The largest four banks in the system, FAB, ENBD, ADCB and DIB, accounting for 77 per cent of UAE banking assets, reported a combined net profit of $4 billion.

Profits at large UAE banks surged during the first six months of 2021 after a modest improvement in the operating environment led to lower loan-loss provisions, Moody’s Investor Service said.

The largest four banks in the system, First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank PJSC (DIB), accounting for 77 per cent of UAE banking assets, reported a combined net profit of $4 billion for the first half of 2021, up 17 per cent compared with the same period last year, Moody’s I said in its report titled “Easing provisions drive solid recovery in half-year profits.”

The profit surge is subsequent to booking of lower loan-loss provisions by the banks, reflecting the pick-up in economic activity and consumer confidence. “Easing pandemic restrictions, a strong vaccination roll-out, renewed real-estate activity (particularly within the villa segment), and increased optimism regarding upcoming projects such as Expo 2020 all helped to boost confidence,” said the report.

All four banks achieved double-digit growth in bottom-line profits, delivering an aggregate return on assets of 1.2 per cent in the six months to June 2021, up from 1.1 per cent in the same period last year (1.0 per cent excluding acquisitions impact).

The result remains well below pre-pandemic levels, however. “We expect bottom-line profitability to gradually improve over the next 12 to 18 months as banks ease their provisioning efforts, analysts at Moody have said.

Net interest income declined during the first half of 2021, largely due to a combination of low interest rates and muted loan growth. Combined net interest income for the four banks was Dh21 billion ($5.8 billion) as of June 2021, down 12 per cent year-on-year.

“Lower interest rates pushed down net interest income. The decline was slightly offset by lower interest expenses as banks retired expensive deposits in an effort to reduce funding costs. Non-interest income surged. Income from investment securities, fee-based activities and market trading rose 17 per cent year-on-year as economic activity in the UAE picked up and one-off fee waivers granted last year ended. Operating efficiency improved further,” said the report.

The four banks are focused on cost-efficiency and reduced operating expenses for the period by 6.0 per cent year-on-year when excluding the cost of integrating acquisitions, supporting their bottom-line profitability.

The banks’ provisioning fell by 38 per cent in the first half of 2021, as the economy recovered. While the full impact of the pandemic on banks’ asset quality will not be clear until the central bank’s Targeted Economic Support Scheme (TESS) is withdrawn, combined non-performing loans of the four banks have increased from to 6.2 per cent as of June 2021 from 5.2 per cent as of June 2020. At the same time, coverage moderately declined to still solid levels of 83 per cent.

The report noted that profitability will remain below pre-pandemic levels this year. The aggregate return on assets of the four banks was 1.2 per cent for the first half of the year, up 10 basis points year-on-year, but lower than the 1.7 per cent they achieved in 2019.

Lower interest income, combined with precautionary provisioning will keep net profit below pre-pandemic levels over the coming quarters. Capital buffers remain adequate. The banks maintained Basel III Tier 1 capital at 15.9 per cent of risk-weighted assets (RWAs) in aggregate. Sound capital levels are the result of lower dividend payouts and muted growth in risk-weighted assets.