Loans still outweigh deposits despite central bank warning on bad debt
Emirati banks are likely to miss the target set by the Central Bank of the UAE to cut their loans as a proportion of deposits, according to analysts.
In late 2008, the central bank set a rule demanding that the size of a bank’s loan book as a proportion of its deposits fall below 100 per cent by the end of the year, to make the banks’ balance sheets more resistant to bad debts.
However, the latest figures from the central bank show that the loan-to-deposit ratio for the UAE banking sector as a whole was still 104 per cent at the endof September. This means banks collectively need to attract an extra AED90bn ($24.5bn) of deposits or reduce the value of their loan books by the same amount. The ratio peaked at 110 per cent in January.
“Loan growth has dropped since the start of the year and deposit growth has improved, but, sector-wide, it may not be enough,” says Deepak Toolani, analyst at UAE investment bank Al-Mal Capital.
Abu Dhabi Commercial Bank and Emirates NBD are currently the country’s most-extended banks, with loan-to-deposit ratios of 143 and 118 per cent respectively in their third-quarter results. Since December, bank loans in the UAE have increased by 2.7 per cent, while deposits have risen by 5.6 per cent. In 2008, deposits grew by 27 per cent, but loans soared by 40 per cent.
“The central bank is in a difficult situation; it wants banks to make new loans to stimulate the economy, but it also wants to manage down the loan-to-deposit rate,” says another UAE-based bank analyst.
Most banks in the UAE remain risk-averse, which should help them bring down their loan-to-deposit ratios next year, says the analyst.
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