Profitability to remain resilient for leading UAE lenders

The top four banks in the UAE, with a combined deposit base of Dh1 trillion, will post sturdy profits in the next 12 to 18 months on the back of higher returns on loans and stable funding costs, despite sluggish economic growth and weaker fee and commission income, according to Moody’s Investors Service.

The four lenders – First Abu Dhabi Bank (FAB), the second-largest financial institutions in broader Middle East region; Emirates NBD (ENBD), Dubai’s biggest bank by assets; Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB), the top Sharia-compliant lender in the country, reported a combined net profit of Dh6.7 billion in the second quarter of this year.

Aggregate net profitability was broadly flat versus yearon-year but fell 3.5 per cent quarter-on-quarter, partially because of a decline in fees and commissions.

“Profitability was supported by higher yields on loans and stable funding costs, which drove higher net interest income, despite sluggish economic growth due to current oil prices,” Nitish Bhojnagarwala, a vice president at Moody’s said in the report released yesterday.

Banks in the hydrocarbon-dependent economies of the Arabian Gulf region have struggled to maintain profitability amid persistently low crude prices. Loan growth has remained subdued and non-performing loans have risen, especially in Saudi Arabia, the region’s biggest economy and largest banking market.

Moody’s this month said the five biggest banks in the kingdom could face declining profits next year on the back of reduced government spending that has affected economic growth and dampened credit demand.

The four lenders in the UAE have coped with the softer economic conditions relatively better than their regional competetion. Operating expenses across the banks were down by 6 per cent relative both to the previous quarter and to the second quarter of 2016.

Provisioning for bad debts, however, depict a mixed trend at these lenders.

“ENBD and FAB are showing an improving trend, while ADCB and DIB posted weakening trends,” Mr Bhojnagarwala said, adding that there could be a “modest rise in provisioning charges in the coming quarters”.

The combined deposits at the four banks also declined by 1 per cent, compared with the first quarter of this year. This slight drop, Moody’s noted, came after solid deposit growth in previous quarters for the UAE banking system, which suggests that liquidity pressure has been easing.

Oil price levels will continue to be a factor that will continue to weigh down deposit growth in the next few quarters, the ratings agency added.

Moody’s rates FAB at Aa3/Aa3 stable, a3; Emirates NBD at A3/ A3 stable, ba1; ADCB at A1/A1 stable, baa3; and DIB at A3/A3 stable, ba2.

Oil price levels will continue to be a factor that will weigh down deposit growth in the next few quarters