UAE Banking Pulse Quarter 2, 2021

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UAE Banking Pulse

Quarter 2, 2021

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FOREWORD Alvarez & Marsal Middle East Limited (A&M) is delighted to publish the Q2’21 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 sector. 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 metrics has been updated, where required, to reflect appropriate comparative information.

Q2’21 financial results of the top UAE banks suggest modest rebound in profitability and balance sheet metrics. L&A growth turned positive (+1.9% QoQ), after declining for three consecutive quarters. Dubai’s mortgage market has showed robust signs of improvement, with number of mortgage issuances almost doubling between December 2020 and June 2021. Asset quality (NPL/ net L&A) decreased to 6.2%, after increasing for six consecutive quarters.

The RoE increased by +1.1% points QoQ to 10.9% as net income increased ~12% QoQ, on higher operating income and reduced provisioning.

We hope 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 herein

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Co-Authors

3

 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

 Former CEO of banks in the UAE & Kenya

Asad Ahmed

Co-Author, Managing Director Head of ME Financial Services

Sumit Mittal

Co-Author, Senior Director ME Financial Services

 12+ years of experience in consulting and banking

 Focuses on strategy formulation & implementation, operating model design & execution, performance improvement and cost transformation

[email protected] Phone: +97145671065

CONTACT

DETAILS

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UAE Macro & Sector Overview

1 IMF, ²US Board of Federal Reserve, ³UAE Central Bank, ⁴Bloomberg & A&M Analysis, ⁵based on data of 8 banks, weighted average exposure of all banks; for consistency purpose data for all banks is captured from IR presentations ^*Data

for top ten UAE banks by asset size as of June 30^th2021 4

Macro overview Banking overview Q2’21

 In July’21 the US Fed Chair announced that the US labor market requires to show sizeable improvement before the Fed starts exploring rate hike options

 The overnight EIBOR saw a marginal decrease in Q2’21 by

~1.7 bps to 0.09% compared to Q1’21

 In June’21, the UAE’s central bank raised its base rate for overnight deposits by 5 bps to 0.15%, in line w ith the US Fed

 The UAE banks’ exposure to the real estate and construction sectors remained stable at 21.8%

 The country’s real estate sector is seen to be bouncing back and w ill continue to sustain the momentum in H2’21 due to visa reforms, vaccination drive and government measures to spur demand and manage over supply

21.7 21.4 22.3 21.8 21.8

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

Real Estate & Construction as % of Total Gross Loans⁵

0.3 0.3 0.3 0.3 0.3

0.1 0.1 0.1 0.1 0.1

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

US Fed Funds Rate², EIBOR, %

US Fed rate movement Overnight EIBOR

 Total interest income of top ten UAE banks increased by 0.3% in Q2’21 after declining for five consecutive quarters

 Aggregate net income increased by ~12% QoQ, mainly supported by low er funding costs, increased cost efficiencies and low er impairments

 Consequently, RoE (10.9%) is back to the levels seen during December’19

 In July’21, IM F reiterated its GDP growth outlook for UAE at 3.1% in FY’21 and 2.6% for FY’22. Meanw hile, the central bank expects the economy to grow by 2.4% in FY’21

 Average Q2’21 UAE’s Purchasing Managers’ Index (PMI) increased to 52.4 compared to 51.5 in Q1’21, due to increase in business activity and new orders

 UAE central bank announced its strategy w hich includes issuance of a digital currency and driving digital

transformation in the nation’s financial services sector by utilizing artificial intelligence and big data solutions

1.7

(5.9)

3.1 2.6 2.6

2019 2020E 2021F 2022F 2023F

UAE GDP Growth Rate¹, %

 M2 money supply decreased by 1.9% during Mar’21 - May’21 to AED 1,458.5bn. It increased by 0.5% YoY

 M2 money supply decreased as quasi monetary deposits fell by 3.9% betw een Mar’21 and May’21

 M1 money supply increased by 0.6% during Mar’21 - May’21 to AED 646.4bn. On an annual basis, M1 increased by 14.5%

