Liquidity is expected to remain healthy for lenders for the remainder of 2018
UAE banks improve first quarter performance as costs decline, Alvarez & Marsal says
The UAE's top-10 listed banks have improved their quarter-on-quarter performance in the first three months of this year as costs declined and liquidity is expected to remain healthy for the rest of 2018, according to global consultants Alvarez & Marsal.
“In terms of liquidity, this quarter saw similar growth in both deposits and loans and advances. This resulted in a stable loan to deposit ratio, with nine out of the 10 banks in the ‘sweet spot’ with what is typically considered to be a healthy amount of liquidity,” Saeeda Jaffar, managing director of for financial institutions advisory services practice, Alvarez & Marsal said in report released on Sunday.
The drivers for the increase in return on equity are threefold: lower operating costs, a decrease in cost of risk, driven by a significant decline in provisioning, and an increase in leverage of the banks’ balance sheets, she added.
GCC banks are forecast to see rising profits in 2018 due to lower costs and a stabilising macroeconomic environment. The banks are expected to see slight recovery in loan growth, driven by the corporate segment, and an improvement in spreads quarter-on-quarter, Egyptian investment bank EFG Hermes said in a report last week.
Alvarez & Marsal’s said it used market data and 16 different metrics to assess key performance areas including size, liquidity, income, operating efficiency, risk, profitability and capital of the lenders - First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Union National Bank, Commercial Bank of Dubai, National Bank of Ras Al-Khaimah, and the National Bank of Fujairah.
Commercial Bank of Dubai reported a 68 cent rise in its first-half net income as operating expenses and impairment charges for bad loans declined while net interest and fee income climbed.
Net profit for the six-month period to the end of June, climbed to Dh561 million, the lender said in a statement on Wednesday to Dubai Financial Market, where its shares are traded. Income for the second quarter, surged 63 per cent to Dh281.3m, the lender said in a separate bourse filing.
The report noted that the net interest margin declined, despite a rise in yield on credit, driven by an increased cost of funds. Five of the top-10 banks witnessed a decrease in their net interest margins during the first quarter, it added.
Return on equity, one of the main measures to gauge the financial health of an institution, and return on assets both increased during the three-month period to the end of March as cost of risk decreased along with operating expenses.
“This came at the expense of a decrease in capital adequacy ratio. Nine out of 10 banks showed an increase in ROE,” the consultancy said in the report.
Cost to income ratio for the 10 surveyed UAE banks improved, falling from 34.2 per cent for the three-month period ending December 31 to 32.3 per cent at the end of the first quarter. A decrease in operating expenses of 45 basis points, drove the improvement, Alvarez & Marsal said.
The cost of risk for the lenders also fell significantly from 1.04 per cent in the fourth quarter of the last year to 0.81 per cent in the first three months of 2018 due to a fall in loan loss provisions, it noted.