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UAE Banking PulseQuarter 2, 2019

FOREWORD Alvarez & Marsal Middle East Limited (A&M) is delighted to publish the

Q2’19 edition of the UAE Banking Pulse (“The Pulse”). In this quarterly

series, we share results from our research examining the top ten largest

listed UAE banks by assets, and highlight key performance indicators of

the UAE banking industry. The Pulse aims to help banking executives

and board members stay current on industry trends.

All the data used in this report has been obtained from publicly available

sources and the methodology for the calculations is discussed in the

glossary. Calculation of several metrics has been changed from the

previous version to accommodate available information.

We hope that you will find the Pulse useful and informative.

Disclaimer:

The information contained in this document is of a general nature and has been obtained from publicly available information

plus market insights. The information is not intended to address the specific circumstances of an individual or institution. There

is no guarantee that the information is accurate at the date received by the recipient or that it will be accurate in the future. All

parties should seek appropriate professional advice to analyze their particular situation before acting on any of the information

contained herein2

Authors

3

18+ years of international experience in

management consulting and industry

Focuses on strategic and performance-related

matters in financial institutions, sovereign wealth

funds, family businesses, real estate, private equity

and private investments

Emirati National, frequent speaker and moderator in

Banking & Finance events

Board member of the Bahrain Fintech Bay

Dr. Saeeda Jaffar

Lead Author, Managing Director

Asad Ahmed

Co-Author, Managing Director

30+ years of experience in banking

Focuses on performance improvement,

turn-around, credit management, and formulating

and managing strategic and operational changes in

financial institutions

Expertise in Financial Inclusion and creation of

digital wholesale and retail banks

Former CEO of banks in the UAE & Kenya

Served on the governing council of the Kenyan

Bankers’ Association

Neil Hayward

Co-Author, Managing Director

18+ years experience in turnaround and

restructuring in the Middle East, Europe as well as

the U.S.

Focuses on financial services and is an expert in

restructuring both conventional finance and Islamic

finance facilities

Advises financially distressed companies including

playing a major role as a board member

[email protected]

Phone: +97145671065

CONTACT

DETAILS

mailto:[email protected]

UAE Macro & Sector Overview

1 UAE Central Bank and IMF forecasts, 2 US Board of Federal Reserve, 3 UAE Central Bank, 4 Company filings, The spurt

in Q2,19 revenues is largely attributable to consolidation of UNB and Al-Hilal Bank into ADCB’, ENBD net income

adjusted for one time gain of AED 2.0bn from disposal of stake in jointly controlled entity 5 Bloomberg & Axience research, 6 Bloomberg and Axience research; * Data of top 10 UAE banks shortlisted on the basis of asset size as of June 30,2019

Macro overview Banking overview Q2’19

The US Federal Reserve reduced its funds rate in Jul'19

for the first time since 2008

The Fed reduced its benchmark interest rate by 25 bps to

2.25% in Jul’19 and indicated the possibility of a

further cut this year to support the record-long US

economic expansion

The move was likely driven by fears of global economic

slowdown, intensifying US-China trade tensions, and

lower inflation

During Q2’19, major initiatives were announced such as

freehold law and launch of Golden Card to boost

economic diversification and stimulate demand in real

estate sector

Despite collective efforts, sector continues to remain under

pressure and may lead to higher delinquencies for banks

The UAE banks’ exposure to sector though declined in Q2’19,

remains at a level which presents a concentration risk

19.9

20.621.0

21.8

20.3

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

Real Estate & Construction as % of Total Loans5*

1.82.0

2.32.5 2.5 2.5

Q1

'18

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

US Fed Funds Rate2, %

The top ten UAE banks reported steady performance in top line during Q2’19 but well below the 2018 average of 5.6%, as the economy continued to recover at a slow pace

Major banks including FAB, ENBD, and DIB reported significant impairments, averaging 12.9%, which adversely impacted the bottomlines