 M3 money supply decreased by 0.9% during Mar’21 - May’21. On an annual basis, M3 increased by 0.1%

 Emirates NBD had entered into an agreement w ith Eradah Capital to sell a controlling interest in Dubai Bank. The deal is expected to be completed by the end of 2021

 The central bank announced a new rule w here domestic banks are required to have a minimum paid-up capital of AED 2.0bn by 2023

 The regulation is expected to drive the next w ave of consolidation in the domestic banking sector. MSQ, NBF and RAK are among the top banks w hose paid-up capital is less than AED 2.0bn

2.7 1.9 5.6 7.1 0.6

0.2 0.7 0.7 0.6 -1.9

2.2 3.0 -2.0 -0.2 -0.9

-5 .0 -3 .0 -1 .0 1 .0 3 .0 5 .0 7 .0 9 .0

Q2'20 Q3'20 Q4'20 Q1'21 May'21

M1 M2 M3

UAE Money Supply^3,(%, Quarterly)

-12.7% -7.7%

-1.7%

-4.1%

21.2% 0.3%

-3.0%

-40.1%

84.8%

11.5%

-6 0 .0 % -4 0 .0 % -2 0 .0 % 0 .0 % 2 0. 0%

4 0. 0%

6 0. 0%

8 0. 0%

1 00 .0 %

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

UAE Banks’ Profitability, %⁴

Interest Income % QoQ Net Income % QoQ

0.0 1.0 2.0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

UAE Banking M&A Deals

# of deals

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Pulse: Profitability Metrics of the UAE Banking Sector Improve Further, as Interest Income Increase and Impairments Decline

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 Q1’21 Q2’21 Q2’20 Q3’20 Q4’20 Q1’21 Q2’21

Size Loans and Advances (L&A) Growth (QoQ) -0.7% 1.9%

Deposits Growth (QoQ) 1.2% 2.1%

Liquidity Loan-to-Deposit Ratio (LDR) 84.5% 84.4%

Income &

Operating Efficiency

Operating Income Growth (QoQ) 1.3% 2.8%

Operating Income / Assets 2.9% 2.9%

Non-Interest Income(NII) / Operating Income 34.9% 34.4%

Yield on Credit (YoC) 5.1% 5.1%

Cost of Funds (CoF) 1.2% 1.1%

Net Interest Margin (NIM) 2.0% 2.0%

Cost-to-Income Ratio (C/I) 33.1% 33.0%

Risk Coverage Ratio 91.0% 92.3%

Cost of Risk (CoR) 1.3% 1.2%

Profitability

Return on Equity (RoE) 9.8% 10.9%

Return on Assets (RoA) 1.1% 1.2%

Return on Risk-Weighted Assets (RoRWA) 1.7% 1.8%

Capital Capital Adequacy Ratio (CAR) 17.4% 17.0%

Key Trends of Q2’21 1

2 3

4

5 6 7 8

L&A (+1.9% QoQ) increased after declining for the three consecutive quarters. Deposits increased by 2.1% QoQ

RoRWA increased in line with higher net income, while the capital adequacy ratio declined from 17.4%

to 17.0%

RoE rebounded to reach double-digit levels (10.9%), as net income increased 11.5% QoQ

CoR declined to 1.2% due to 9.3% QoQ decrease in impairment allowances. Coverage ratio increased to 92.3% from 91.0%

C/I ratio decreased to its lowest level in past eight quarters to 33.0% as banks continue to optimize their overheads

NIM remained flat at 2.0%, as industry-wide rates continue to remain low in Q2’21

Operating income increased 2.8% QoQ, supported by reduced cost of borrowing and higher investment income

LDR decreased for the second quarter to 84.4% from 84.5%, as deposits increased more than L&A

Improved Stable Worsened

5

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Higher Operating Income and Lower Impairments Supported Net Income Growth

Net income bridge – AED Bn

Source: Financial statements, Investor presentations, A&M analysis 6

 Aggregate net income increased 11.5%

QoQ to AED 9.0bn

 Higher operating income (+2.8% QoQ) and lower impairments (-9.3% QoQ) were among the key drivers for net income growth

