UAE banks to return to 'pre-pandemic' profitability in 12-18 months, Moody's says

Country’s four largest banks posted sharp profit growth in 2021 on the back of strong non-interest income and softening loan loss provisions

FILE PHOTO: A man rides a bicycle past Emirates NBD head office in Dubai, UAE January 30, 2018. REUTERS / Satish Kumar / File Photo

Banks in the UAE will return to pre-pandemic levels of profitability in the next 12-18 months on the back of stronger net interest income and increasing business momentum, as the economy rebounds from the Covid-19 pandemic-induced slowdown.

Profitability will be driven by growth in net interest income, underpinned by rising interest rates expectations and strong business momentum supporting non-interest income, while provisioning efforts ease, Moody's Investors Service said in a report on Monday.

"The four largest banks' profitability rebounded to near pre-pandemic levels in 2021, largely reflecting robust non-interest income and softening loan loss provisions," said Nitish Bhojnagarwala, vice president and senior credit officer at Moody's and the author of the report.

"We expect a full return to pre-pandemic levels of profitability in the next 12-18 months."

The UAE's four largest banks, First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank, reported a combined net profit of $8 billion for 2021, up 31 per cent from the previous year.

The rebound was driven by "robust non-interest income and softening loan loss provisions" and was a result of "improving consumer confidence as macroeconomic conditions in the UAE recovered, particularly given loosening pandemic restrictions, a strong vaccination roll-out, recovering oil prices and expectations of a reversal in the benchmark interest rates cycle", the report said.

Overall, non-interest income accounted for 35 per cent of total operating income in aggregate, higher than the pre-pandemic figure of 31 per cent in 2019.

Non-funded revenue, including non-recurring returns on investment portfolios and trading gains, notably on foreign-currency and derivative income, and higher fee-generating transactions, drove profitability as market sentiment continued to improve.

Income from one-off gains on the sale of securities, while reflecting an "exceptional performance" by global markets during the year, also contributed to growth in non-interest income, which rose by 30 per cent year-over-year, Moody's said.

"The trend in non-interest income is likely to slow in 2022 as non-recurring revenues normalise while the economic recovery continues to support fee-based income," it added.

Meanwhile, the low interest rate environment led to an aggregate 4 per cent decline in the banks' net interest income in 2021. The lenders reported a combined net interest margin (NIM) of 1.8 per cent for the year, compared with 2 per cent in 2020 and 2.2 per cent in 2019.

"In line with our expectations for benchmark interest rate hikes, increased lending volumes on the back of improving domestic economic conditions are likely to drive higher NIMs for UAE banks over the next 12-18 months," the report said.

Provisioning against loan losses eased in 2021 as market activity improved.

"Early prepayments and settlements, underpinned by restored consumer confidence and lower than expected levels of credit losses, reduced pressure on provisioning charges and drove higher profitability during the year," the report said.

Impairment charges fell by 34 per cent annually for three of the four banks, while cost of risk also dropped to "almost pre-pandemic levels".

Return on assets stood at 1.2 per cent at the end of the year, compared to 1.4 per cent at the end of 2019.

"The pandemic's impact on banks' asset quality will become clearer following the full withdrawal of the UAE central bank's Targeted Economic Support Scheme, which is expected in mid-2022," the rating agency said.

The four largest UAE banks also preserved their capital ratios in 2021, thanks to strong profit generation, lower dividend payouts and overall modest growth in risk-weighted assets (RWAs).

"We expect the pick-up in bottom-line profitability to further support the UAE banks' already healthy capital buffers and outweigh the decline stemming from increased lending activity (reflected in higher RWAs) in a context of economic recovery," it added.

In October, Moody's affirmed the long-term ratings of eight UAE banks and changed the outlook to stable from negative, saying the move was driven by a recovery in operating conditions in the country.

Moody's changed the outlook to stable from negative on the long-term deposit and issuer ratings of Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, Dubai Islamic Bank, HSBC Bank Middle East, Mashreqbank, National Bank of Fujairah and The National Bank of Ras Al Khaimah.