Profitability to remain resilient for top UAE lenders

Moody’s says four biggest banks with Dh1 trillion deposit base have stable funding cost

Emirates NBD bank in Al Barsha area. Jeffrey E Biteng / The National

The top four banks in the UAE, with a combined deposit base of Dh1 trillion, will post sturdy profits in the next 12 to 18 months on the back of higher returns on loans and stable funding cost, despite sluggish economic growth and weaker fee and commission income, according to Moody’s Investors Service.

The four lenders - First Abu Dhabi Bank (FAB), the second-largest financial institutions in broader Middle East region; Emirates NBD (ENBD), Dubai biggest bank by assets; Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB), the top Sharia-compliant lender in the country, reported a combined net profit of Dh6.7bn in the second quarter of this year. Aggregate net profitability was broadly flat versus year-on-year but fell 3.5 per cent quarter-on-quarter, partially due to a fall in fee and commission

"Profitability was supported by higher yields on loans and stable funding costs, which drove higher net interest income, despite sluggish economic growth due to current oil prices," Nitish Bhojnagarwala, a vice president at Moody's said in the report.

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Banks in the hydrocarbon-depended economies of Arabian Gulf region have struggled to maintain profitability amid persistently low crude prices. Loan growth has remained subdued and non-performing loans have risen, especially in Saudi Arabia, the region’s biggest economy and largest banking market. Moody’s in August said the five biggest banks in the kingdom could face a declining profits next year on the back of reduced government spending that has affected economic growth and dampened credit demand.

The four lenders in the UAE have coped with the softer economic condition relatively better than their regional peers. Operating expenses across the banks were down by 6 per cent relative both to the previous quarter and to second quarter of 2016.

Provisioning for bad debts, however, depict a mixed trend at these lenders. “ENBD and FAB are showing an improving trend, while ADCB and DIB posted weakening trends,” Mr Bhojnagarwala said, adding that there could be a “modest rise in provisioning charges in the coming quarters”.

The combined deposits at the four banks also declined by 1 per cent, compared with the first quarter of this year. This slight drop, Moody’s noted, came after solid deposit growth in previous quarters for the UAE banking system, which suggests that liquidity pressure has been easing. Oil price levels will continue to be a factor that will continue to weigh down the deposit growth in the next few quarters, the ratings agency added.

Moody’s rates FAB at Aa3/Aa3 stable, a3; Emirates NBD at A3/A3 stable, ba1; ADCB at A1/A1 stable, baa3; and DIB at A3/A3 stable, ba2.