UAE banks have posted strong second-quarter profits continuing the growth phase, which started in 2013.

“It is a positive trend and goes hand-in-hand with the more upbeat operating environment that we saw emerge in 2013,” says Redmond Ramsdale, director, financial institutions, at global rating agency Fitch, based in Dubai.

The banking sector has benefited from the UAE’s economic growth, forecast by the Washington-headquartered IMF to hit 4.8 per cent this year, as well as its rebounding real estate market.

The country’s financial institutions have spent the past few years tackling problem loans accrued during the 2009 financial crisis and the collapse of the country’s real estate market.

Most UAE banks are now posting increased profits fuelled by strong loan volumes and underpinned by an expanding deposit base.

“The banks have had a reasonable amount of time dealing with legacy portfolios. They have had time to do some restructuring and write-offs and got themselves into a position to start growth,” Ramsdale says.

Dubai bank Mashreq reported one of the strongest jumps in net profit in the second quarter. Profits hit AED585m ($159.2m) in the three months up to the end of June, marking an increase of 45 per cent on last year.

In line with other banks, Mashreq also reduced its non-performing loans(NPL) to gross loans ratio to 5.7 per cent from 6 per cent in December last year.

Mashreq’s growth was driven by a 26 per cent increase in operating income year-on-year and an 11 per cent increase in its loans and advances portfolio.

The bank’s results follow a decision by US rating agency Standard & Poor’s (S&P) in June to upgrade its outlook from stable to positive, to reflect Mashreq’s improving asset quality. It affirmed its rating at BBB+.

Mashreq’s performance suggests Dubai’s banks are beginning to catch up on their generally stronger counterparts in Abu Dhabi.

“We continue to see Abu Dhabi is better risk but things in Dubai are improving very fast,” says Timucin Engin, director of financial services ratings at S&P.

Abu Dhabi banks generally have less exposure to problem loans. National Bank of Abu Dhabi has reduced its NPL ration to 3.29 per cent in the second quarter this year, while Abu Dhabi Commercial Bank improved its NPL ratio to 3.4 per cent.

The UAE’s banking sector continues to face risks despite its improved position. Analysts continue to be wary of the bank sector’s exposure to the potentially volatile real estate sector. 

Several financial institutions still have exposure to large amounts of debt held by government-related entities, which will reach maturity in the coming years.

The deadline for $4.4bn-worth of bank debt held by Dubai World is approaching in 2015, and as yet there is limited clarity on how much of the debt will be refinanced or repaid.