Profitability at the four largest UAE banks will remain solid in the next 12 to 18 months underpinned by solid interest income, despite pressure on fee and commission income, says Moody's Investors Service in a new report.

The four banks, First Abu Dhabi Bank PJSC (FAB, Aa3/Aa3 Stable, a3), Emirates NBD PJSC (ENBD, A3/A3 Stable, ba1), Abu Dhabi Commercial Bank (ADCB, A1/A1 Stable, baa3) and Dubai Islamic Bank PJSC (DIB, A3/A3 Stable, ba2), reported a combined net profit of AED6.7 billion (US $1.8 billion) in Q2 2017 supported by higher net interest income, according to the report, "UAE - Four Large Banks Q2 Update - Higher Net Interest Income Underpins Stable Profitability".

Aggregate net profitability was broadly flat versus Q2 2016, but fell 3.5 percent quarter on quarter also partially driven by a decline in fee and commission income.

"Profitability was supported by higher yields on loans and stable funding costs, which drove higher net interest income, despite sluggish economic growth due to current oil prices," said Nitish Bhojnagarwala, a Vice President at Moody's.

Operating expenses across the four banks were down by 6 percent relative both to the previous quarter and to Q2 2016. Over the next 12 to 18 months, we expect broadly stable cost to income ratios as the banks continue to invest in technology offsetting cost-cutting gains, Bhojnagarwala said.

Combined deposits at the four banks declined marginally by 1 percent to AED 1 trillion (around US$273 billion) compared to Q1 2017. This slight drop was after solid deposit growth in previous quarters for the UAE banking system, which suggest that liquidity pressure has been easing. Nevertheless, the oil price levels will continue to weigh on deposit growth for the next few quarters.

The banks' combined Tier 1 capital ratio improved modestly to 16.7 percent 16.2 percent relative to the previous quarter.

The research is an update to the markets and does not constitute a rating action.