Hussam Abdulnabi (Dubai)
A report by Alvarez & Marsal monitored a significant improvement in the performance of the UAE banking sector from the first quarter of 2021, as the profitability of the ten largest banks in the UAE increased, after the total net income increased by 85% on a quarterly basis, due to lower operating expenses and costs. Lower value provisions that supported overall profitability.
The report, “The Performance of the Banking Sector in the UAE for the First Quarter of 2021”, monitored an increase in bank deposits by 1.2%, after declining in the fourth quarter of 2020, while loans and advances decreased by 0.7% in the first quarter of the fiscal year, and the percentage of total loans decreased to deposits to reach 84.5% in the first quarter of 2021 compared to 86.2% in the fourth quarter of 2020, stressing that the UAE’s strong financial and external positions will continue to support the fundamentals of the banking sector, although pressure continues on the real estate sector, which constitutes Risks to UAE banks.
The Alvarez & Marsal report said that eight of the 10 largest banks in the UAE recorded a decrease in the cost of risk, as the improvement in the macroeconomic environment led to a decrease in total loan loss provisions by 36.1% on a quarterly basis in the first quarter of 2021 to 5.3 billion dirhams. .
He pointed out that the gross net interest margin remained under pressure, as it decreased to its lowest level in several years by 10 basis points to 2.0% in the first quarter of 2021, due to the decrease in the return on credit, at a rate of 19 basis points quarterly, from The ratio is 5.3% to 5.1%, while the cost of funds has remained largely flat at 1.2%, and the net interest margin is low for most banks.
The report showed that the total return on shareholders’ equity improved from 5% in the fourth quarter of 2020 to 9.7% in the first quarter of 2021, as net income increased by 85% on a quarterly basis, pointing to the increase in operating income of banks (excluding interest). From 30.6% in the fourth quarter of last year to 34.9% in the first quarter of this year.
Commenting on the report, Asad Ahmed, General Manager and Head of Financial Services in the Middle East at Alvarez and Marsal, confirmed that the UAE banking sector witnessed a remarkable improvement in profitability in the first quarter of 2021, and this trend is likely to continue in the subsequent financial periods, expecting that The Targeted Economic Support Program (TESS), extended by the UAE Central Bank until June 2022, is helping to reduce the asset quality of banks and relieve pressure on their balance sheet until the second quarter of 2022.
Ahmed said that with the economy recovering from the repercussions of the “pandemic”, it is expected that banks’ income flows will remain under pressure, while interest rates are likely to remain low as they were, noting that operating costs and fees for credit losses are expected to improve in 2021 compared to 2018. 2020, as banks focus on cost efficiency, embrace innovation and gain clarity about economic recovery.