Dubai: Interest margins of the top UAE lenders improved in the second quarter of 2017 on the back of an increase in yield on credit and loans to deposit ratio reversing previous trend, according to an analysis by global professional services firm Alvarez & Marsal (A & M).
Data shows seven of the top 10 banks improved their net interest margins (NIM), while one remained stable. NIM for these UAE banks increased from 2.45 per cent in the first quarter of 2017 to 2.52 per cent.
While overall profitability has decreased slightly due to lower non-interest income and leverage, net interest margins have increased. Moreover, the cost-to-income Ratio (C/I) has decreased, and the risk profile remains broadly healthy.
“The banking sector’s overall performance during the most recent quarter has been modest, with profitability and returns on equity showing a small decline. However, this has been partially offset by a rise in net interest margin and banks have also been very sensible in managing their costs, with an improvement in cost-to-income ratio,” said Dr Saeeda Jaffar, a managing director of Alvarez & Marsal.
The ‘UAE Banking Pulse’ report from A & M compares the quarterly data of the 10 largest listed UAE banks in the second quarter of 2017 against the first quarter of 2017. The report uses independently-sourced published market data and 16 different metrics to assess the key performance areas including size, liquidity, income, operating efficiency, risk, profitability and capital.
Key trends
Second quarter data showed a modest decline in profitability, mainly driven by a decrease in both non-interest income and leverage. This has been offset by an increase in net interest margin (NIM) and continued cost control on the part of banks, resulting in an overall decrease in cost-to-income ratio. Risk metrics showed mixed results with decrease in both coverage ratio and cost of risk.
On quarter on quarter basis loans and advances and deposits for the top 10 banks decreased by 0.30 per cent and 1.03 per cent respectively, despite most banks growing both. Seven of the top 10 banks grew their loans and advances market share and six banks grew their deposits market share. Operating income growth decreased due to a drop in non-interest income; eight of the top 10 banks grew non-interest income.
Further improvements in efficiency was visible with cost-to-income ratio decreasing further from 33.1 per cent to 32.8 per cent, continuing previous quarter trend; six of the top 10 banks reduced their C/I compared to the first quarter of 2017.
Risk metrics showed mixed performance with decline in both coverage ratio and cost of risk. The decrease in cost of risk is driven by a decrease in provisioning rather than an increase in the loans portfolio
Top banks’ return on equity (RoE) decreased marginally this quarter from 14.4 per cent to 14 per cent, on the back of a decrease in both income margins and leverage; but individual results were mixed and pure Islamic banks continue to outperform their conventional peers.
“The decline in cost of risk is a reassuring indicator of the sector’s overall stability, and liquidity remains at healthy levels. Looking ahead, we expect the market to return to a longer-term growth trajectory, especially as the initial impact of the NBAD / First Gulf Bank merger transforms into longer term performance,” said Dr Jaffar.
