UAE banks remain resilient despite global economic headwinds

Deposits grew faster than loans and advances, and net interest margins continued to improve

Abu Dhabi, United Arab Emirates - February 7th, 2018: FAB (First Abu Dhabi Bank) Head office - Business Park. Wednesday, February 7th, 2018. Twofour54, Abu Dhabi. Chris Whiteoak / The National
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The top 10 listed lenders in the UAE have reported steady performance in the second quarter of the year but pressure on margins is expected to rise as interest rates drop and competition for deposits intensifies.

Deposits for the quarter ending June 30 for the 10 publicly-traded banks grew 8.5 per cent, a faster rate than loans and advances, which were up 7.7 per cent, putting pressure on margins, consultancy Alvarez & Marsal said in its second-quarter banking report released on Sunday. Net interest margins in the second quarter improved marginally on the first three months of the year, increasing by 3 basis points to 2.48 per cent, it said.

Banks reported “steady performance in top line during the second quarter but well below the 2018 average of 5.6 per cent, against a backdrop of reduced economic growth”, A&M’s head of financial services Asad Ahmed said.

“For the remainder of 2019, we expect margins to remain under pressure due to the rate cut in July 2019, and further rate cuts are possible. It’s also clear that different banks are adopting different strategies according to their individual circumstances, leading to significant variation on certain metrics.”

Overall, the banking sector remains resilient and lenders in the UAE, the second-biggest Arab economy, continue to perform despite headwinds for the economy. Operating income across the sector improved marginally on the first quarter of the year, driven largely by consolidation in the sector as the three-way merger of ADCB, Al Hilal Bank and Union National Bank concluded.

The completion of this deal removed two independent lenders from the market. Although the expected pace of M&A in the financial sector could slow, increasing regulatory requirements, higher spending on digitalisation, pressures to reconfigure physical infrastructure and competition are likely to support the case for further consolidation in the sector, A&M said.

First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, Emirates Islamic Bank, National Bank of Ras Al Khaimah and Sharjah Islamic Bank are the lenders included in A&M's report.

The upward trend in cost of risk continued for these lenders from the first quarter of the year, as several banks increased their net loan loss provisions by 15 per cent in the second quarter. Impairment charges for some of the banks ran at higher levels than historic averages, the analysis said.

"Increased funding costs are also likely to impact banks amid intensified competition for deposits and tighter liquidity in the second half,” Mr Ahmed said.

“As such, with any more tightening in liquidity, banks could take this as an opportunity to re-adapt their business models” and increase efficiencies to match the current market scenario, he said.