UAE's Leading Banks Excel In Q2 2024: Enhanced Asset Quality And Profitability

The UAE's leading banks have maintained a strong capital position, bolstered by high profits and improved asset quality in the quarter ending June 2024. According to Alvarez & Marsal (A&M), a global professional services firm, profitability rose to AED 21.5 billion for Q2 2024 due to higher net interest income (NII) and a significant reduction in impairment charges (-35.4 percent QoQ).

Loans and advances (L&A) saw moderate growth of 3.2 percent QoQ, driven by an 8 percent surge in retail lending. However, deposit mobilisation slowed, increasing by only 0.4 percent QoQ, mainly due to a 2.5 percent decline in time deposits. As a result, the loan-to-deposit ratio (LDR) increased by 2 percent QoQ.

Despite stable interest rates, NII grew by 2 percent QoQ due to a higher LDR. Non-interest income slightly decreased by 2.9 percent QoQ, resulting in a nominal growth of total operating income by 0.4 percent QoQ and an expansion of return on equity (RoE) by 48bps QoQ. Return on assets (RoA) remained stable at 2.2 percent during the same period.

Total operating income saw marginal growth due to lower non-core income offsetting NII growth. Operating income increased slightly by 0.4 percent QoQ as non-interest income declined by 2.9 percent QoQ. The aggregate non-interest income/total operating income ratio stood at 32.5 percent in Q2'24.

Six out of the top ten banks reported deteriorating cost efficiencies, with the cost-to-income ratio worsening by 19bps QoQ to 28.1 percent in Q2'24 but still below the ~30 percent level. Cost efficiencies declined as total operating expenses grew faster than total operating income (+1 percent vs +0.4 percent QoQ).

Net Interest Margins and Yield on Credit

Net interest margins (NIMs) remained mostly flat in Q2'24 as benchmark interest rates were stable, contracting slightly by 1bp QoQ to 2.65 percent during Q2'24. Yield on credit increased by 8bps QoQ to reach 12.3 percent, while the cost of funds rose by 13bps QoQ to 4.6 percent in Q2'24.

"The UAE banks’ performance continues to remain strong on the back of lending growth and improvement in asset quality," said Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services.

Cost of Risk and Capital Adequacy

The cost of risk (CoR) continued to improve for UAE banks, reaching a multi-year low with a decrease of 16bps QoQ to settle at 0.3 percent for Q2'24. Total impairments dropped significantly by 35.4 percent QoQ to AED 1.3 billion, with six out of the top ten banks reporting an improvement in CoR.

The Central Bank of the UAE (CBUAE) maintained its benchmark interest rate at 5.4 percent at the end of Q2'24, anchored to the US Fed rate.

Future Expectations

Banks are expected to take precautionary provisioning as asset quality remains sensitive at the peak of the interest rate cycle, according to Ahmed.

Banks are also likely to focus on growing non-interest income as net interest margins face pressure from potential rate cuts.

"We see, for example, a number of banks refocusing on their Transaction Banking offering," Ahmed added.

The UAE banking sector is well-capitalised with aggregate capital adequacy ratio (CAR) levels at 17.6 percentage (+0.34 percentage points QoQ). This robust capital position supports continued growth despite economic challenges.

The report highlighted that credit demand outpaced deposit mobilisation in Q2'24, with aggregate L&A growing by 3.2 percent QoQ compared to deposits growth of just 0.4 percent QoQ.

As digital initiatives mature, UAE banks are expected to benefit from improved cost efficiency through these investments.

With inputs from WAM