The last of the four largest UAE-based banks - First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank - recently published results for first-quarter, reporting an aggregate net profit of $1.6 billion, down 32% from $2.3 billion last year, a credit negative, according to ratings agency Moody's.
Together these banks - (FAB -Aa3/Aa3 stable), (ENBD, A3/A3 stable), (ADCB, A1/A1 stable) and (DIB, A3/A3 stable) - accounted for 74% of banking assets as of March, it stated.
According to Moody's, the banks' material decline in profitability primarily reflects the early effects of the coronavirus outbreak and anticipation of higher credit losses, which prompted them to increase provisioning 222% versus first-quarter 2019.
Their combined cost of risk, computed as total impairment charge for the period divided by gross loans, rose to 202 basis points (bp) in the first-quarter from 83 bp in 2019, the top ratings agency said in the report.
The banks' combined return on assets was 1% in the first-quarter, compared to 1.7% in 2019. DIB's first-quarter return on assets was 1.6%, followed by ENBD at 1.2% and FAB at 1.1%. ADCB's return on assets was 0.2%.
In its review, Moody's cautioned that the UAE's coronavirus pandemic-related containment actions, the broader global economic shock, significant drop in oil prices and a pre-existing cyclical and structural slowdown in the non-oil economy would materially weaken banks' asset quality and profitability.
Sectors likely to be most affected by the pandemic account for more than half of the UAE's GDP: the hydrocarbon sector (26% nominal GDP in 2018), wholesale and retail trade (11%), construction (8%), real estate (6%), transportation and storage (6%), and accommodation and food service (2%), it stated.
Borrowers in those sectors are apt to be the most affected, with SMEs particularly vulnerable to the economic shocks, it added.
As of March, credit to the wholesale trade sector and retail trade sector together accounted for 9% of systemwide lending; credit to the transport, storage and communication sectors was 5%; and credit to the construction and real estate sectors (including hospitality) was 19%.
DIB’s cost of risk was 316 bp in the first quarter (126 bp adjusted cost of risk), up from 112 bp in the year 2019, reflecting the provisioning increase ahead of anticipated pandemic-related credit losses as well as one-off items, said Moody's in the report.
DIB's adjusted cost of risk was 126 bp in the first quarter, when excluding one-off items such as the conservative reserve build from allocating negative goodwill from the Noor Bank acquisition (gain on bargain purchase) to the loss reserves, as well as the management overlay to the expected credit loss, it stated.
ADCB’s cost of risk rose to 295 bp in the first quarter (234 bp adjusted cost of risk), from 91 bp in the year 2019, primarily reflecting a large provision against distressed borrowers NMC Health Group, Finablr and related companies (127 bp excluding it), the report stated.
However, ADCB’s adjusted cost of risk was 234 bp in the first quarter, when including both loans and other credit assets in the denominator, in line with the impairment charge in the numerator, it added.
ENBD’s cost of risk also rose to 215 bp in first-quarter 2020 from 103 bp in the year 2019, reflecting anticipated deterioration in credit quality and the continued alignment of coverage at recently acquired Turkey-based Denizbank.
According to Moody's, FAB’s cost of risk increased to 74 bp in first-quarter from 44 bp in 2019, reflecting the more challenging environment.
The banks’ coverage ratios, computed as loan loss reserves divided by problem loans, varied. ENBD’s coverage increased to 121% at 31 March, from 112% at year-end 2019. FAB’s coverage ratio was 83% at 31 March, little changed from 82% at year-end 2019, it added.-TradeArabia News Service
