Throughout 2011, the loan-to-deposit ratio of the UAE banking system was about 100 per cent. Most banks lacked both the funds and the motivation to book new deals as they worried about economic growth and corporates were in the process of deleveraging.
By the end of May 2013, the loan-to-deposit ratio had dropped to 90 per cent, lenders were awash with liquidity and confidence in a broad economic recovery, particularly in Dubai, was rising. After a difficult slump in 2009 and a painful debt restructuring process at some of the largest government-owned firms, this year Dubais fortunes have recovered.
Still, the flow of banking activity is mainly refinancings rather than new borrowings to fund expansions or investment. As a result, competition among banks to lend is increasing and that is leading to falling loan margins.
A raft of Dubai-based corporates have capitalised on this to lower their borrowing costs. Majid Al-Futtaim is the latest with a $1.5bn loan. While this is great news for companies in Dubai, which have had to pay high rates on their borrowing because of fears over the emirates creditworthiness, it is not good for the banks.
It is true that funding costs are falling and the liquidity positions of the banks have improved, but the interest they earn on corporate loans is also falling and there are no new deals to help boost their overall interest income.
What is good for Dubais corporates is viewed less favourably by its banks.