Report: ‘Significant return to lending’ by UAE banks

There has been a ‘significant return to lending’ by financial institutions in the Emirates, according to the latest UAE Banking Pulse, published by global professional services firm Alvarez & Marsal .

The report, which covers the first quarter of 2017, found that liquidity among the UAE’s top 11 banks, remained health while the cost of risk has decreased.

Eight of the top 11 banks, said A&M 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 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).

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.

Dr. Saeeda Jaffar, author of the report, said: “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.”

The full report is available for download here.