A Perspective on UAE Banking Performance and Lessons for the Future

The UAE banking sector is one of the most dynamic in the region, with major institutions continually adapting to both local and global shifts in the financial landscape. Over the past three years, UAE banks have seen significant changes in key financial metrics due to factors such as digital transformation, the global pandemic, and evolving customer expectations. By analyzing key financial metrics of the top 20 UAE banks, we can derive insights that help identify which areas have been growing exponentially, which are growing steadily, which are stagnant, and which are lagging compared to global benchmarks and best practices.

Overview of Key Metrics for Analysis

To assess the growth and performance of UAE banks, we focus on the following key financial metrics:

1. Net Profit Growth
2. Total Assets
3. Revenue Growth (Interest and Non-Interest)
4. Loan Growth and Non-Performing Loans (NPLs)
5. Return on Equity (ROE) and Return on Assets (ROA)
6. Cost-to-Income Ratio (CIR)
7. Capital Adequacy Ratio (CAR)
8. Digital Banking Adoption and Efficiency Metrics
9. Liquidity and Deposit Growth

The performance of these metrics helps us understand where the banks are thriving and where there might be challenges, as well as how they compare to global financial benchmarks.

1. Exponentially Growing Areas

These areas have seen rapid growth in the past three years, largely driven by the shift to digital banking, demand for financial inclusion, and increased foreign investment in the UAE's financial markets.

1a. Net Profit Growth and Revenue

• Key Insight: Several UAE banks have seen exponential growth in net profits, particularly the top-tier banks like First Abu Dhabi Bank (FAB), Emirates NBD, and Dubai Islamic Bank (DIB). This is largely due to strong revenue from digital banking, wealth management, and corporate banking services.
• Metrics: FAB and Emirates NBD saw a 20-25% rise in net profit over the last 3 years, driven by robust growth in their retail banking and investment banking sectors. Non-interest income, including fees from wealth management, investment banking, and digital payment services, has been a key driver of profitability. Global Benchmark: Globally, large banks like HSBC and JPMorgan Chase have also seen substantial growth in non-interest income, which demonstrates the shift away from traditional interest-based revenue models. UAE banks are on par or ahead in their non-interest income performance, outperforming banks in Western markets.

1b. Digital Banking and Digital Payments Growth

• Key Insight: The digitalization of banking services has been a key growth driver. Banks such as Emirates NBD and ADCB have made considerable progress in digital banking services, such as mobile apps, online loan processing, and AI-based customer support (chatbots, etc.).
• Metrics: Over 30% year-on-year growth in digital transactions and mobile app adoption. Emirates NBD reports that 70% of their customer interactions are now digital. Global Benchmark: This is in line with global trends seen in leading digital banks like BBVA in Spain or U.S. Bank, which have successfully integrated AI, chatbots, and seamless digital banking solutions into their business models.

2. Steady Growth Areas

These areas have experienced consistent, steady growth over the past few years, reflecting the overall health and stability of the UAE banking sector.

2a. Total Assets

• Key Insight: Total assets of UAE banks have grown steadily, with an increase in both domestic and international business. The banking sector’s growth reflects strong demand for financial services, bolstered by strong foreign investment and an expanding customer base.
• Metrics: Total assets for UAE banks have increased by 5-7% annually on average in the past three years. FAB, Mashreq Bank, and Abu Dhabi Commercial Bank (ADCB) consistently lead in total assets, each surpassing AED 400 billion. Global Benchmark: While global banks like Deutsche Bank and BNP Paribas have larger asset bases, UAE banks are growing at a faster rate in relation to the region's GDP and local demand.

2b. Return on Equity (ROE) and Return on Assets (ROA)

• Key Insight: Despite challenging market conditions, UAE banks have maintained a steady ROE (ranging from 10-15% for the largest banks) and ROA (0.9-1.2%). These returns demonstrate efficient capital management, relatively low cost-to-income ratios, and a strong market position in both retail and corporate banking sectors.
• Metrics: FAB and Emirates NBD consistently report ROEs above 12%, which is considered a benchmark for strong performance. Global Benchmark: ROEs of 12-15% are considered strong by global standards. For example, U.S. banks like Wells Fargo and Citigroup report ROEs in the 10-14% range, which is comparable to top UAE banks.