 Operating income grew on account of higher other income (+3.3% QoQ) and lower funding costs (-6.4% QoQ)

 However, this was partially offset by a marginal decline in net fee income

 Impairments reduced as

macroeconomic environment continued to improve and UAE customers

payback their dues KEY TAKEAWAYS

8.09 0.48 9.02

(0.01)

0.11 (0.17)

0.50

0.03 Q1'21 Net interest

income Net fee &

commission income

Other operating

income

Operating

expenses Impairments Taxes Q2'21

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-2.0 0.0 2.0 4.0 6.0 8.0

-2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

CBD Outperformed its Peers on L&A and Deposit Growth

Note: MS stands for market share

 Top ten UAE banks’ L&A increased by 1.9% QoQ while the deposits increased by 2.1% QoQ

 CBD reported highest increase in L&A (+6.4% QoQ), driven by strong uptake in public (+43% QoQ) and mortgage (+19% QoQ) lending

 FAB’s L&A rose 5.5%, driven by higher domestic, international corporate and trade-related lending

 CBD also reported the highest increase in deposits (+12.6% QoQ), supported by growth in government (+32% QoQ) and corporate (+12% QoQ) deposits KEY TAKEAWAYS

L&A Growth QoQ (%)

Deposits Growth QoQ (%)

Lost Deposits & Financing MS Gained Financing MS

Gained Deposits MS Gained Deposits & Financing MS

Q2’21 Av

2.1%

1.9%

1

(8)

65 70 75 80 85 90 95 100 105

0 100 200 300 400 500 600 700 800 900 1000

Aggregate LDR Remained Largely Stable During the Quarter

 Aggregate LDR decreased to 84.4% in Q2’21 compared to 84.5% in Q1’21

 CBD (-5.4% points QoQ) reported the highest decline in LDR to 92.8%

 FAB (+4.9% points) and SIB (+1.0%

points) reported the highest increase in their LDR during the quarter

 Despite an increase, FAB’s LDR is the lowest among its major peers

Note: The green zone is an area of healthy liquidity

Source: Financial statements, A&M analysis 8

KEY TAKEAWAYS

2

Loans to Deposits Ratio (%)

Total Asset (AED Bn)

Q1’21 Av Q1’21

Q2’21 Av Q2’21

84.4%

84.5%

(9)

Operating Income Continued to Grow for the Third Consecutive Quarter

Note: Some numbers might not add up due to rounding

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

 Operating income increased by 2.8%

QoQ, driven by 3.5% QoQ growth in net interest income and 1.4% QoQ growth in non-funded income (fee + other operating income)

 This helped in offsetting a marginal (-0.2% QoQ) decline in fee income

 FAB (+18.5% QoQ) reported the highest increase driven by higher fee, FX and investment income

 The bank’s fee income increased on account of strong deal pipeline

execution and trade-related fees

 FX income grew strongly amid substantial trading gains and

portfolio returns from global markets

 ENBD operating income fell 13.4%

QoQ due to lower fee (-14%QoQ) and FX income (-72% QoQ)

KEY TAKEAWAYS

20.5

19.9 20.4 20.7 21.2

1 0 .0 1 2 .0 1 4 .0 1 6 .0 1 8 .0 2 0 .0 2 2 .0 2 4 .0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

5.8 6.1 6.2

7.2 7.3

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

14.7

13.7

14.2

13.5

13.9

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

Quarterly NII

(AED Bn) Quarterly Operating Income

(AED Bn)

Quarterly Net Fee commission and other Operating Income (AED Bn)

+

3

(10)

NIM Appear to Have Stabilize at Around 200 – 210 bps

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

 NIM increased by ~5 bps QoQ to 2.05%

 Yield on credit declined by 1.4 bps QoQ to 5.1%, while cost of funds decreased by 7.2 bps QoQ to 1.1%

KEY TAKEAWAYS

Yield On Credit

(Quarterly Annualized) Net Interest Margin

(%,Quarterly Annualized)

Cost of Funds

(Quarterly Annualized)

