Interest on lending gives UAE banks an unexpected windfall

Banks reaped an extra Dh1 billion this year from margins on lending.

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Banks gained a Dh1 billion (US$272.2 million) windfall from interest on lending over the past three months.

That helped them to shrug off the impact of new laws intended to curb excessive bank charges.

Among the UAE banks that have reported third-quarter earnings so far, net interest income increased to Dh8.8bn, 13.6 per cent more than the Dh7.7bn in the same period last year.

"We've seen strong growth in net interest margins, and that's been driven by a widening of net interest spreads and lower cost of funds," said Shabbir Malik, a financial analyst at EFG-Hermes.

Banks received a boost from a fall in benchmark interbank lending rates, known as Eibor, which sank to historic lows during the quarter.

New deposits totalling Dh78.7bn entered the UAE banking system between the start of January and the end of April, according to the Central Bank. However, this has recently started to reverse, with levels of bank deposits last month at their lowest since January.

Margins grew far faster than new lending during the third quarter. Across the banking sector, net loans and advances increased 1.7 per cent to Dh1.07 trillion, according to data from the Central Bank.

The extra revenue was more than enough to counteract the impact of tighter regulations on retail lending, factored into banks' results for the first full quarter since their introduction in May.

Caps on fees charged on personal loans, alongside limits on credit cards and lending for car purchases, caused income from fees and commissions to dip 12.5 per cent to Dh2.2bn. Abu Dhabi Commercial Bank has been the most notable beneficiary of falling Eibor rates, reporting an increase in profit of 91.2 per cent, driven by a 48.6 per cent boost to net interest income to Dh1.29bn.

Union National Bank also reported a boost to earnings from higher margins, with interest income rising 30 per cent to Dh561.9m for the third quarter.