Alvarez & Marsal Release Third Quarter 2022 UAE Banking Pulse | Alvarez & Marsal | Management Consulting

  • The profitability of the top 10 banks in the UAE stands at 15.1%; Net interest income (NII) increased by 12.2% as interest rates rose
  • Total interest income increased significantly by 27.5%
  • Sharp rise in credit yields boosted net interest margins (NIM)

Dubai – November 17, 2022 – Global professional services leader Alvarez & Marsal (A&M) has released its latest United Arab Emirates (UAE) Banking Pulse for the third quarter of 2022. The top ten banks in the UAE reported an increase in profitability driven by a increase in basic interest income despite a slowdown in loans and advances (L&A). The aggregate NII jumped 12.2% quarter-on-quarter (QQ) and NIMs improved 18 bps in QQ, supported by higher credit yield thanks to higher benchmark rates. Asset quality improved with non-performing loans (NPLs)/L&As falling 0.2% to 5.5% in the quarter.

L&A growth edged up 0.7% quarter-on-quarter, while deposits grew 5.2% quarter-on-quarter. Overall, while the interest rate hike in Q3’22 had a positive impact on banks, the impact on borrowing is more muted, despite positive economic activity in the GCC such as the ; The IMF has revised its UAE GDP forecast upwards from 4.2% to 5.1% in October 2022.

Overall, banks reported higher profitability, with return on equity (RoE) improving by 1.3% qoq to 15.1% and return on assets (RoA) at 0. 1% qoq to 1.7% in the quarter, thanks to stronger economic activity, higher interest rates, and high oil prices.

A&M’s UAE Banking Pulse examines data from the 10 largest banks listed in the UAE, comparing Q3’22 results to Q2’22 results. Using independently published market data and 16 different metrics, the report assesses key areas of bank performance, including size, liquidity, revenue, operational efficiency, risk, profitability and the capital.

The 10 largest listed banks in the country analyzed in A&M’s UAE Banking Pulse are First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB), Dubai Islamic Bank (DIB), Mashreq Bank (Mashreq), Abu Dhabi Islamic Bank (ADIB), Commercial Bank of Dubai (CBD), National Bank of Fujairah (NBF), National Bank of Ras Al-Khaimah (RAK) and Sharjah Islamic Bank (SIB).

The dominant trends identified for Q3 2022 are as follows:

  1. Customer deposit growth, led by FAB, significantly outpaced L&A growth in Q3’22. FAB recorded the largest increase in deposits of 15.1% QoQ, reaching AED746 billion in Q3’22. The L&A aggregate increased by 0.7% QoQ in Q3’22 while the deposits of the top 10 banks increased by 5.2% QoQ. Consequently, the loan-to-deposit ratio (LDR) fell by 3.5% quarter-on-quarter to 78.9%.
  2. Operating profit increased significantly by 8.3% quarter-on-quarter, mainly due to the increase in the NII for banks in the United Arab Emirates. The NII increased significantly by 12.2% quarter-on-quarter. The increase in other operating income of 8.0% quarter-on-quarter was offset by a decrease in net commissions of 7.8% quarter-on-quarter. As a result, overall non-interest income fell slightly by 0.1% quarter-on-quarter.
  3. NIM grew as the return on assets exceeded the increase in the cost of funding. Aggregate NIMs improved 18 basis points QoQ to 2.5% supported by a higher yield on credit of 7.4% QoQ. Most of the top ten banks in the UAE have seen NIM expansion. The cost of funds (CoF) increased by 66 basis points quarter-on-quarter to 1.9% in Q3 2022, as interest expense increased by +61.1% quarter-on-quarter due to higher rates.
  4. Operating cost efficiency improved for the top ten UAE banks for the second consecutive quarter. The cost/income ratio (C/I) improved by 1.0% quarter on quarter to reach 30.5%. This was primarily driven by an 8.3% quarter-on-quarter increase in operating profit, which outpaced the 5.0% quarter-on-quarter growth in operating expenses.
  5. The cost of risk (CoR) deteriorated by 19 basis points Q/Q like the banks, for the first time after six consecutive quarters. reported higher provisions of 27.8% compared to the previous quarter. This was mainly due to an increase in impairment charges of 27.8% QoQ in Q3 22 to AED4.1 billion. Six out of ten banks reported an increase in impairment provisions following an increase in the cost of risk.
  6. RoE increased 1.3% QoQ to 15.1%, while RoA improved to 1.7% in Q3’22; attributed to an increase in profitability levels of 7.3% QoQ.

Insight

The table below presents the key indicators:

Source: Financial statements, investor presentations, A&M analysis

Mr. Asad Ahmed, Managing Director of A&M and Head of Middle East Financial Services, said: “With the tailwinds of stronger economic growth and higher interest rates, UAE banks have seen improved profitability. Third quarter 2022 earnings momentum accelerated with strong margins and improving asset quality. We expect the improving trend to continue in the fourth quarter, but remain cautious about the effect of higher rates on retail and corporate borrowers.”

About Alvarez & Marsal

Businesses, investors and government entities around the world turn to Alvarez & Marsal (A&M) for leadership, action and results. Privately held since its inception in 1983, A&M is a leading global professional services firm providing consulting, business performance improvement and turnaround management services. When conventional approaches aren’t enough to create transformation and drive change, clients seek out our deep expertise and ability to deliver practical solutions to their unique problems.

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