For the rest of 2019, margins are likely to stay under pressure due to rate cut in Jul’19 and expected cut in Sep’19

Downward revisions in interest-bearing deposits (~47% of bank total deposits) are likely to reduce cost of funding and ease pressure from lower yields

In Q1'19 GDP grew by 2.2% YoY, backed by steady performance in non-oil sector, which was up 1.6% YoY

The GDP is projected to grow by 2.0% in FY19 primarily driven by a robust government spending, policy reforms, and healthy private sector performance

The average Q2’19 Emirates NBD Purchasing Managers’ Index (PMI) stood at the highest level since Q2’14 as private sector gained momentum in the last two quarters

7.35.8

7.0

0.5

6.5

3.0

-0.2

6.9

0.7

-0.6

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

UAE Bank’s Profitability4, %*

Revenue % QoQ Net Income % QoQ

1.7

2.2 2.2 2.0

1.6 2.0

3.3

2018

Q1

'19

Q2

'19

E

Q3

'19

E

Q4

'19

E

2019E

2020F

UAE GDP Growth Rate1, %

M2, one of the best indicators for the availability of

liquidity in the economy, registered a large increase of 1.7%

YoY in Q2’19

M2 was up primarily because of quarterly increase in

non-government resident deposits, which jumped 1.5%

YoY to AED 1,273.7bn

The YTD average oil price of about $66 per barrel is close to

the UAE's 2019 fiscal break even level of $65 per barrel,

which is expected to support the fiscal balances

The pace of M&A activity could slowdown owing to less-

supportive ownership structures i.e. banks with lesser

common owners

However increasing regulatory requirements, digital spending,

and competition are likely to support the case for

consolidation in the sector

During Q2’19 ADCB, UNB, and Al-Hilal Bank merged

to create the #3 bank in the country with AED 416bn

of assets

3.7

-3.0

-3.1

0.3 5

.4

-0.8

1.4

0.5

-2.3

1.3 1.5 1.72

.7

1.8

0.7 1

.4 1.8

0.8

Q1

'18

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

E

UAE Money Supply3, %

M1 M2 M3

0

2

4

6

8

0

5,000

10,000

15,000

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

UAE Banking M&A Deals6

Deal Value AED mn # of deals

4

Pulse: NIMs up marginally amid tightening liquidity conditions

Note 1: QoQ stand for quarter over quarter

Note 2: Growth in loans & advances and deposits were presented QoQ instead of YoY

Note 3: Quarterly income was used in the calculation of operating income growth

Source: Financial statements, Investor presentations, A&M analysis

Metric Q1’19 Q2’19 Q2’18 Q3’18 Q4’18 Q1’19 Q2’19

SizeLoans and Advances Growth (QoQ) 1.5% 7.7%

Deposits Growth (QoQ) -0.5% 8.5%

Liquidity Loan-to-Deposit Ratio (LDR) 88.3% 87.6%

Income &

Operating

Efficiency

Operating Income Growth (QoQ) -0.5% 4.3%

Operating Income / Assets 3.6% 3.6%

Non-Interest Income(NII) / Operating Income 32.6% 31.5%

Yield on Credit (YoC) 7.1% 7.2%

Cost of Funds (CoF) 2.1% 2.2%

Net Interest Margin (NIM) 2.5% 2.5%

Cost-to-Income Ratio (C/I) 31.8% 32.9%

RiskCoverage Ratio 108.6% 113.8%

Cost of Risk (CoR) 0.8% 0.9%

Profitability

Return on Equity (RoE) 15.6% 14.7%

Return on Assets (RoA) 1.9% 1.8%

Return on Risk-Weighted Assets (RoRWA) 2.8% 2.6%

Capital Capital Adequacy Ratio (CAR) 17.4% 17.6%

Key Trends of Q2’19

1

2

3

4

5

6

7

8

The volatility seen in bank size for Q2’19 was driven by

the consolidation of UNB and Al-Hilal Bank into ADCB

ROA declined by 1bp due to lower profit margins.

