How and when will UAE banks return to profitability?
Low interest rate environment and increase in impairments to remain big challenges
Earnings trend of large UAE banks in the first half of 2020 point to subdued profitability for the whole of 2020, according to banking sector analysts.
The four largest UAE banks such as First Abu Dhabi Bank (FAB), Emirates NBD, Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB) which account for 74 per cent of banking assets in the country reported a combined net profit of $3.4 billion (Dh12.5 billion) for the first half of 2020, down 36 per cent compared with the same period last year.
The decline reflected substantial coronavirus-related provisioning charges, lower interest rates, and a non-recurring gain last year at Emirates NBD, according to rating agency Moody’s.
Lower interest income
“We expect second half NII to be similar to H1 2020, with higher lending volumes, as coronavirus-related restrictions ease, offsetting low rates and repayment reliefs. Provisioning will remain elevated, as problem loans increase and the outbreak impacts the non-hydrocarbon economy,” said Mik Kabeya, an analyst at Moody’s.
Although many banks witnessed some recovery in their profits in the second quarter of 2020 quarter on quarter, banks continued to experience a considerable contraction in net interest margins (NIM) in the second quarter due to many factors such as the shift to the marginal cost of funds-based lending rate, and an all-time low interest rates, according to an analysis of published data for top ten banks by Alvarez & Marsal.
“While there has been a peripheral increase in profitability, the outlook for the domestic banking sector still remains subdued as a result of the weakened after-effects of COVID-19, in addition to low oil prices, and the postponement of Expo 2020,” said Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services.
Pandemic-related provisions
The decline in bank profits was driven by a large increase in pandemic-related loan loss provisions, the impact of lower interest rates on revenues and the absence of a large one-off $1.2 billion gain at ENBD reported in H1 2019 (related to the partial disposal of a stake in NetworkInternational.
Pressure on profitability
Analysts expect profitability of UAE banks to remain under pressure in 2020. “The low interest environment, along with a possible increase in impairments, is expected to further weigh on profitability [of UAE banks],” said Assad.
Moody’s analysts expect the first half profitability trend to persist throughout 2020.
