Coverage: weekly note · Information to 28 March 2024
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TGB Weekly Research Note · 28 March 2024
Six of seven large Gulf lenders reported higher profits for 2023, and all three UAE banks in the group lifted their return on tangible equity.
The desk view
Emirates NBD lifted its return on tangible equity (RoTE) to 24.3% from 17.1%, Dubai Islamic Bank to 20% from 17% and First Abu Dhabi Bank to 17.6% from 15.7%. In Saudi Arabia, Al Rajhi Bank reported a 19.35% return on equity, but its profit of SAR 16,621 million was below the SAR 17,151 million of 2022. At Emirates NBD the drivers were a wider margin on higher interest rates and lower impairment allowances, and Dubai Islamic Bank's impairment charges also fell sharply. Both supports are cyclical, so the rate path matters for whether these returns hold.
Returns rose at most of the large lenders
Emirates NBD's profit rose 65% to AED 21.5 billion, and its RoTE increased by 7.2 percentage points to 24.3%. Dubai Islamic Bank's net profit rose 26% to AED 7,010 million, with RoTE up 300 bp to 20%. First Abu Dhabi Bank's net profit rose 22% to AED 16.4 billion, or 56% on an underlying basis, and the bank described a third consecutive year of improved RoTE, to 17.6%.
Outside the UAE, Kuwait Finance House's net profit rose 63.4% to KD 584.5 million, and it reported a return on average tangible equity of 20.5% before synergies while completing its merger with Ahli United-Kuwait. Saudi Awwal Bank's net profit rose 45% to SAR 7,002 million, with RoTE above 15%. Qatar Islamic Bank grew net profit by 7.5% to QAR 4,305 million.
Margins and recoveries did the work
Emirates NBD's net interest margin rose 52 bp to 3.95%, which it attributed to a favourable loan and deposit mix and higher interest rates. Its impairment allowances fell 33% on strong recoveries, and its impaired loan ratio improved to 4.6%. Dubai Islamic Bank's impairment charges fell 34% to AED 1,396 million. First Abu Dhabi Bank is the exception among the UAE lenders: its net impairment charge rose 8%, a cost of risk of 63bp, so its higher profit did not rest on lower provisions.
UAE system data add context. Customer deposits at banks operating in the UAE rose 13.5% in 2023 while gross credit grew 6.0%, a gap of 7.5 percentage points. This suggests that 2023 returns were driven by pricing and credit costs on a liquid balance sheet rather than by rapid credit expansion.
Al Rajhi and QIB show the limits
Al Rajhi Bank's profit of SAR 16,621 million was 3.1% below 2022, even as it reported a 19.35% return on equity and a 2.12% return on assets. Qatar Islamic Bank's single-digit profit growth came with a cost-to-income ratio of 17.1% and a non-performing financing ratio of around 1.7% at 31 December 2023. Ratios already that low leave little room for further gains from efficiency or lower impairments. For these lenders, further gains depend more on balance-sheet growth than on the cyclical tailwinds that helped Dubai banks.
The rate path decides whether returns hold
The CBUAE raised its Base Rate to 5.40% from 27 July 2023, and the rate is anchored to the US Federal Reserve's Interest on Reserve Balances. On 20 March 2024 the Federal Open Market Committee kept the federal funds target range at 5.25-5.50%. First Abu Dhabi Bank's outlook assumes three rate cuts in the second half of 2024, and it guides to a RoTE above 16%, below the 17.6% achieved in 2023. Lower rates would compress the margin gains that underpinned 2023, so banks that relied most on margins are more exposed to a reversal.
What to watch
- 30 April-1 May 2024: next scheduled FOMC meeting; the CBUAE Base Rate is anchored to the Federal Reserve's IORB.
Primary sources: Emirates NBD (via Dubai Financial Market disclosure feed), Emirates NBD's 2023 profit surges 65% to AED 21.5 billion (press release), 25 January 2024; Dubai Islamic Bank (via Dubai Financial Market disclosure feed), Dubai Islamic Bank Full Year 2023 Group Financial Results (press release), 23 January 2024; First Abu Dhabi Bank, Q4/FY'23 Earnings Presentation, 1 February 2024; Al Rajhi Bank, Abdullah Al Rajhi: alrajhi bank Announces SAR 16,621 million Profits for 2023, 31 January 2024; Al Rajhi Bank, Abdullah Al Rajhi Leads alrajhi bank to Record 2022 Profits of SAR 17,151 Million, Up 16%, 30 January 2023; Saudi Awwal Bank (SAB), Saudi Awwal Bank records SAR7 billion net profit after Zakat and Income Tax for 2023, 8 February 2024; Kuwait Finance House, Al Marzouq: A Record Net Profit for KFH Shareholders at KD 584.5 Million in 2023, an increase of 63.4%, 31 January 2024; Qatar Islamic Bank, QIB Profit grows by 7.5% to reach QAR 4,305 Million in 2023, 16 January 2024; Central Bank of the UAE, United Arab Emirates Monetary, Banking & Financial Markets Developments, 2023 – 4th Quarter Report, 29 February 2024; Central Bank of the UAE, CBUAE Raises the Base Rate by 25 Basis Points, 26 July 2023; Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement, 20 March 2024; Board of Governors of the Federal Reserve System, Federal Open Market Committee announces tentative meeting schedule for 2024, 23 June 2023.