Q1 2022 results for UAE banks will reinforce recent asset gains and profitability

Dubai: UAE banks could see strong profit growth in Q1 2022 with continued improvement in margins, asset quality and operational efficiencies.

The strong recovery in operating conditions in the UAE economy will be reflected in bank earnings, offset by lower loan loss provisions and improved loan yields despite weak loan growth.

The top 10 banks in the UAE, representing nearly 80% of the country’s banking assets, had reported aggregate net income of 37.8 billion dirhams in 2021, up 48.6% year-on-year, mainly due to higher operating profit (+5.2 percent) as well as lower deficiencies (-30.1 percent).

While the impact of lower operating costs and loan loss provisions are expected to directly reflect on banks’ net profits in future results, the UAE Central Bank’s decision to pursue certain elements of its Targeted Economic Support Program (TESS) will likely support growth lending.

“CBUAE’s decision will reduce the pressure on banks in terms of liquidity and regulatory compliance, which will lead to cost savings,” said a chief financial officer of a bank. “Continued support will mean more leeway for banks to manage liquidity and write-downs in a gradual way while increasing lending.”

Cost savings

Banks will continue to benefit from some of the cost reduction measures introduced following the COVID-19 crisis and the rapid adoption of digitalization.

The streamlining of branch staff and operations – aided by digitization – has lowered operating costs, and bank profits will continue to benefit from lower costs.

The cost/income (C/I) ratio fell 1.7% year-on-year to 32.8% last year. Operational efficiency (C/I ratio) improved, supported by a 5.2% increase in operating profit. The decline in the C/I ratio can be partially attributed to strict cost control measures.

“UAE banking sector assets are expected to grow on the back of the anticipated economic recovery and digital transformation,” said Asad Ahmed, Managing Director and Head of Middle East Financial Services at Alvarez & Marsal (A&M).

Impact of the tariff increase

Although the recent quarter-percent increase in interest rates is unlikely to affect first-quarter earnings, it will be a major contributor to profitability going forward.

Banks continue to benefit from a large share of current and savings accounts (CASA), which accounted for two-thirds of total system-wide deposits.

“Over the past three years, the contribution of these (CASAs) to the total deposit base of UAE banks has continued to increase. Banks’ balance sheets have been positioned to benefit from rising interest rates – with a higher amount of assets (loans) than liabilities (deposits),” said Mohamed Damak, senior director of services. Financials at S&P Global Ratings.

Solidarity economy

The steady improvement of the local economy is seen as the main driver of the banking sector’s profitability gains through improved asset quality and loan growth.

While the CBUAE predicts 4.2% growth for the UAE economy, a much higher growth rate is expected this year in light of steadily rising oil prices and easing restrictions of travel.

Some of the high frequency indicators such as the Purchasing Managers Index (PMI), job creation and consumer spending point to a steady recovery in the UAE economy. February PMI data indicated a marked improvement in the health of the UAE’s non-oil private sector economy, with a further strong increase in market demand.

According to the latest CBUAE assessment, the financial soundness indicators of UAE banks remain solid thanks to a gradual and steady recovery of the economy.

Michael J. Birnbaum