The UAE’s leading banks continue to demonstrate robust capital positions, fueled by strong profitability and improved asset quality in the second quarter of 2024.
According to Alvarez & Marsal (A&M), a leading global professional services firm, in their latest UAE Banking Pulse report, profitability surged to AED21.5 billion in Q2 2024. This growth was driven by a combination of increased net interest income (NII) and a significant decrease in impairment charges (-35.4 percent QoQ).
Despite stable interest rates, NII saw a 2 percent Quarter-on-Quarter (QoQ) increase, largely attributed to a higher loan-to-deposit ratio (LDR). While non-interest income experienced a slight decline (-2.9 percent QoQ), total operating income still saw a modest growth of +0.4 percent (QoQ). This expansion contributed to a 48bps QoQ increase in return on equity (RoE), while return on assets (RoA) remained stable at 2.2 percent.
The report highlighted several key trends during the quarter:
Strong credit demand
Credit demand outpaced deposit mobilization in Q2 2024. The top 10 UAE banks witnessed a 3.2 percent QoQ increase in aggregate loans and advances (L&A), exceeding the 0.4 percent QoQ growth in deposits. This resulted in a 2 percent QoQ rise in LDR, reaching 75.8 percent.
Moderate operating income growth
Total operating income saw a marginal increase of 0.4 percent QoQ, with the growth in NII offset by a decline in non-core income. Non-interest income decreased by 2.9 percent QoQ, leading to a non-interest income / total operating income ratio of 32.5 percent in Q2 2024.
Stable net interest margin (NIM)
NIM remained relatively flat in Q2 2024 due to stable benchmark interest rates. Aggregate NIMs contracted slightly by 1bp QoQ to 2.65 percent during the quarter. While yield on credit increased by 8bps QoQ to reach 12.3 percent, the cost of funds also rose by 13bps QoQ to 4.6 percent. The increased LDR, driven by faster growth in L&A compared to deposits, contributed to this trend. Notably, eight out of ten banks reported a contraction in NIM.
Mixed cost efficiency
Six out of the top ten banks experienced a deterioration in cost efficiencies. The cost-to-income ratio (C/I) increased by 19bps QoQ to 28.1 percent in Q2 2024, remaining below the ~30 percent level. This deterioration was attributed to a slower growth in total operating income (+0.4 percent QoQ) compared to the increase in total operating expense (1 percent QoQ).
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Improved cost of risk (CoR)
UAE banks continued to demonstrate improvement in their CoR, reaching a multi-year low. CoR improved by 16bps QoQ to settle at 0.3 percent for Q2 2024. Total impairments declined by 35.4 percent QoQ in Q2 2024, reaching AED 1.3 billion. Six out of the top ten banks reported an improvement in CoR.
Enhanced profitability
Profitability saw a boost due to higher NII and lower impairment charges. UAE banks continue to be well-capitalized, with aggregate capital adequacy ratio (CAR) levels reaching 17.6 percent (+0.34 percentage points QoQ).
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