The UAE’s banking sector experienced a challenging third quarter in 2024, with slower loan growth, rising impairment charges and a marginal decline in profitability, according to Alvarez & Marsal’s (A&M) UAE Banking Pulse. The report, which tracks the performance of the top 10 banks by asset size, highlights critical shifts in lending, deposits, and operational efficiency across the sector.
Slowing loan growth and rising deposits
Loans and advances (L&A) grew by 3.5% quarter-on-quarter, driven primarily by retail lending, which rose 4.9% during the period. However, this was overshadowed by deposit growth of 3.9% quarter-on-quarter, largely attributed to a 5.6% rise in time deposits as customers sought to lock in higher pre-rate-cut returns. This disparity caused the loan-to-deposit ratio (LDR) to decline marginally by 0.3 percentage points to 75.5%.
Key drivers of deposit growth included FAB and ADCB, which recorded increases of 8.5% and 8.7% quarter-on-quarter in time deposits, respectively. Meanwhile, RAKBANK saw the largest L&A growth at 12.7% quarter-on-quarter, driven by corporate and wholesale segment lending.
Impairment charges and profitability
Aggregate impairment charges surged by 124.9% quarter-on-quarter to Dh2.9 billion, undermining profitability. Net income for the sector declined by 5.5% quarter-on-quarter, resulting in a contraction in return on equity (RoE) by 223 basis points (bps) to 18.6% and return on assets (RoA) by 16 bps to 2.1%. This marked the first profitability decline in 2024.
Impairment costs were driven by cautious approaches to asset quality. For instance, ENBD recorded Dh872 million in impairment charges for the quarter, reversing a credit allowance recorded earlier in the year. The aggregate cost of risk worsened by 30 bps to 0.6%.
Mixed trends in income and margins
Despite a 50 bps reduction in benchmark interest rates by the Central Bank of the UAE (CBUAE), net interest income (NII) grew by 1.5% quarter-on-quarter, supported by stable credit yields and marginally higher cost of funds. Total operating income rose 3.5% quarter-on-quarter, bolstered by a 7.4% increase in non-interest income. FAB and ENBD were notable contributors, with non-interest income growing by 16.2% and 8.9%, respectively.
However, net interest margins (NIM) remained flat at 2.6%, reflecting funding cost pressures and declining spreads. The spread between yield on credit and cost of funds narrowed by 12 bps quarter-on-quarter.
“The UAE banks’ performance reflects a cautious approach amid changing monetary policies and economic conditions,” said Asad Ahmed, A&M Managing Director, Financial Services. “While lending growth continues, the sector faces challenges with higher impairment charges and cost efficiencies.
The focus on digitalisation and strategic cost management will be crucial for sustaining profitability and capital strength in the coming quarters.”
Cost efficiency deterioration
Operational efficiency metrics showed a mixed performance. The cost-to-income (C/I) ratio increased by 99 bps quarter-on-quarter to 29.0%, as operating expenses grew faster (+7.1%) than total operating income (+3.5%). ENBD accounted for a significant portion of this increase, with operational costs rising 16.4% quarter-on-quarter due to higher staff expenses, marketing costs, and professional fees.
FAB, however, offset some of this deterioration by improving its cost efficiency, with its C/I ratio decreasing by 74 bps quarter-on-quarter.
Outlook and sector resilience
The UAE banking sector remains well-capitalised, with an aggregate capital adequacy ratio (CAR) of 17.9%, up 37 bps quarter-on-quarter. Asset quality metrics also improved, with the non-performing loans (NPL) ratio declining by 0.2 percentage points to 3.9% and coverage ratios increasing to 109.6%.
Looking ahead, A&M anticipates lending growth to persist, driven by the sector’s strong capital base and ongoing investments in retail and corporate lending. However, profitability will likely remain under pressure due to impairment costs and narrowing margins. The report stresses the importance of digitalisation and strategic cost management as key areas for banks to enhance efficiency and sustain profitability.
