12 September 2021
Profits at the four largest UAE banks rose during the first half of 2021 after an improvement in the operating environment led to lower loan-loss provisions, rise in non-interest income and improvement in operating efficiency.
The combined net profit of four major banks, First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB), and Dubai Islamic Bank (DIB) reached USD 4 billion in H1 2021, up 17% from the same period last year. The four big banks dominate UAE banking accounting for 77% the country’s banking assets.
Rise in non-interest income makes up for lower interest rates
Lower interest rates pushed down net interest income. Net interest income for the four banks fell by 12% for the six months as lower interest rates drove a fall in asset yields. 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% year-on-year as economic activity in the UAE picked up and one-off fee waivers granted last year ended.
Operating efficiency improved further. The four banks focused on cost-efficiency and managed to reduce operating expenses for the period by 6% year-on-year when excluding the cost of integrating acquisitions, supporting their bottom-line profitability.
Easing loan loss provisions
Loan-loss provisions eased as bank provisioning fell by 38% in the first half of 2021, as the UAE economy recovered with GDP growth expected to reach 3.1% in 2021 as against 5.9% de-growth in 2020. 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pandemic on banks' asset quality will not be clear until the central bank's Targeted Economic Support Scheme (TESS) is withdrawn, combined non-performing loans of the four banks have increased slightly to 6.2% as of June 2021 from 5.2% as of June 2020. At the same time, coverage moderately declined to still solid levels of 83%.
Profitability as measured by return on assets will remain below pre-pandemic levels this year. The aggregate return on assets of the four banks was 1.2% for H1 2021, up 10 basis points year-on-year, but lower than the 1.7% 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 have maintained Basel III Tier 1 capital at 15.9% of risk-weighted assets (RWAs) in aggregate. The sound capital adequacy ratios are the result of lower dividend payouts and muted growth in risk-weighted assets.
Share Price Performance
The improving profitability has been reflected in the rebound of the banks’ share prices this year with FAB surging by 34% for the year-till-date as of September 6, 2021 (YTD). Emirates NBD is up 34.9% YTD while Abu Dhabi Commercial Bank and Dubai Islamic Bank are up 22.9% and 10.4% YTD respectively.
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