–

1.5% 1.3% 1.2% 1.2% 1.1%

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

5.8% 5.3% 5.3% 5.1% 5.1%

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

87.7%

84.1%

86.2%

84.5% 84.4%

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

Loan-to-Deposit Ratio (LDR) x

4

2.26

2.05

2.10

2.00

2.05

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

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1. 20 2. 51 2. 21 2. 30 2. 00 2. 51 2. 10 2. 01 4. 22 2. 49

1. 24 2. 50 2. 41 2. 33 2. 04 2. 54 2. 20 2. 08 4. 22 2. 60

ADCB, CBD and NBF Reported NIM Expansion by 10 – 20 bps; NIM for the Rest was Largely Unchanged

 NIM increased by ~5 bps QoQ to 2.0%

after declining in previous quarter

 Driven by decrease in funding costs

 ADCB reported a 20 bps rise in NIM, on account of higher asset yields (+6 bps QoQ), increased business volumes and lower borrowing cost (-12 bps QoQ)

 ENBD’s NIM declined 1 bps QoQ, on account of lower treasury yields (-6 bps QoQ) and drop in NIM from DenizBank (-1 bps QoQ)

 ENBD continues to have the highest cost of funding for the last 3 quarters (>50% above peer average)

KEY TAKEAWAYS Net Interest Margin (%, Quarterly)

2.00%2.05%

Q1’21 Q2’21 Q1’21 Av Q2’21 Av

4

0.20 0.11

0.04

0.03

0.10 0.07

-0.01 0.03

0.04

0.00

(12)

6.9 6.8

7.5

6.8

7.0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

Cost to Income Ratio Remain Largely Unchanged This Quarter

 C/I ratio decreased marginally to 33.0%

as SG&A expenses grew at a slower pace compared to the operating income

 ADCB (-5.2% points QoQ) reported highest improvement in C/I ratio, driven by lower administration costs (-5%

QoQ)

 Cost rationalization along with

increased digitization exercise were among the key drivers for C/I ratio improvement

KEY TAKEAWAYS

Quarterly Operating Expenses

(AED Bn) Cost to Income Ratio

(%, Quarterly Annualized)

Quarterly Operating Income (AED Bn)

÷

20.5 19.9 20.4 20.7 21.2

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

33.4%

34.3%

36.7%

33.1% 33.0%

3 1. 0%

3 2. 0%

3 3. 0%

3 4. 0%

3 5. 0%

3 6. 0%

3 7. 0%

3 8. 0%

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

5

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30.1 30.3 36.3 27.5 44.0 44.3 27.3 38.2 41.2 31.1

27.9 35.5 33.4 26.4 41.1 43.6 25.3 40.3 41.3 30.3

Efficiency Ratios of ADCB and MSQ Witnessed the Highest Improvement

 Seven of the top ten banks reported improvement in C/I ratio

 ADCB’s C/I ratio improved the most (- 2.9% points QoQ), followed by MSQ (- 2.8% points QoQ)

 ADCB’s operating expenses decreased by just 0.5% QoQ, while MSQ was able to reduce its expenses by 3% QoQ

 FAB’s C/I ratio improved 2.1% points QoQ (expenses up 10% QoQ), as the bank deployed cost saving initiatives and generated synergies from Bank Audi Egypt’s integration

 CBD’s operating expenses increased by

~9% QoQ, while its C/I ratio decreased by 1.9% points

 ENBD’s C/I ratio deteriorated the most by 5.2% points QoQ followed by SIB

(+2.0% points QoQ)

 ENBD’s C/I ratio deteriorated on the back of lower operating income and higher costs

Note: Scaling and some numbers might not add up due to rounding Source: Financial statements, investor presentations, A&M analysis

*Comparison on QoQ basis 13

KEY TAKEAWAYS Cost to Income Ratio (%, Quarterly)

5

Q1’21 Q2’21 Q1’21 Av Q2’21 Av

33.1%

33.0%

-2.1

-2.9

-1.1 -0.8

0.1 -2.8

5.2

2.0 -0.7

-1.9

(14)

