Abu Dhabi, UAESaturday 7 December 2019

UAE banking sector on its way to recovery, report says

The UAE banking sector is doing well compared to its global peers, according to the consultancy Alvarez & Marsal.
National Bank of Abu Dhabi merged with FGB to become First Abu Dhabi Bank. Silvia Razgova / The National
National Bank of Abu Dhabi merged with FGB to become First Abu Dhabi Bank. Silvia Razgova / The National

While the profitability of UAE banks has been dented in recent years because of low oil prices, the industry remains in better shape overall than its global peers, according to a report on the UAE banking sector by Alvarez & Marsal.

The global consultancy also said in its inaugural report on the country’s banking sector that there are increasing signs of recovery following several dismal years amid a rise in bad debts and lacklustre lending growth.

The report, which is to be published on a quarterly basis, also said the biggest banks in the UAE, which have the most diversified portfolios of loans and have operations abroad, have fared the best.

“The good news is we are seeing signs of this downward cycle bottoming out,” said Saeeda Jaffar, managing director at Alvarez & Marsal. “There is plenty of reason for banks’ shareholders to feel optimistic. Returns are still considerably higher than in other parts of the world and banks are being run very prudently. Capital adequacy ratios and coverage ratios, a sure sign of a bank’s health, have also been increasing.”

Alvarez & Marsal analysed quarterly data of 10 banks in the UAE since the fourth quarter of 2015, using metrics that include liquidity, revenue, operating efficiency, risk, profitability and capital.

Those banks were Emirates NBD, National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, FGB, Dubai Islamic Bank, Mashreq, Abu Dhabi Islamic Bank, Union National Bank, Commercial Bank of Dubai and National Bank of Ras Al Khaimah (RAKBank).

UAE banks and financial institutions that lend have not had the best of times in recent years. Deposits have dwindled as government-related entities have withdrawn funds to plug growing budget deficits.

While the fall in the price of oil, which has been reversing since November, led to an increase in borrowing by governments to reduce those deficits, it has softened demand for loans among local corporations and increased the level of debt defaults. Among the hardest hit have been small and medium-sized businesses.

Despite the recent woes of the banking industry there are some signs to cheer, such as an increase in lending despite the provisions that banks are continuing to take, as well as tighter control on expenses. Seven of the 10 banks reviewed by the consultancy had improved their cost-income ratios at the end of last year compared with the fourth quarter of 2015 amid prudent measures such as delaying investments and hiring.

RAKBank had the biggest decrease in headcount and lower bonuses, the consultancy’s report said.

When it came to profitability, the biggest banks – FGB, Emirates NBD and Abu Dhabi Islamic Bank – fared best in terms of decline in profitability that has affected all banks. The consultancy noted that on the whole, Islamic banks performed better than conventional peers.

“In 2016, year-on-year returns were not as high as in previous years as a sustained period of more conservative lending took its toll,” Ms Jaffar said.

“We will be looking for more positive signs as banks start to report their first-quarter 2017 results.”


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Updated: April 17, 2017 04:00 AM