03/09/2014

The combined loans to deposit ratio of UAE banks, the broad indicator of banking sector liquidity, was at 95 per cent per cent at the end of June 2014 compared to 98 per cent in the same period last year, according to latest central bank statistics on banking sector liquidity.

Data shows, total deposits of the UAE banks increased by 1.4 per cent in June this year to reach Dh1.4 trillion. While the resident deposits increased by Dh13.5 billion in June non-resident deposits of banks surged by Dh6.4 billion.

Overall loan growth in the country marginally increased by 0.2 per cent in June reaching a total of Dh1.32 trillion for the first half of the year. Total banking sector assets on a gross basis was up by 0.2 per cent in June to reach total of Dh2.23 trillion at the close of the first half of the year.

Modest loan growth combined with significant surge in deposits has seen banking sector liquidity swelling in the first half of the year. Banks surplus cash helped push the three-month Emirates interbank offered rate (Eibor) to a decade low of around 0.7 per cent. With surging liquidity and relatively slow loan growth, lending rates and margins are expected to remain under pressure. “In a highly liquid environment prevailing in the UAE, pricing is very competitive. All players in the industry are facing margin compression. But we expect this will not last too long,” said Mohsin Ali Nathani, CEO of Standard Chartered UAE in a recent interaction with reporters.

Global macro economic developments support further boost to banking sector liquidity in the UAE in the short to medium term. “European Central Bank’s quantitative easing is inevitable in our European team’s view — but it is not yet imminent, and we think rates are not pricing it in,” David Hauner, a Bank of America Merrill Lynch analyst wrote in a recent note.

Analysts believe that further easing in Europe through ABS [asset backed securities] purchase programme that could come later in the year after the asset quality review is finalised in October could see further liquidity boost.

With European and US interest rates expected remain at historical lows for another three to four quarters ahead, banking sector in the UAE is expected remain flush with cash for some more time.

“Our US team’s Fed view remains dovish given the poor risk/reward for turning hawkish too early in the face of global risks, still high unemployment and low inflation; it expects the first rate hike only in Q3 2015 and a turn in the Fed’s language only in spring,” said Hauner.

While the supply side of liquidity remains robust, loan demand remains weak as corporate sector borrowing is yet to pick up pace after a 5- year-long deleveraging following the financial crisis.

The loan book of UAE banks grew moderately by 4.8 per cent year on year in the second quarter despite recovery in the real estate sector and overall economic growth. “The slowdown in lending is attributed to high credit penetration levels and absence of quality lending opportunities. In addition, some banks have also witnessed sizeable loan repayments during the quarter which dampened net credit offtake numbers. Due to the recent addition of Dubai Expo 2020 to UAE’s to-do list, we expect infrastructure spending to grow significantly in next few years,” said Naveed Ahmad, Senior Manager at Global Investment House.

Babu Das Augustine - Gulf News