The UAE banking sector witnessed a notable AED20.8 billion ($5.66 billion) growth in profitability during the first quarter of 2024 due to non-core income, lower operational costs, and declining impairment charges of 47.9 percent quarter-on-quarter (QoQ). Leading global professional services firm Alvarez & Marsal (A&M) has recently released its latest UAE Banking Pulse for Q1 2024, highlighting the country’s banking sector performance across different metrics.
“Banks in Q1’24 were profitable due to improved cost efficiencies, lower provisions and higher non-operational income. Against the backdrop of a static benchmark interest rate, now likely at its peak, the sector has demonstrated ongoing resilience,” commented Asad Ahmed, A&M managing director and head of Middle East financial services.
Key figures
In Q1 of 2024, benchmark interest rates remained unchanged. The UAE banking sector’s net interest income (NII) declined marginally by 1.1 percent compared to Q4 of 2023. However, non-core income increased substantially by 18.9 percent. In turn, this supported the total operating income, which rose 4.8 percent.
In addition, the UAE banking sector’s loans and advances grew 3.4 percent, reaching their highest level post-COVID-19. Meanwhile, deposits grew at a faster rate of 5.1 percent in Q1 of 2024. Moreover, the banking sector’s return on equity rose by 1.2 percentage points compared to Q4 of 2023 to 20.3 percent. Meanwhile, return on assets improved by 0.1 percent points to 2.2 percent.
“Asset quality remains sensitive to the continued high-interest rate environment. The Central Bank of the UAE continues to anchor its benchmark rate to the U.S. fed and maintains the bank rate at 5.4 percent,” added Ahmed.
Prevailing trends in the UAE’s banking sector
In Q1 of 2024, deposit mobilization across the UAE banking sector continued to outpace credit demand. Hence, aggregate deposits grew by 5.1 percent, outpacing loans and advance growth of 3.4 percent. Therefore, the loan-to-deposit ratio saw a 1.2 percent decline to 73.8 percent. Total operating income saw a 4.8 percent increase in Q1 compared to a decline of 0.8 percent in Q4 of 2023 due to a surge in non-core income. In addition, net fees and commission income increased by 19.4 percent, while other operating income increased by 18.5 percent.
Overall cost efficiency improves
The UAE banking sector’s net interest margin declined due to the lower loan-to-deposit ratio and shrinking spreads. The aggregate net interest margin declined to 2.7 percent, the yield on credit decreased to 12.2 percent, and the cost of funds decreased to 4.4 percent.
In addition, the sector’s cost-to-income ratio rose substantially by 3.6 percent to 27.9 percent in Q1 of 2024, remaining within its average range after a surge to 31.5 percent in Q4 of 2023. Therefore, the overall cost efficiency in the UAE banking sector improved with none of the top 10 banks reporting a deterioration.
Outlook remains optimistic
More than 50 percent of banks reported an improvement in the cost of risk, which overall improved by 39bps settling at 0.4 percent. In addition, total impairments saw a decline of 47.9 percent to AED2 billion.
A&M’s UAE Banking Pulse also noted that UAE banks were profitable due to improvements in cost efficiencies, loan recoveries, and non-operational income. The 9.3 percent rise in net income also led to an improvement of 1.2 percent in aggregate return on equity to 20.3 percent in Q1 of 2024.
“Barring any regional issues, the sector has reason to remain optimistic as we anticipate continued steady growth in the UAE banking sector,” added Ahmed.
Read: UAE Islamic banks surpass $195.39 billion in assets, up 13.61 percent year-on-year
A&M’s UAE Banking Pulse
A&M’s UAE Banking Pulse examines quarterly data from the 10 largest listed banks in the UAE. Using independently sourced published market data and 16 different metrics, the report assesses banks’ key performance areas, including size, liquidity, income, operating efficiency, risk, profitability and capital.
Moreover, the report offers an overview of the key developments impacting the banking sector in the UAE. It also provides insight into segments including loans and assets, deposit mix, and a stage-wise breakdown of the lending book.
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