129 131 129 125 127 4.8 5.5 5.6 5.8 5.5

-

1 .0 2 .0 3 .0 4 .0 5 .0 6 .0 7 .0 8 .0

-

2 0 .0 4 0 .0 6 0 .0 8 0 .0 1 0 0. 0 1 2 0. 0 1 4 0. 0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

Asset Quality Appears to Have Stabilized After Deteriorating

in 2020; Only Three Banks have Coverage Ratio of 100%+ ^ Aggregate coverage ratio for the banks increased to 92.3% from 91.0%

 UAE banks need to book AED 16.9 bn worth of more provisions (12%

more than FY’20 provisions) to have 100% coverage ratio

 Coverage ratio of MSQ (+12.2% points QoQ) and NBF (+6.7% points QoQ) increased the most

 ENBD reported a fall in coverage ratio from 130.6% in Q1’21 to 127.7% in Q2’21

 Aggregate NPL / net loan ratio declined in Q2’21 after increasing for six

consecutive quarters to reach 6.2%

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

Source: Financial statements, investor presentations, A&M analysis, ¹accumulated allowance for impairment / NPL 14

KEY TAKEAWAYS

Coverage Ratio

¹

and NPL / Net Loans Ratio (%, Quarterly)

Coverage Ratio, % NPL / Net loans, %

6

125 127 123 131 128 6.2 6.4 6.7 6.6 6.8

-

1 .0 2 .0 3 .0 4 .0 5 .0 6 .0 7 .0 8 .0 9 .0

-

2 0 .0 4 0 .0 6 0 .0 8 0 .0 1 0 0. 0 1 2 0. 0 1 4 0. 0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

80 82 79 79 80

4.1 4.0 4.1 4.2 4.1

-

1 .0 2 .0 3 .0 4 .0 5 .0 6 .0 7 .0

-

2 0 .0 4 0 .0 6 0 .0 8 0 .0 1 0 0. 0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

70 67 73 67 69

5.6 6.0 6.6 7.2 6.5

-

1 .0 2 .0 3 .0 4 .0 5 .0 6 .0 7 .0 8 .0

-

2 0 .0 4 0 .0 6 0 .0 8 0 .0 1 0 0. 0 1 2 0. 0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

74 73 70

68 68 4.8 5.1

6.1 6.6 6.8

-

1 .0 2 .0 3 .0 4 .0 5 .0 6 .0 7 .0 8 .0 9 .0

-

2 0 .0 4 0 .0 6 0 .0 8 0 .0 1 0 0. 0 1 2 0. 0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

98

117 126

103 115 5.6 5.4 6.4 6.2 6.0

-

1 .0 2 .0 3 .0 4 .0 5 .0 6 .0 7 .0 8 .0 9 .0

-

2 0 .0 4 0 .0 6 0 .0 8 0 .0 1 0 0. 0 1 2 0. 0 1 4 0. 0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

49 48 52 53 56

8.8 9.4

9.2 9.3 9.3

-

2 .0 4 .0 6 .0 8 .0 1 0 .0 1 2 .0 1 4 .0 1 6 .0 1 8 .0

-

1 0 .0 2 0 .0 3 0 .0 4 0 .0 5 0 .0 6 0 .0 7 0 .0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

72 76 81 83 85

7.3 7.3

7.1 6.9

6.8

6 .4 6 .5 6 .6 6 .7 6 .8 6 .9 7 .0 7 .1 7 .2 7 .3 7 .4

-

2 0 .0 4 0 .0 6 0 .0 8 0 .0 1 0 0. 0 1 2 0. 0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

90 86 94 93 95

4.5 5.0 4.7 4.9 4.8

-

1 .0 2 .0 3 .0 4 .0 5 .0 6 .0 7 .0 8 .0 9 .0 1 0 .0

-

2 0 .0 4 0 .0 6 0 .0 8 0 .0 1 0 0. 0 1 2 0. 0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

65 66

81 77 84

7.9 9.0

10.9 10.9 10.9

-

2 .0 4 .0 6 .0 8 .0 1 0 .0 1 2 .0 1 4 .0

-

2 0 .0 4 0 .0 6 0 .0 8 0 .0 1 0 0. 0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

