MEASURING PERFORMANCE OF BANKS

A Bank is a large machine consist of a large number of deposit holders and borrowers, hundreds
of small operations, and thousands of skilled people, which makes them difficult to analyze.
To measure a commercial Bank’s performance (i.e. profitability and efficiency), we can use
following areas for a comparative analysis with its peers and historical trends:
1) Risk-adjusted return
2) Expected losses through provisions
3) Unexpected losses through capital adequacy
Accordingly, the key variables can be stressed to assess the impact of systemic and tail risks on
profitability and capital adequacy.

For this analysis, we have used following matrices using public information for major Banks in
the Gulf region:
Ratio Categories Definition
Return:
▪ ROA ▪ Net Income / Total Assets
(Historically, minimum 1% is considered good)
▪ ROE ▪ Net Income / Total Equity
(Historically, minimum 10% is considered good)
▪ Leverage Margin ▪ ROE – ROA
(Historically, minimum 10 times is considered good)
Credit Provision Coverage:
▪ NPL Ratio ▪ Non-performing / Gross Loans
▪ ECL Coverage ▪ ECL Provisions / Total Gross Loans
▪ ECL Provisions / Total Non-performing Loans
Capital Adequacy:
▪ Capital Adequacy Ratio ▪ Minimum Capital Requirements as per Basel is 8%
(CAR)
▪ Minimum Capital Requirements in UAE (as per the
CB Basel III regulation):
o 13% inclusive of 2.5% capital conservation.
DSIBs require an additional 0.5% buffer
o CET1 must be at least 7% of RWA
o Tier1 must be at least 8.5% of RWA
o Tier1 + Tier2 must be at least 10.5% of RWA
▪ Safety Margin ▪ CAR – Minimum
(safety against the stress conditions)

Please refer to next page for a comparative analysis for major Banks in the Gulf region, using
public information as of Q3, 2020.

By Asad Khan - MSc (Risk Mgt.), CFA, CA, CQF, FRM Page 1 of 3
 MEASURING PERFORMANCE OF BANKS

Comparative Analysis:
30-Sep-20
FAB ENBD ADCB DIB Mashreq Average
Return:
ROA 0.8% 0.8% 0.7% 1.0% 0.2% 0.7%
ROE 7.2% 6.8% 5.1% 7.8% 1.9% 5.8%
Leverage Margin (ROE - ROA) 6.4% 6.0% 4.4% 6.8% 1.7%
Credit Provision Coverage:
NPL Ratio 4.0% 6.0% 7.3% 4.7% 5.1% 5.4%
ECL Coverage - Portfolio 3.2% 7.1% 3.8% 3.6% 6.0% 4.7%
ECL Coverage - NPA 80.6% 119.6% 52.9% 75.9% 116.5% 89.1%
Capital Adequacy Ratio (Pillar 1):
CAR 16.8% 19.1% 16.7% 17.3% 17.4% 17.5%
Minimum UAE 13.5% 13.5% 13.5% 13.5% 13.0%
Safety Margin (CAR - Minimum 8%) 8.8% 11.1% 8.7% 9.3% 9.4%
Safety Margin (CAR - Minimum UAE) 3.3% 5.6% 3.2% 3.8% 4.4%

NCB - KSA QNB - Qatar NBK - Kuwait AUB - Bahrain Bank Muscat Average
Return:
ROA 1.4% 0.3% 0.6% 1.0% 0.9% 0.8%
ROE 10.7% 3.3% 4.4% 8.1% 5.7% 6.4%
Leverage Margin (ROE - ROA) 9.3% 3.0% 3.9% 7.1% 4.8%
Credit Provision Coverage:
NPL Ratio 1.7% 2.0% n/a 2.5% n/a 2.1%
ECL Coverage - Portfolio 2.5% 2.7% n/a 4.0% 4.2% 3.3%
ECL Coverage - NPA 143.1% 134.4% n/a 162.7% n/a 146.8%
Capital Adequacy Ratio (Pillar 1):
CAR 19.2% 18.1% n/a 20.2% 20.2% 19.4%
Safety Margin (CAR - Minimum 8%) 11.2% 10.1% - 12.2% 12.2%

Conclusions:

✓ ROA trend is less than 1% threshold except for DIB and NCB. See below for Limitations.

✓ ROE trend is less than 10% threshold except for NCB. However, 2020 is possibly not the
best year for profitability measurement. This emphasizes the need for higher efficiency, not
only by reducing staff cost (no bias !!), but mainly using digitalization of front-end systems
and better use of back-end systems and processes. As Banks are big machines, over time they
result in a lot of bureaucracy - excess layers in decision making, lack of well-documented
procedures, and fragmented systems.

✓ Overall pressure on profitability (low ROA and ROE), also results in an inefficient use of
Leverage. This requires that Banks need to be innovative in targeting new sources of liquidity
through deposits and Bonds/Sukuks reducing their dependency on central banks.

✓ NPL ratios are expected to be higher, and ECL coverage lower in current situation.
However, portfolios need to be stressed and assessed carefully considering forward-looking
macroeconomic and industry-specific conditions. Concentration analysis (industry, geography,
currency, customer, etc.) is a good starting point. For a comprehensive picture of coverage also
consider Reserves maintained other than the Provisions.

✓ Generally, Banks in the region are well capitalized and able to absorb stress conditions.
Central banks are also playing their part to support Banks through offering liquidity and capital
buffers. Macro outlook is promising too.
By Asad Khan - MSc (Risk Mgt.), CFA, CA, CQF, FRM Page 2 of 3
 MEASURING PERFORMANCE OF BANKS

Analysis Limitations:
As the above analysis is based on only publicly available information, there are many limitations
to our analysis due to the absence of key information such as:
• Portfolio composition - credit, corporate, Islamic, industry, etc.
• Collateral nature and enforceability after applying realistic haircuts
• Revenue recognition practices – IRR, NPV, fixed fees, fair value, etc.

Working Table:
AED million
FAB ENBD ADCB DIB Mashreq
Loans & Advances:
Performing (Stage 1 & 2) 385,705 447,881 234,244 195,106 74,602
Non-performing (Stage 3 & POCI) * 15,935 28,398 18,366 9,685 4,018
Gross Loans & Advances 401,640 476,279 252,610 204,791 78,620
Less: ECL 12,840 33,974 9,720 7,355 4,679
Net Loans & Advances 388,800 442,305 242,890 197,436 73,941
Total Assets 955,147 692,138 409,262 299,303 169,724
Total Equity 101,445 82,726 55,026 40,032 21,727
Net Income 7,317 5,647 2,802 3,124 411
IFRS-9 / Reg Credit Risk Reserve 1,039 n/a n/a 0 n/a

Notes:
Source: Financial Statements
n/a = sufficient information not available in F/S
* including Interest Suspended, where disclosed separately

NCB - KSA QNB - Qatar NBK - Kuwait AUB - Bahrain Bank Muscat
SAR million QR million KD million USD million RO million
Loans & Advances:
Performing (Stage 1 & 2) 339,427 721,705 n/a 21,171 n/a
Non-performing (Stage 3) 5,952 14,757 n/a 537 n/a
Gross Loans & Advances 345,380 736,462 n/a 21,708 9,233
Less: ECL 8,519 19,838 208 874 386
Net Loans & Advances 336,860 716,624 17,634 20,834 8,847
Total Assets 577,084 986,324 30,383 40,665 12,711
Total Equity 76,655 93,865 3,997 5,071 1,995
Net Income 8,189 3,117 177 409 113

By Asad Khan - MSc (Risk Mgt.), CFA, CA, CQF, FRM Page 3 of 3