The CAR improved marginally due to improvement in

risk weighted assets

The RoE for Q2’19 was mainly impacted by

consolidation of ADCB, UNB and Al-Hilal, which

resulted in 67% increase in ADCB’s equity compared

to 2.5% increase in net income

The CoR is up marginally as Net Loan Loss provisions

increased during the quarter

The increase in C/I ratio was primarily due to ADCB’s

consolidation with UNB & Al-Hilal bank, which

increased from 34.9% to 40.2%

NIM remained stable during the period

The operating income was negatively impacted by

increased impairment charges at leading banks (64%

of total impairments) and higher cost of funding

Excluding ADCB impact QoQ growth in deposits

(2.8%) exceeded L&A growth (1.6%)

Improved Stable Worsened

5

Muted L&A growth puts pressure on margins amid rising deposits

Note: MS stands for market share

Source: Financial statements, Investor presentations, A&M analysis

** Excluded ADCB due to higher ratios driven by consolidation of Al-Hilal bank 6

Excluding ADCB banks maintained

steady QoQ growth with deposits (up

2.8%) and L&A (up 1.6%)

RAK bank reported the highest

deposits growth of 9.7% and increase

in loans & advances of 2.4%

Mashreq, SIB, DIB and ADIB deposits

declined by 3.8%, 1.9%, 1.4% and

0.8%, respectively. However, for the

same banks L&A increased by 1.2%,

1.0%, 3.8% and 1.0%, respectively

leading to tight liquidity position

KEY TAKEAWAYS**

L&A Growth QoQ (%)

Deposits Growth QoQ (%)

Lost Depositing &

Financing MS

Gained Financing MS

Gained Deposits MS

Gained Deposits &

Financing MS

Q2’19 Av

2.8%

1.6%

1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

(6.0) (4.0) (2.0) - 2.0 4.0 6.0 8.0 10.0 12.0

Loans to Deposits Ratio (%)

Q1’19 AvQ1’19

Q2’19 AvQ2’19

87.8%

86.8%

Liquidity conditions seemingly tightened amid slowing deposit growth for select banks

Excluding ADCB, LDR decreased to

86.8% in Q2’19 from 87.8% of Q1’19;

the decrease was primarily attributable

to lower growth in L&A (1.6%) versus

deposits growth (2.8%)

However the LDR for DIB, Mashreq,

and CDB increased sharply to the

range of 90%-100% as these banks

witnessed increase in L&A against

falling deposits

Note: The green zone is an area of healthy liquidity

Source: Financial statements, A&M analysis

** Excluded ADCB due to higher ratios driven by consolidation of UNB and Al-Hilal bank 7

KEY TAKEAWAYS**

1

Total Asset (AED Bn)

70

75

80

85

90

95

100

105

110

115

- 100 200 300 400 500 600 700 800

Millions

Operating income largely flat amid rising costs

Note: Some numbers might not add up due to rounding

Source: Financial statements, investor presentations, A&M analysis 8

The 4.3% increase in operating income

was primarily driven by ADCB which

reported a 26.8% QoQ increase in NII

The increase in NII for ADCB was due

to consolidation of UNB and

Al-Hilal bank in its Q2’19 earnings

Excluding ADCB’s consolidation

impact, the operating income improved

marginally by 1.4%

KEY TAKEAWAYS

19.2 19.3

20.3 20.2

21.0

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

5.8 5.6 5.7 6.6 6.6

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

13.5 13.7

14.6

13.6

14.4

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

Quarterly NII

(AED Bn)

Quarterly Operating Income

(AED Bn)

Quarterly Net Fee commission and other

Operating Income (AED Bn)

+


2

NIM improved marginally as yields on credit edged-up

Note: Relation between elements above represents a functionality and not necessarily an exact mathematical formula

