bank in the UAE. Deposit growth at ENBD and DIB was around the 2 per cent average of total growth of the four banks.

Capital levels improved modestly and remained strong. These banks’ combined Basel II Tier-1 capital ratio improved modestly from 16.6 per cent in the fourth quarter of 2016 to 17.2 per cent. ENBD reported the highest regulatory capital ratio at 19.5 per cent, up from 18.8 per cent in the third quarter of 2017 due to solid internal capital generation and lower credit growth.

ADCB’s Tier-1 capital also increased over the quarter from 15.3 per cent to 15.9 per cent. FAB’s and DIB’s capital levels were broadly stable.