Emairtes: The top ten UAE banks’ profitability in the third quarter 2022 jumped on the back of higher core interest income despite a slowdown in loans and advances growth, according to a leading global professional services firm.

Aggregate net interest income (NII) surged by 12.2 per cent quarter-on-quarter while net interest margins (NIM) improved by 18 basis points (bps) quarter-on-quarter (QoQ) supported by higher credit yield on back of rising benchmark rates, Alvarez & Marsal (A&M) said in its UAE Banking Pulse report.

Total interest income grew significantly by 27.5 per cent as asset quality improved while non-performing loans (NPL)/ L&A fell by 0.2 per cent to 5.5 per cent during the quarter.

“With the tailwinds of stronger economic growth and higher interest rates, UAE banks reported improved profitability. The Q3 2022 earnings momentum gathered pace with elevated margins, and asset quality pickup. We expect the improving trend to continue in the fourth quarter, but remain cautious of the effect of higher rates on retail and corporate borrowers,” said Asad Ahmed, A&M managing director and head of Middle East Financial Services.

Abdulaziz Al Ghurair, chairman of UAE Banks Federation, forecasted a positive and robust growth of the UAE banking sector, and predicted that the banking industry would grow faster than the macroeconomic rate with bank revenues, after risk provisions, to reach more than $25 billion by 2030, a 50 per cent increase over current revenues establishing an excellent financial standing. He noted that the UAE banks are well-capitalised and profitable, which are prerequisites to enhancing the stability of the sector in the long term.

The 10 largest listed banks analyzed by A&M include First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank, Commercial Bank of Dubai, National Bank of Fujairah, National Bank of Ras Al Khaimah and Sharjah Islamic Bank.

Loan and assets growth was marginally up by 0.7 per cent, while deposits increased by 5.2 per cent QoQ. On balance, while Q3 interest rate increases have positively impacted banks, the impact on borrowing is more subdued, despite positive economic activity in the GCC as the International Monetary Fund revised its UAE GDP forecast upwards from 4.2 per cent to 5.1 per cent in October 2022, said the report.

“Overall, banks reported higher profitability as return on equity improved by 1.3 per cent QoQ to 15.1 per cent and return on assets improved by 0.1 per cent QoQ to 1.7 percent during the quarter, thanks to stronger economic activity, higher interest rates, and elevated oil prices,” it said.

Banks’ operating income grew significantly by 8.3 per cent QoQ primarily driven by increased NII for the UAE banks. The NII increased substantially by 12.2 per cent QoQ. The increase in other operating income of 8.0 per cent QoQ was offset by decrease in net fees and commission income of 7.8 per cent QoQ. As a result, the aggregate non-interest income marginally declined by 0.1 per cent QoQ.