Source: Financial statements, Investor presentations, A&M analysis 9

NIM improved marginally by 3bps in

Q2‘19 to 2.48% over Q1’19

The improvement was largely driven by

increase in loans and advances, and a

stabilized yield on credit

The increased competition for deposits

and tighter liquidity continue to push up

the cost of funds

KEY TAKEAWAYSYield On Credit

(Quarterly Annualized)

Net Interest Margin


Cost of Funds


–

2.6% 2.6%2.7%

2.5% 2.5%

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

1.7% 1.8% 1.9% 2.1% 2.2%

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

6.5%6.8%

7.1% 7.1% 7.2%

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

88.2%87.3%

86.5%

88.3%87.6%

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

Loan-to-Deposit Ratio (LDR) x

3

1.7

2.7

2.4

2.8

2.7

3.0

2.6

5.3

2.9

3.0

1.8

2.6

2.6

2.8

2.7

3.1

2.5

5.1

3.0

3.1

Mixed trend seen in NIM for the coverage universe

Half of the banks within coverage

universe witnessed an improvement

in NIM

FAB, ADIB, SIB, ADCB, and EIB

witnessed an expansion ranging from

0.05% to 0.23% in NIM in Q2’19

The anticipated US Fed funds rate cut

in July’19 impacted loan pricing in

Q2’19 for some banks



KEY TAKEAWAYSNet Interest Margin (%)


2.5%

2.5%0.07

-0.06 0.23 -0.09 -0.030.05

-0.13

0.080.10

-0.13

Q1’19 Q1’19 Av Q2’19 AvQ2’19

3

6.5 6.4 6.7 6.4 6.9

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

C/I ratio excluding ADCB improved during the quarter



Increase in C/I ratio was primarily

attributable to consolidation of UNB and

Al-Hilal bank into ADCB

The consolidation resulted in 46.3%

higher SG&A cost for the bank which

impacted overall coverage cost pushing

up the C/I ratio

Excluding ADCB, C/I ratio was 31.7%

for Q2’19 as compared with 31.4% in

the previous quarter

KEY TAKEAWAYS


Quarterly Operating Expenses

(AED Bn)

Cost to Income Ratio

(%, Quarterly Annualized)

Quarterly Operating Income

(AED Bn)

/

19.2 19.3 20.3 20.2 21.0

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

33.6% 33.4% 32.9%

31.8%32.9%

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

4

26

.6

29

.4

34

.9

26

.0

41

.5

45

.2

26

.9

38

.4

30

.3

40

.7

26

.5

29

.8

40

.2

25

.1

44

.2

45

.6

31

.1 3

9.9

29

.9

40

.8

-0.09

0.39

5.35

-0.83

2.700.32

1.46

-0.37

0.07

4.16

Rising staff costs pushed the SG&A expenses up for most banks

Seven banks from the coverage

universe, witnessed increase in their

C/I Ratios

ADCB, CBD and Mashreq exhibited the

highest increase of 5.3%, 4.2%, and

2.7%, respectively in C/I ratio

The increase in ADCB’s C/I ratio was

primarily attributable to 46% increase in

SG&A due to consolidation impact

The C/I ratio declined for FAB, SIB,

and DIB by 0.1%, 0.4%, and 0.8%

respectively

Note: Scaling and some numbers might not add up due to rounding


KEY TAKEAWAYSCost to Income Ratio (%, Quarterly)


32.9%

31.8%

4

Q1’19 Q1’19 Av Q2’19 AvQ2’19

Cost of Risk increased due to increase innet loan loss provisions



The CoR was marginally up at 0.9% as

banks increased their net loan loss

provisions by 15.0% in the quarter

The CoR is likely to increase further on

account of pressure seen in the real

estate, hospitality, and retail sector

amid softening economic conditions

KEY TAKEAWAYSQuarterly Net Loan Loss Provisions

(AED Bn)

Cost of Risk

(%, Quarterly Annualized)

