UAE’s largest banks to see 'solid' profits this year despite rising costs

Growth in interest rates, fee and commission income boosted Q4 2017 results, Moody's says

First Abu Dhabi Bank is the largest bank in the UAE, predicted to see solid profitability in 2018, according to Moody's. Chris Whiteoak / The National

The UAE's four largest banks are expected to continue to report solid profits for the next 12 to 18 months, despite rising operational and provisioning costs, according to Moody's.

"Over the coming quarters, we expect provisioning costs to rise modestly as loan performance softens and the rate of recoveries – which has been broadly driving the fall in provisioning charges since 2015 – slows," said Nitish Bhojnagarwala, a vice-president and senior analyst at Moody's, in a paper published on Monday. "But operating expenses will stabilise," he added.

The combined fourth quarter net profit of the UAE's four largest banks - First Abu Dhabi Bank (FAB), Emirates NBD, Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB) - rose 8 per cent compared to the same period in 2017 and 2 per cent quarter on quarter, representing a “solid” rise in net profits, Moody’s report said.

“[The increase] was largely driven by higher business volumes and recent interest rates hikes, which generated higher recurring income, both in the form of net interest income and fees and commissions,” Mr Bhojnagarwala said.

Operating expenses rose 10 per cent quarter on quarter and 7 per cent from a year ago, “mainly related to investments in technology to drive digitalisation and to improve operational efficiency”, he added.

Combined provisioning charges increased by 4 per cent for the quarter and 13 per cent over the year. The increase was due to lower recoveries in the fourth quarter of 2017 due to a reduced stock of problem loans, the report said.

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Customer deposits at the four banks increased 2 per cent to Dh1 trillion, compared with the third quarter of 2017, with the fastest growth recorded at FAB – 4.5 per cent year on year – reflecting its solid deposit franchises as the largest bank in the UAE, Moody's said. DIB followed, with 2.5 per cent year-on-year deposit growth over the quarter.

The banks’ combined Basel II-reported Tier 1 capital improved modestly to 17.2 per cent of risk-weighted assets, compared to 17 per cent in the previous quarter. All four banks have met newly introduced Basel III capital thresholds.

Core profitability is expected to remain solid over the next 12-18 months, underpinned by stabilising operating expenses at the four banks and suggestions of a broader economic rebound in the UAE and wider region, the report said.