Higher provisions bite into banks’ third quarter profits

LOWINTEREST RATES AND SLOWER LOAN GROWTH SQUEEZE MARGINS

The third quarter 2020 bank results point to a sharp decline in profits for UAE banks largely resulting from rise in provisions against bad loans.

The pattern has been broadly same for both large and small banks indicating the impact of pandemic on both asset quality and profitability.

Emirates NBD, the largest bank in Dubai reported a 55 per cent decline in net profits due to higher impairment charges and the gain on disposal of a stake in Network International not repeated in 2020.

Broad trend

Even without the gain from the share sale in Network International, the bank’s net profit shrank 30 per cent year on year in the nine- month period.

The Group continued to increase impairment allowances for Stage 1 and 2 coverage in light of the challenging economic climate.

“Despite the challenging conditions that individuals and businesses have faced over the last six months, Emirates NBD has remained profitable and maintained a strong balance sheet,” said Shayne Nelson, Group Chief Executive Officer of Emirates NBD.

Lower loan growth and lower yields resulted in contraction of interest incomes. Excluding the Deniz Bank, its Turkish subsidiary, net interest income declined 11 per cent year on year due to lower margins.

Net interest income declined throughout 2020 due to lower interest rates but non- funded income showed improvement in the third quarter of 2020.

Results of Dubai Islamic Bank ( DID), RAKBank and Sharjah Islamic Bank also broadly showed the trend of rise in loan impairments. DIB’s nine- month earnings were squeezed by a 151 per cent year on year surge in impairments. The bank reported Dh3.12 billion net profit for the nine- month period down 22 per cent year on year.

Gradual recovery

The bank said despite the challenges in the global economy, it continues to demonstrate franchise strength and remain profitable during the ongoing global crisis.

RAKBank’s nine- month net profits were down 48 per cent to D438.6 million largely driven by lower third quarter earnings due to reduced income resulting from a subdued loan demand and higher IFRS 9 provisions that are set aside as precautionary measures to combat the economic impact of COVID- 19. Provisions were higher by more than 30 per cent year on year.

“The third quarter has remained challenging for RAKBank, and we have to expect this trend to continue for next few quarters at least as it takes time for the gradual recovery to flow through the economy and begin to translate into improved performance at RAKBank,” said Peter England, CEOofRAKBank.