NPL/Net Loans Ratio (Aggregate)

5.5 5.7 6.1 6.3 6.2

-

1 .0 2 .0 3 .0 4 .0 5 .0 6 .0 7 .0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

(15)

Lower Provisioning by Banks Underline an Improved Credit Outlook

 Aggregate cost of risk decreased by

~13 bps QoQ, as total provisioning decreased ~9.3% to AED 4.8bn

 Provisioning reduced on the back of improving economic situation and as UAE customers continue to repay their dues

 ENBD (-52% QoQ) and RAK (-17%

QoQ) reported the largest decrease in provisioning during the quarter

KEY TAKEAWAYS

Quarterly Net Loan Loss Provisions

(AED Bn) Cost of Risk

(%, Quarterly Annualized)

Average Gross Loans (AED Bn)

÷

^1.42% ^1.31%

2.01%

1.29%

1.16%

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

5.9 5.5

8.4

5.3 4.8

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

1,660 1,664 1,663

1,653

1,685

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

6

(16)

47.1 147.8 113.2 146.6 360.0 61.2 110.8 62.8 439.8 304.2

66.7 71.7 109.3 146.4 385.0 106.5 145.7 104.1 359.9 321.1

Aggregate Cost of Risk Reduced, as ENBD, ADCB and RAK Reported Lower Provisioning

 Aggregate cost of risk fell 12.8 bps QoQ, despite six of the top ten banks reporting increased cost of risk

 RAK (-80.0 bps QoQ) and ENBD (-76.1 bps QoQ) reported the highest decline in cost of risk

 RAK’s cost of risk fell, as the bank reported lower provisioning in its credit card and personal loan portfolio

 ADIB (+45 bps QoQ), SIB (+41 bps QoQ) and CBD (+35 bps QoQ) were among the banks which reported major increase in cost of risk

KEY TAKEAWAYS Cost of Risk (bps) – Net of Reversals

6

Q1’21 Q2’21 Q1’21 Av Q2’21 Av

116.1128.9 19.6

-0.1 -76.1

-3.8 34.9

-80.0 25.1

45.3 41.3

17.0

(17)

0 2 4 6 8 10 12 14 16

0 200 400 600 800 1,000

Aggregate RoE Reaches its Highest Level in Last Five Quarters

 Aggregate RoE improved from 9.8% in Q1’21 to 10.9% in Q2’21, as net

income increased 11.5% QoQ

 Aggregate RoE has moved to be double-digits as the economic conditions continue to improve

 RAK, FAB and DIB reported substantial increase in RoEs as all the three banks have reported sequential increase in net profit

 On the other hand, ADIB reported a decline in RoE (11.7% vs 14.6% in Q1’21), as the bank reported a 75%

increase in provisioning

KEY TAKEAWAYS

Return on Equity (%)

7

Asset Size (AED Bn)

9.8%

10.9%

Q1’20 Av Q1’20

Q2’21 Av Q2’21

(18)

UAE Banking Sector Showing Green Shoots Amid a Fragile Economic Environment

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

 Continued improvement in profitability provides some early signs of recovery in the banking sector

 Central bank’s Q2’21 credit sentiment survey disclosed that the domestic credit demand remains strong across all sections of the economy

 Mortgage market in Dubai remains particularly strong, with a 91%

increase in mortgage completions during YTD June’21

 However, US Fed’s commitment to maintain interest rates at current low levels would keep income streams for UAE banks under pressure

 Thus, the banks are expected focus on rationalizing their costs to

improve profitability KEY TAKEAWAYS

Net Interest Margin (%) Cost of Funds (%) Non-Interest Income /

Op. Income (%) Yield On Credit (%)

LDR (%) Return on Equity (%)

9.5 8.8 5.1

9.8 10.9

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

Return on Assets (%)

1.1 1.0 0.6

1.1 1.2

-

0 .2 0 .4 0 .6 0 .8 1 .0 1 .2 1 .4

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

Assets / Equity (x)

