Moody's: UAE's four large banks Q2 2017: Higher net interest income underpins stable profitability
First Abu Dhabi Bank (FAB, Aa3/Aa3 Stable, a3)1 ; Emirates NBD (ENBD, A3/A3 Stable, ba1)2 , Abu Dhabi Commercial Bank (ADCB, A1/A1 Stable, baa3) and Dubai Islamic Bank (DIB, A3/ A3 Stable, ba2) accounted for around 60 per cent of UAE banking system assets as of June 2017.
Stable Q2 profits with higher net interest income offsetting declining fees and commissions. The four banks reported a solid combined net profit of AED 6.7 billion ($1.8 billion) in Q2 2017, underpinned by higher net interest income, despite the economic slowdown due to weak oil prices. Aggregate net profitability was broadly flat versus Q2 2016, but fell 3.5 per cent quarter on quarter also partially driven by a decline in fee and commission income.
Operating costs were down while provisioning showed a mixed trend. Operating expenses were down by six per cent relative both to the previous quarter and to Q2 2016. Apart from ADCB, all banks reported a reduction in their cost base.
However, provisioning charges at a consolidated level increased by one per cent and six per cent when compared to both Q1 2017 and Q2 2016. This overall increase does not accurately reflect the mixed performance of the peer group, with ENBD and FAB showing an improving trend and ADCB and DIB a weakening trend.
Deposits were broadly stable and capital improved modestly. Combined deposits at the four banks declined marginally, by one per cent to AED 1 trillion (around $273 billion) relative to Q1 2017 primarily driven by FAB, while DIB bucked the trend, reporting three per cent deposit growth quarter on quarter as the oldest Islamic franchise in the UAE continues to attract depositors.
At the same time, the combined Tier-1 capital improved modestly to 16.7 per cent of risk-weighted assets from 16.2 per cent in the previous quarter and we expect the banks are meeting the recently introduced Basel III capital thresholds.
We expect core profitability to remain solid over the next 12-18 months. However, we anticipate that pressure on fee and commission income will continue for the next few quarters as economic growth remains sluggish. Liquidity pressures have eased but funding costs are expected to rise due to a rising interest rate environment. We also expect a modest rise in provisioning charges, also driven by the sluggish economic growth.