3. Stagnant Areas

These are areas that have not shown significant growth over the past few years and are facing challenges in keeping up with evolving market conditions.

3a. Loan Growth and Non-Performing Loans (NPLs)

• Key Insight: While total loan growth has been steady, there has been a noticeable increase in non-performing loans (NPLs) due to the economic pressures of the pandemic and regional economic challenges. Many banks, especially mid-tier ones, are struggling with asset quality and loan growth.
• Metrics: NPL ratios for banks like Sharjah Islamic Bank and Al Hilal Bank have been trending upwards, exceeding 4-5%. Loan growth for banks like RAKBANK has been stagnant, as growth in corporate loans has slowed in recent years. Global Benchmark: Globally, the banking sector has been facing similar challenges with NPLs, especially in emerging markets, where average NPL ratios hover around 3-5%. However, the rise in NPLs in the UAE is somewhat higher than in other GCC nations, where more robust economic recovery is underway.

3b. Cost-to-Income Ratio (CIR)

• Key Insight: While some banks have effectively reduced their cost-to-income ratios (CIR) through digital transformation and cost-cutting initiatives, other banks, particularly smaller institutions, have seen stagnant or rising CIRs. Inefficiencies in branch networks and high operational costs have been barriers to further improvement.
• Metrics: Banks like Ajman Bank and United Arab Bank continue to face high CIRs (over 50%), indicating inefficient cost management and reliance on traditional banking services. Global Benchmark: The global benchmark for a healthy CIR is under 45%. Leading banks globally, such as HSBC and JPMorgan, maintain CIRs closer to 40%, driven by large-scale digital initiatives and streamlined operations.

4. Lagging Areas

These areas have underperformed compared to global standards and best practices, potentially hindering banks from reaching their full potential.

4a. Digital Banking Adoption and Innovation

• Key Insight: While some UAE banks have embraced digital transformation, others have lagged behind in adopting new technologies, particularly in areas such as blockchain, AI, and robo-advisory services. Banks that have not fully embraced these technologies risk falling behind competitors in terms of customer experience and operational efficiency.
• Metrics: Banks like National Bank of Ras Al Khaimah (RAKBANK) and Al Masraf have been slower in their adoption of AI and blockchain technologies compared to Emirates NBD and Mashreq Bank, which have robust digital infrastructures. Global Benchmark: Globally, banks in markets like the U.S. and Europe are significantly ahead in areas like AI-driven customer service (e.g., Bank of America’s Erica), blockchain for payments, and the integration of open banking platforms. UAE banks need to accelerate in this space to remain competitive.

4b. Capital Adequacy and Risk Management

• Key Insight: While UAE banks are generally well-capitalized, some smaller banks have struggled to maintain sufficient capital buffers, especially in light of the increased volatility caused by global economic uncertainty.
• Metrics: Banks like National Bank of Fujairah and Al Khaliji report lower capital adequacy ratios (CAR) compared to industry leaders like FAB (which consistently reports CARs above 16%). Global Benchmark: In comparison, global banks such as JPMorgan maintain CARs of 12-15%, which positions them well to manage risk in a volatile global environment. UAE banks, particularly mid-tier ones, need to focus on improving their capital resilience.

Conclusion

In summary, the UAE banking sector has witnessed exponential growth in areas such as net profit, non-interest income, and digital banking. However, there are areas of stagnation and underperformance, particularly related to loan growth, NPLs, and cost efficiency. To stay competitive globally, banks must focus on accelerating digital transformation, reducing costs, and improving asset quality.

For the next three years, UAE banks should prioritize the following action steps:

1. Foster Digital Transformation: Expand AI, blockchain, and open banking initiatives.
2. Enhance Asset Quality: Address rising NPLs through proactive risk management strategies.
3. Improve Operational Efficiency: Focus on reducing CIR through automation and streamlining operations.
4. Strengthen Capital Resilience: Boost capital adequacy to mitigate risks during economic downturns.

By focusing on these key areas, UAE banks can drive sustainable growth, improve global competitiveness, and future-proof their businesses.