According to Alvarez & Marsal, the UAE banking region is anticipated to be less volatile in 2021 than last year. Banks' asset quality will deteriorate after the Central Bank of the UAE's deferral program concludes in June 2021. According to A&M's UAE Banking Pulse survey, the top 10 UAE banks' aggregate net profit fell 38.3% year on year due to lower operating income and higher provisions.

Net interest income (NII) dropped 2% year over year as system-wide rates fell dramatically after the UAE's Central Bank cut rates to combat the impact of the Covid-19 pandemic. NIM, increased as banks were able to lower their funding costs even further.

Due to the low-interest climate and sluggish economic conditions, the UAE banking sector showed signs of volatility, which weighed on overall profitability and returns metrics.

Operating performance (C/I ratio) declined as well, as operating income fell faster than operating expenses. Despite the difficult market climate, the UAE banks' aggregate capital adequacy ratio remained strong at 17.6% at the end of December 2020, compared to 17.3% towards the end of December 2019.

Based on lower operating income and higher provisions, and decreasing profitability ratios, these banks' aggregate net profit fell by 38.3% for the past few years.

Because of the uncertain economic climate and banks' exposure to many high-profile publicly revealed events, total loan loss provisions rose by 79 % to Dh28.1 billion. The cost of risk rose by 69 basis points to 1.71 %. Also, the coverage ratio dropped to 91.9 % from 97 % a year earlier. From 4.6 % at the end of 2019, the aggregate NPL ratio rose to 6.1 % at the end of 2020.

According to KPMG, the top ten banks in the UAE's net profit will drop by 41% on average in 2020 compared to 2019. The Covid-19 pandemic, lower oil prices, and continued pressure on the real estate sector have all increased risks for UAE banks, according to S&P, but the banking authorities' response to crisis reporting requirements has improved supervision and accountability.

Asset-quality metrics for rated UAE banks are expected to deteriorate further once regulatory forbearance measures are lifted, though some will be covered by their high capitalization and earning potential. While loan forgiveness measures could be extended beyond their current mid-year 2021 deadline, expecting them to phase out gradually and carefully. Despite this assistance, banks with a systemic orientation to sectors with the lowest prospects are likely to book major credit losses in the future.