8.2 8.2

7.8 8.1 8.1

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

28.5 30.9 30.5 34.9 34.4

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

2.3 2.0 2.1 2.0 2.0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

5.8

5.3 5.3

5.1 5.1

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

1.5 1.3 1.2 1.2 1.1

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

87.7 84.1

86.2

84.5 84.4

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

Cost / Income Ratio (%)

Cost of Risk (%) Op. Income / Assets (%)

33.4 34.3 36.7

33.1 33.0

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

1.4 1.3 2.0

1.3 1.2

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

3.0 2.8 2.8 2.9 2.9

Q2'20 Q3'20 Q4'20 Q1'21 Q2'21

7

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GCC Banking Consolidation

GCC list of M&A transactions in banking sector since January 2019

Announcement Date Target Company Target Country Acquirer Company % Sought Consideration

(AED Mn) Deal Status*

20-Jan-21 Bank Audi SAE (Egypt) Egypt First Abu Dhabi Bank PJSC 100% NA Completed

16-Sep-20 Ahli United Bank Egypt SAE Egypt Ahli United Bank BSC 14.4% 298 Pending

30-Jun-20 Al Khalij Commercial Bank PQSC Qatar Masraf Al Rayan QSC 100% 4,404 Pending

25-Jun-20 Samba Financial Group SJSC Saudi Arabia National Commercial Bank SJSC 100% 57,252 Completed

31-Dec-19 Alizz Islamic Bank SAOG Oman Oman Arab Bank SAOC 81% NA Completed

12-Sep-19 Ahli United Bank BSC Bahrain Kuwait Finance House KSCP 100% 21,431 Pending

15-Aug-19 Cqur Bank LLC Qatar VTB Bank PJSC 19% NA Completed

08-Aug-19 DenizBank AS Turkey Emirates NBD PJSC 0.20% NA Completed

20-Jun-19 Warba Bank KSCP Kuwait Kuwait & Middle East Financial Investment Co KSCP 75.70% NA Proposed

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

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

10-Apr-19 Invest bank PSC UAE Emirate of Sharjah United Arab Emirates 50% 989 Completed

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

03-Apr-19 Oman United Exchange Co Oman Private Investor 25% NA Completed

15-Mar-19 Banque Saudi Fransi Saudi Arabia Olayan Investments, Ripplewood Advisors LLC 5% 1,609 Completed

29-Jan-19 Union National Bank PJSC UAE 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

Source: Bloomberg

*Proposed Status: Board suggests shareholders to consider the acquisition

*Pending Status: Acquisition has announced

*Completed Status: Acquisition has completed 19

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GLOSSARY

Glossary

20

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Glossary

Metric Abbreviation Definition

Size Loans and Advances Growth QoQ growth in EOP net loans and advances for the top 10

Deposits Growth QoQ growth in EOP customer deposits for the top 10

Liquidity Loan-to-Deposit Ratio LDR (Net EOP loans and advances / EOP customer deposits) for the top 10

Income &

Operating Efficiency

Operating Income Growth QoQ growth in aggregate quarterly operating income generated by the top 10 Operating Income / Assets (Annualized quarterly operating income / quarterly average assets) for the top 10 Non-Interest Income /

Operating Income (Quarterly non-interest income / quarterly operating income) for the top 10

Net Interest Margin NIM (Aggregate annualized quarterly net interest income) / (quarterly average earning assets) for the top 10 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 10

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 10

Cost-to-Income Ratio C/I (Quarterly operating expenses / quarterly operating income) for the top 10

Risk Coverage Ratio (Loan loss reserves / non-performing loans) for the top 10

Cost of Risk CoR (Annualized quarterly provision expenses net of recoveries / quarterly average gross loans) for the top 10

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 10

Return on Assets RoA (Annualized quarterly net profit / quarterly average assets) for the top 10

Return on Risk-Weighted Assets RoRWA (Annualized quarterly net profit generated / quarterly average risk-weighted assets) for the top 10 Capital Capital Adequacy Ratio CAR (EOP tier I capital + tier II capital) / (EOP risk-weighted assets) for the top 10

Note: LTM and EOP stand for last twelve months and end of period respectively 21