Profitability of top 10 listed banks in the UAE recovers significantly

21 March 2022 3 min. read

The profitability of the UAE’s banking sector recovered significantly last year, according to a new report by Alvarez & Marsal, on the back of continued economic recovery and a raft of effective measures implemented by the banks in the emirate.

For its UAE Banking Pulse 2021 study, Alvarez & Marsal looked into the key financials of ten largest listed banks operating in the UAE, including First Abu Dhabi Bank, Emirates ENBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, and Commercial Bank of Dubai. Combined, the five banks have total assets of over AED 2,800 billion

The analysis found that aggregate net income increased substantially by 48.6 percent year-on-year (YoY) to AED 37.8 billion, mainly driven by higher operating income (+5.2 percent YoY) along with lower impairments (-30.1 percent YoY).

Net income bridge – AED Bn

“The growth in operating income was supported by a higher fee and commission income (+9 percent YoY) and income from investments and gains from foreign exchange (+43.7 percent YoY),” explained Ahmed, Managing Director and Head of Financial Services at Alvarez & Marsal in the Middle East.

However, despite the higher income and higher liquidity, UAE’s banks remained cautious in originating new loans in 2021. “It is likely that the banks are holding reserves considered too high for the risk profile of their portfolio, given recent credit trends,” said Ahmed.

Banks continue to remain cautious in originating new loans despite higher liquidity

Net interest margin deteriorated further during 2021 to a six-year low of 2.1 percent, as compared to 2.3 percent in 2020, largely due to a low interest rate environment. Meanwhile, aggregate yield on credit and cost of funds declined across the banks by 68 basis points and 42 basis points, respectively.

As banks managed to control costs while increasing the operating income, UAE-based banks noted a strong earnings growth in 2021.

Net interest margins have compressed to six-year lows

Aggregate net profit increased by 48.6 percent YoY, and overall, profitability ratios such as return on equity (RoE) and return on assets (RoA) improved to 11.1 percent and 1.3 percent from 7.7 percent and 0.9 percent, respectively.

Looking ahead towards 2022, Ahmed said that the banking sector is expected to grow further, on the back of anticipated economic recovery and the digital transformation of the banking industry. “Broader profitability is expected to be driven by net-interest income growth as interest rates in the UAE are expected to increase in tandem with rate hikes by the US Federal Reserve.”

Sector profitability recovered sharply in 2021

“Higher oil prices, supportive government spending and normalizing of non-oil sector activity is expected to support gross domestic product growth and reinforce the UAE lender’s creditworthiness,” he continued.

The ten banks assessed for the study were: First Abu Dhabi Bank, Emirates ENBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Commercial Bank of Dubai, Abu Dhabi Islamic Bank, National Bank of Ras Al-Khaimah, Sharjah Islamic Bank, and National Bank of Fujairah.