Average Gross Loans

(AED Bn)

/

0.7%0.7%

0.8% 0.8%

0.9%

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

2.4 2.5 2.6 2.6 3.0

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19

1,325 1,351 1,356

1,379

1,481

Q2'18 Q3'18 Q4'18 Q1'19 Q2'19


5

44.0

63.5

75.6

91.6

142.5

91.6

156.9

398.8

1.0

(16.7

)

49.6

71.8

99.9

97.9

118.9

77.8

112.0

356.9

23.8

127.4

5.538.36 24.21

6.37

-23.62

-13.84

-41.93

22.82

144.14-44.95

Cost of Risk improved for four of the top ten banks

CBD, RAK, Mashreq, and ADIB banks

reported the highest decline in CoR

of 45 bps, 42 bps, 24bps, and

14bps, respectively

EIB, ADCB, and SIB witnessed the

highest increase in CoR of 144bps,

24bps, and 21bps, respectively



KEY TAKEAWAYSCost of Risk (bps) – net of reversals

85.2

77.4

5


Q1’19 Q1’19 Av Q2’19 AvQ2’19

0

7

13

20

26

- 100 200 300 400 500 600 700 800 900

Millions

RoE increased for six out of ten banks

The Q2’19 reported RoE for the

coverage companies was 14.7%

compared with 15.6% in Q1’19

The consolidation of UNB and Al-Hilal

bank into ADCB increased ADCB’s

equity by 66.5% and net income by

2.5% which largely impacted the

coverage RoE in Q2’19

In addition, higher net impairments

impacted EIB’s RoE, which declined

to 13.4% in Q2’19 from 22.1%

during Q1’19

Excluding ADCB, RoE for Q2’19

declined to 15.4% from 15.8% in Q1’19


KEY TAKEAWAYS

Return on Equity (%)

Q1’19 Q1’19 Av

Q2’19 AvQ2’19

6

15.6

14.7

Asset Size (AED Bn)

Overall a lackluster quarter but earnings likely to stay under pressure

Note: All the charts above are based on L3M numbers

Op Income stands for Operating Income

Scaling and some numbers might not add up due to rounding


RoE declined to 14.7%, driven by an

increase in CoR and higher

provisioning during Q2’19

NIM continues to be under pressure

amid slowing loan disbursals and

increasing deposits

Tighter liquidity conditions and

downward revisions to interest rates

are likely to put pressure on banks’

margins going forward

KEY TAKEAWAYS

Net Interest Margin (%) Cost of Funds (%)

Non-Interest Income /

Op. Income (%)

Yield On Credit (%)

LDR (%)

Return on Equity (%)

16.2

15.3 14.7

15.6

14.7

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

Return on Assets (%)

1.9

1.9

2.0 1.9

1.8

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

Assets / Equity (x)

7.5 7.6

7.5

7.7

7.6

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

30.0 29.1

28.2

32.6 31.5

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

2.6 2.6 2.7 2.5 2.5

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

6.5 6.8

7.1 7.1 7.2

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

1.7 1.8 1.9 2.1 2.2

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

88.2

87.3

86.5

88.3 87.6

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19


Cost / Income Ratio (%)

Cost of Risk (%)

Op. Income / Assets (%)

33.6 33.4 32.9

31.8

32.9 Q

2'1

8

Q3

'18

Q4

'18

Q1

'19

Q2

'19

0.7 0.7 0.8 0.8

0.9

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

3.6 3.6 3.6 3.6 3.6

Q2

'18

Q3

'18

Q4

'18

Q1

'19

Q2

'19

7

GCC Banking Consolidation

GCC list of M&A transactions in banking sector YTD – June’19

Announcement

DateTarget Company

Target

CountryAcquirer Company % Sought

Consideration

(AED Mn)Deal Status

29-Jan-19Union National

Bank PJSCUAE Abu Dhabi Commercial Bank PJSC 100% 11,531 Completed

29-Jan-19 Al-Hilal Bank PJSC UAE Abu Dhabi Commercial Bank PJSC 100% NA Completed

