UAE banks’ Q1-2022 profits reflect an improving economy, and with better numbers to come

Dubai: UAE banks’ Q1-2022 financials offer further confirmation of improving economic conditions that are supporting their profitability, asset quality, net interest margins (NIM), and interest and non-interest income.

UAE’s top bank, First Abu Dhabi Bank (FAB) Group’s net profit of Dh5.1 billion, up 107 per cent year-on-year, and supported by strong loan growth. “We saw growth picking up across all our business segments particularly at the tail-end of the quarter with group loans expanding 6 per cent year-to-date,” said James Burdett, Chief Financial Officer of FAB.

As loan growth is picking up momentum, rising interest rates should further improve net interest margins. Non-interest income is also on a steady rise, especially from capital market activity such as brokerage, managing public issues, debt issues and arranging loan syndications and M&As.

“We expect credit growth in the country to remain solid at 5 per cent for 2022 as credit demand from the government, businesses and individuals increases modestly,” said Nitish Bhojnagarwala, Vice-President -Senior Credit Officer at the rating agency Moody’s.

Funding mix

Emirates NBD’s Q1-2022 profit was up 18 per cent to Dh2.7 billion, helped by a record gain in retail lending and deposit growth. The bank also reported improving credit quality as loan impairments were down 20 per cent year-on-year.

The CASA [current and savings account] deposits grew a record Dh18 billion in the first quarter. “The improved funding mix positions us very well for rising interest rates expected throughout 2022,” said Patrick Sullivan, Group Chief Financial Officer of Emirates NBD.

While strong CASA position in the funding mix limits the rise in cost of funding, the expected increase in interest rates is boosting net interest margins at most banks.

Declining operating costs

Abu Dhabi Commercial Bank (ADCB) reported 32 per cent growth in profits supported by lower impairments and operating expenses. UAE banks in general reported drops in operating costs and on cost-to-income ratios through savings from digitalisation, branch rationalisation and reduced staff costs.

Dubai Islamic Bank’s (DIB) net profit for the quarter was up 58 per cent up at Dh1.34 billion, largely driven by lower impairments and higher operating revenues. “Persistent efforts on proactively managing credit underwriting and asset quality trends have led to Non-Performing Financing (NPF) improving by 10 basis points, year to date to reach 6.7 per cent,” said Dr. Adnan Chilwan Group CEO of DIB.

Asset quality fears

UAE banks have been successful in managing asset quality issues arising from the impact of pandemic on the economy and businesses thanks to a host of direct and indirect support measures from the Central Bank of UAE. With most forbearance measures coming to a gradual stop, analysts expect asset quality to suffer resulting in some spike in non-performing loans.

“We think part of the deterioration [in asset quality] will come from deferred exposures once the central bank lifts support measures and companies in still vulnerable sectors are reclassified,” said Puneet Tuli, an analyst at Standard & Poor’s.

Watch the loans

There could be an increase in problem loans to around 7 per cent of the total during 2022, from 6.4 per cent 2021, according to Moody’s.
This could be proportionately higher for the smaller banks.