UAE Banking Sector Sees 3.9% Growth in Deposits Despite Rising Impairments
RIYADH: The UAE banking sector recorded a 3.9 percent quarterly increase in deposits in the third quarter, led by a 5.6 percent increase in time deposits, a latest report said. This solid growth in deposits outpaced a 3.5 percent rise in loans and advances during the same period.
Retail lending was the main driver of loan growth, with retail lending growing by 4.9 percent in the quarter.
However, the profits of the UAE’s leading banks fell as impairment charges rose 124.9 percent to 2.9 billion dirhams ($789.5 million) in the quarter, according to global professional services firm Alvarez & Marcel.
The sharp increase in impairments led to a 5.5 percent drop in net income, which was driven by a 223 basis point contraction in return on equity and a 16 basis point decline in return on assets.
Alvarez & Marsal’s Managing Director of Financial Services, Asad Ahmed, warned that the sector faces challenges amid changing monetary policies and economic conditions.
“While lending growth continues, the sector faces challenges with high impact fees and cost efficiency. Focusing on digitalization and strategic cost management will be critical to sustaining profitability and capital strength in the coming quarters,” Ahmed said.
He added: “As expected, the UAE’s Central Bank cut its benchmark interest rate by 50bps in Q3’24 to 4.9 percent, in line with the US Federal Reserve. Despite some headwinds, the management’s guidance notes indicate confidence that growth momentum will continue, while taking a cautious outlook.
The deposit-to-total-loan ratio declined by 0.3 percentage points in the quarter to 75.5 percent, as deposit growth outpaced loan growth.
Despite these challenges, total operating income increased by 3.5 percent in the quarter, driven by a 7.4 percent increase in non-interest income and an 11.8 percent increase in other operating income. Net interest income also increased by 1.5 percent in the same period.
Cost-efficiency metrics worsened in the quarter, with six of the top 10 banks reporting higher operating expenses. The cost-income ratio increased by 99 basis points to 29 percent as operating expenses increased by 7.1 percent, compared to a 3.5 percent growth in operating income.
Additionally, the cost of risk increased by 30 basis points to 0.6 percent during the quarter. This was the opposite of what happened in the second quarter.
Compared to 1.3 billion dirhams in the second quarter, total impairments increased dramatically to 2.9 billion dirhams in the third quarter.
The sector’s overall capital adequacy ratio, which increased by 0.37 percentage points during the quarter to 17.9 percent, remained solid in spite of these difficulties.