15-Mar-19 Banque Saudi Fransi Saudi ArabiaOlayan Investments, Ripplewood

Advisors LLC5% 1,609 Completed

03-Apr-19Oman United Exchange

Co LLCOman Private Investor 25% NA Completed

10-Apr-19 Invest bank PSC UAEEmirate of Sharjah United

Arab Emirates50% 989 Completed

21-Apr-19 HSBC Saudi Arabia Ltd Saudi Arabia HSBC Holdings PLC 2% 31 Pending

07-Apr-19 Noor Bank PJSC UAE Dubai Islamic Bank PJSC 100% NA Proposed

12-May-19 Gulf Bank KSCP Kuwait Alghanim Industries Ltd 16% NA Completed

20-Jun-19 Warba Bank KSCP KuwaitKuwait & Middle East Financial

Investment Co KSCP- NA Proposed

Source: Bloomberg 17

GLOSSARY

18

Glossary

Metric Abbreviation Definition

SizeLoans and Advances Growth QoQ growth in EOP net loans and advances for the top 9

Deposits Growth QoQ growth in EOP customer deposits for the top 9

Liquidity Loan-to-Deposit Ratio LDR (Net EOP loans and advances / EOP customer deposits) for the top 9

Income &

Operating

Efficiency

Operating Income Growth QoQ growth in aggregate quarterly operating income generated by the top 9

Operating Income / Assets (Annualized quarterly operating income / quarterly average assets) for the top 9

Non-Interest Income /

Operating Income(Quarterly non-interest income / quarterly operating income) for the top 9

Net Interest Margin NIM(Aggregate annualized quarterly net interest income) / (quarterly average earning assets) for the top 9

Earnings assets are defined as total assets excluding goodwill, intangible assets, and property and equipment

Yield on Credit YoC (Annualized quarterly gross interest income / quarterly average loans & advances) for the top 9

Cost of Funds CoF(Annualized quarterly interest expense + annualized quarterly capital notes & tier I sukuk interest) / (quarterly average interest

bearing liabilities + quarterly average capital notes & tier I sukuk interest) for the top 9

Cost-to-Income Ratio C/I (Quarterly operating expenses / quarterly operating income) for the top 9

RiskCoverage Ratio (Loan loss reserves / non-performing loans) for the top 9

Cost of Risk CoR (Annualized quarterly provision expenses net of recoveries / quarterly average gross loans) for the top 9

Profitability

Return on Equity RoE(Annualized quarterly net profit attributable to the equity holders of the banks – annualized quarterly capital notes & tier I sukuk

interest) / (quarterly average equity excluding capital notes) for the top 9

Return on Assets RoA (Annualized quarterly net profit / quarterly average assets) for the top 9

Return on Risk-Weighted Assets RoRWA (Annualized quarterly net profit generated / quarterly average risk-weighted assets) for the top 9

Capital Capital Adequacy Ratio CAR (EOP tier I capital + tier II capital) / (EOP risk-weighted assets) for the top 9

Note: LTM and EOP stand for last twelve months and end of period respectively 19

Glossary (cont’d.)

Note: Banks are sorted by assets size

* As on 30th June 2019 20

Bank Assets (AED Bn)* Abbreviation Logo

First Abu Dhabi Bank 775.0 FAB

Emirates NBD 537.8 ENBD

Abu Dhabi Commercial Bank 416.7 ADCB

Dubai Islamic Bank 228.2 DIB

Mashreq Bank 136.4 Mashreq

Abu Dhabi Islamic Bank 124.7 ADIB

Commercial Bank of Dubai 78.4 CBD

Emirates Islamic Bank 61.1 EIB

National Bank of Ras Al-Khaimah 57.3 RAK

Sharjah Islamic Bank 44.3 SIB

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