Major UAE banks saw healthy Q3 profits as growing loan portfolios and non-interest income overcame margin pressures.
Top banks such as First Abu Dhabi Bank (FAB), Emirates NBD, and Abu Dhabi Commercial Bank (ADCB) have shown healthy underlying momentum.
This has been driven by strong economic activity in the region.
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Despite global interest rate changes, strong corporate lending and consumer demand kept momentum building on their balance sheets during the third quarter.
Funding Costs Emerge as Key Sector Focus
Liquidity management is a key focus point for executives.
Several large institutions showed higher total loan growth compared to deposit growth during the 3rd quarter:
- Lending Growth: There was strong lending growth in both the corporate and retail books at major conventional and Islamic banks, creating tighter loan-to-deposit ratios.
- CASA Ratios: Banks with strong Current Account Savings Account (CASA) ratios (ADIB, Mashreq) gained an advantage.
- Access to diverse funding sources: Major institutions are increasing their exposure to the international debt capital markets by issuing bonds.
Analysts agree that cost of funds will be a key factor in maintaining net interest margins going forward.
Rapid Credit Growth Forces UAE Banks to Manage Tighter Liquidity Ratios
UAE banks have increased their lending books faster than deposits in the third quarter of the year.
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Major UAE banks such as First Abu Dhabi Bank and Emirates NBD have seen gross loans increase by as much as 10% year-to-date. This has led to a fierce competition between UAE banks for corporate time deposits.
UAE banks are looking abroad to tap debt markets and issue structured bonds to ensure they keep good loan-to-deposit ratios.
Revenue Diversification and Credit Quality Support Earnings
UAE banks were able to increase their non-funded income to help offset pressure on net interest margins due to rate changes globally.
Fee income, trade finance, wealth management, and foreign exchange all contributed strongly to operating income at leading banks.
Declining Non-Performing Loans Provide Crucial Support to Bottom Lines
UAE banks have been able to post stronger balance sheets and lower levels of non-performing loans given strong regional economic conditions.
This improvement in quality has meant that top-tier banks can lower the level of expected credit loss provisions.
The reduction in loan impairments has helped boost bank profitability in the quarter and allowed them to take a hit on tighter net interest margins.
Technology Investments Help Local Lenders Maintain Low Cost-to-Income Ratios
Significant investments in AI and automation have helped UAE banks improve their transaction speeds while reducing costs.
Cost income ratios of around 21% were reported by lenders in Dubai and Abu Dhabi, which is among the lowest in the industry, showing the banks are doing everything they can to keep costs to a minimum.
UAE banks are securing more digitally savvy customers through the launch of sophisticated mobile offerings without having to increase their branch base.
Strategic Outlook and Capital Management
The UAE’s banking sector is also well capitalized and has good levels of liquidity to fund these projects and developments from the private sector.
There will be continuous investment into digitization, which will improve cost-to-income ratios.
Most senior executives at the larger institutions are optimistic about growth prospects given the strength of the economy and sound risk management.
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