Posted inFeatures, Banking & Insurance, Trends and Outlook

UAE banking sector expected to see stable NIMs in 2023, marginal decline in FY 24

Sector saw an increase in profitability due to a 15.4% QoQ rise in total operating income, increase in non-core income by 2.4% QoQ and lower impairment charges

By Nivetha Dayanand
With inflation still above the target levels, rate cuts are expected after mid FY’24; consequently margins may see some pressure in FY24. Credit: Shutterstock
by Nivetha Dayanand

The UAE banking sector is expected to see stable net interest margins (NIMs) in 2023, followed by a marginal decline in FY 24, according to global professional services firm Alvarez & Marsal (A&M).

A&M’s “Banking Pulse for the third quarter of 2023” report said that the CBUAE is expected to cut rates after mid-FY 2024. The report also noted that the sector saw an increase in profitability due to a 15.4% QoQ rise in total operating income, an increase in non-core income by 2.4% QoQ and lower impairment charges.

“This report showcases a robust third quarter for the UAE banks, buoyed by a higher interest rate environment and a meaningful reduction in impairment charges,” said Asad Ahmed, A&M Managing Director and Head of Middle East Financial Services. “Lenders benefit from healthy liquidity conditions supported by high oil prices, foreign capital inflows and moderate credit demand amid rising interest rates.”

The report also found that deposit growth outpaced credit demand, with aggregate deposits growing by 3.9% QoQ, outpacing loans and advances (L&A) growth of 2.4% QoQ. Consequently, the loan-to-deposit ratio (LDR) decreased by 1.1% points QoQ to 75.2%.

NIMs expanded by 8bps as the yield on credit increased to 12%, faster than the cost of funds, which rose to 4.2% in Q3 23. NIM benefited from an overall increase in the benchmark interest rate by the Central Bank of the UAE.

The report also found that the cost-to-income ratio deteriorated by 37bps QoQ to 28% in Q3 23 as total operating expense growth outpaced the total operating income.

Overall, the report found that the UAE banking sector is in a healthy position and is well-positioned to withstand the expected interest rate cuts.

Key trends

  1. Deposit mobilization continued to outpace credit demand. Aggregate deposits grew by 3.9% QoQ, outpacing L&A growth of 2.4% QoQ. Consequently, the loan-to-deposit ratio (LDR) decreased by 1.1% points QoQ to 75.2%. During Q3’23, eight of the top 10 banks reported increased L&A.
  2. Total operating income increased by 4.5% QoQ as NII increased by 5.5% QoQ and non-interest income increased by 2.4% QoQ. Both NII and non-interest income contributed to the growth in total operating income. However, the growth in total operating income was subdued due to a decline in net fees and commission income.
  3. NIMs expanded by 8bps as the yield on credit increased to 12%, faster than the cost of funds, which rose to 4.2% in Q3 23. NIM benefited from an overall increase in the benchmark interest rate by the Central Bank of the UAE. Most banks reported expansion in NIMs for the quarter.
  4. The cost-to-income ratio deteriorated by 37bps QoQ to 28% in Q3 23 as total operating expense growth outpaced the total operating income.
  5. Nine out of 10 banks reported an improvement in cost of risk (CoR). Aggregate CoR improved by 10bps QoQ to settle at 0.6% for Q3 23 as the banks reported lower impairment charges.
  6. Loan book repricing and low-cost deposit base helped NII, while lower impairments supported earnings growth and return on equity (ROE) profile. The marginal growth of NII, non-interest income, and impairment charges reduction resulted in 5.6% QoQ growth in aggregate net income. Consequently, RoE expanded by 13bps QoQ to 21%; and return on assets (RoA) improved by 7bps to 2.3% for the quarter.