Profitability of UAE banks continues to be under pressure, largely driven by conservative lending, although liquidity and risk metrics have been improving over the last 12 months, according to UAE Banking Pulse, an analysis of key data of top 10 banks by Alvarez & Marsal (A&M), global professional services firm.
In 2017 the UAE banks are expected to report mid to high single-digit growth in assets while maintaining costs to income ratios steady with improvement in profitability.
Although banks had anticipated a liquidity crunch last year, at the end of 2016 deposits outgrew loans and advances with banks turning cautious on lending. Both loans and deposit growth moderated last year with decline in loan growth outstripping decline in deposit growth resulting in a decline in loans to deposits ratio.
UAE banks are facing margin compression although the liquidity conditions have improved with cost of funds and cost of risks stabilising in the last quarter of 2016.
“Clearly banks are facing margin squeeze from lower lending due to cautious approach. A combination of conservative lending policies and some amount of deleveraging has resulted in lower loans to deposit ratios,” said Dr Saeeda Jaffar, a Managing Director with A&M’s Performance Improvement and Financial Institutions Advisory Services Practices.
A&M’s analysis is based on quarterly data published since the fourth quarter of 2015 by Emirates NBD, National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, First Gulf Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Union National Bank, Commercial Bank of Dubai and National Bank of Ras Al-Khaimah and the application of a series of metrics to identify key industry trends.
Data shows most large top 10 banks grew deposits faster than the market overall, with varying appetites for loan growth; Emirates NBD, National Bank of Abu Dhabi and Abu Dhabi Commercial Bank gained market share, whilst Dubai Islamic Bank secured a greater share of the loans market.
Six of the top 10 banks witnessed a decline in net interest margin (NIM) while four remained constant; National Bank of Ras Al-Khaimah witnessed largest fall in NIM as higher yielding assets were replaced with lower yielding assets.
Seven of the top 10 banks improved their Cost/Income (C/I) ratios based on prudent cost management by delaying investments and hiring; National Bank of Ras Al-Khaimah showed the largest decline, driven by decrease in headcount and lower bonuses, expected to inch up in 2017.
Profitability of most banks was impacted by deteriorating asset quality and tightening liquidity leading to increase in cost of funds. First Gulf Bank, Emirates NBD and Abu Dhabi Islamic Bank had the smallest relative decline in profitability; in general, Islamic banks such as DIB and ADIB maintained higher profitability than most of their peers
“In 2016, year-on-year returns were not as high as in previous years, banking in UAE
as a sustained period of more conservative lending and an increase in deposits took its toll. However, the good news is we are seeing signs of this downward cycle bottoming out. There is plenty of reason for banks’ shareholders to feel optimistic. Returns are still considerably higher than in other parts of the world, and banks are being run very prudently,” said Dr Jaffar.
Analysts say although the local banks continue to face margin compression, underlying data points to balance sheet strength supporting future improvements in margins. “While yield on credit has been improving, data from leading banks show stabilisation in cost of funds. Capital adequacy ratios and coverage ratios, to show improving balance sheet health,” said Asad Ahmed, a managing director with A&M.
A&M’s report uses 17 different metrics to assess the key performance areas of size, liquidity, revenue and operating efficiency, risk, profitability and capital. Of the 17 metrics deployed, 10 worsened in the fourth quarter of 2016 compared to the equivalent in the fourth quarter of 2015 while nine metrics worsened in fourth quarter of 2016 compared to the equivalent in the third quarter of 2016.