Monday 12, June 2017 by Georgina Enzer

Alvarez & Marsal releases second UAE Banking Pulse report analysing banking sector data For Q1 2017

Alvarez & Marsal (A&M)’s has released its second UAE Banking Pulse, which compares the quarterly data of the 11 largest listed UAE banks in the first quarter of 2017 (Q1 2017) against the last quarter of 2016 (Q4 2016), as well as identifying prevailing trends throughout the intervening period.

This UAE Banking Pulse report finds that while net interest margins (NIM) remain under pressure, banks have grown their loan books with a significant return to lending. Additionally, it highlights that liquidity remains healthy and cost of risk has decreased.

According to the report, while net interest margins (NIM) remain under pressure, banks have grown their loan books with a significant return to lending. Liquidity remains healthy and cost of risk has decreased.

Eight of the top 11 banks had Loan to Deposit Ratios (LDRs) of between 80 per cent and 100 per cent, the industry’s so called “green zone”. However, with deposits growing at a faster rate, the net effect has been an overall reduction in LDRs.

The combination of this, together with lower Yield on Credit (YoC) and increasing Cost of Funds (CoF), has led to a decline in NIMs.

The increase in lending has contributed to an overall increase in revenues and with banks also continuing to monitor their cost bases, in some case delaying investment and hiring decisions, Cost / Income (C/I) ratios have shown an overall improvement.

Return on Equity has also increased. This has been driven primarily by a reduction in capital base due to payment of dividends to shareholders, which takes place in the first quarter of the year.

Trends identified:

  • A majority of banks took a balanced approach of growing their loan books and deposit bases simultaneously
  • Driven by a decrease in Loan to Deposit Ratios (LDR) and Yield on Credit (YoC), and increasing Cost of Funds (CoF), NIM has remained under pressure
  • Cost/Income (C/I) decreased on the back of growing revenues, and continued prudent cost management
  • Risk metrics continue to strengthen, with cost of risk continuing to decrease
  • Average year-on-year Return on Equity (RoE) decreased, as overall profitability remained below 2016 levels
  • Capital Adequacy Ratio (CAR) decreased quarter-on-quarter as a result of equity reduction, but remained higher than the Q1 2016 levels and well above the regulatory requirements

A&M Managing Directors in the firm’s Financial Institutions Advisory Services Practice Dr. Saeeda Jaffar and Asad Ahmed served as lead author and co-author respectively. Stephen Millington a Managing Director and head of A&M’s Middle East practice, specialising in financial investigations and disputes also served as a co-author.

Dr. Jaffar commented:

“The over-riding theme of the most recent quarter is very much revenue based. Banking revenues have risen on the back of increased lending, which has been a key area of focus for the sector and means that liquidity as measured by LDR remains at healthy levels. However, this has in turn contributed to a more competitive environment, leading to a reduction in interest income, reducing yields on credit. When combined with increased cost of funding incurred in growing loan books, this has impacted Net Interest Margins. We noted in our previous report that Cost/Income ratios were improving, and that continued to be the case in the last quarter. Again, though, this is a revenue story more than a cost one, so we cannot be certain at this stage of that trend continuing. While banks have certainly been careful with their costs, in some cases delaying investment and hiring decisions, these investments may be made during the year, and that could drive C/I ratios up. The de-risking of the sector has continued, with cost of risk continuing to decrease, and this is an encouraging trend. UAE banks also continue to deliver returns on equity that are significantly higher than the global average. Overall, therefore, the emerging signs of recovery which we detected in our inaugural banking Pulse are again visible and recent upgrades of the UAE’s credit ratings are also contributing to the growing air of confidence. There is every reason to believe we will see this trend continuing during the rest of this year.”

A&M’s UAE Banking Pulse report uses independently-sourced published market data and 17 different metrics to assess the key performance areas including size, liquidity, revenue, operating efficiency, risk, profitability and capital.

The banks analysed in A&M’s UAE Banking Pulse include National Bank of Abu Dhabi (NBAD), Emirates NBD, Abu Dhabi Commercial Bank (ADCB), First Gulf Bank (FGB), Dubai Islamic Bank, Union National Bank, National Bank of Ras Al-Khaimah (RAKBANK), Commercial Bank of Dubai, Abu Dhabi Islamic Bank, Mashreq Bank – and a new addition – National Bank of Fujairah (NBF).

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