UAE bank deposits fell by 3.4 per cent in August, compared to the previous month, in a sign that liquidity conditions in the UAE may be tightening again.

The latest figures from the Central Bank of the UAE show that deposits fell by AED35.2bn in August, exceeding AED12.4bn, or a 1.1 per cent month-on-month decline in July. The figures also show that new lending in the UAE rose by AED4.8bn, reversing last month’s decline of AED4.4bn.

As a result of the continued decline in the deposit rate and the rise in loans, the loan-to-deposit rate of the UAE banking system has risen to 98 per cent, from 94.5 per cent in July. That is a major improvement on the position a year ago when the loan to deposit rate was 102.7 per cent, above the Central Bank guidelines that banks should not exceed a ratio of 1:1.

The decline in the value of deposits in the UAE, which also fell by 1.1 per cent in July, means that the year-to-date deposits in the UAE have only risen by 2.7 per cent, only just exceeding loan growth of 2.7 per cent for the year-to-date.

Analysts say the build up of deposits in the UAE banking system to correct the previous imbalances is a good sign that the health of the banking sector is improving. However, in attempting to restore the loan-to-deposit rates of banks, loan growth has fallen. Slow credit expansion provides an additional worry that the economy will not have the funding available to fuel expansion and aid economic growth.

The decline in deposits in July and August is believed to be the result of short-term deposits fleeing the country as the Emirates interbank offered rate (Eibor) rate falls. Until recently, the Eibor rate had been much higher than many other markets. The three-month Eibor rate was 2.14 per cent at the beginning of the year, but has since fallen to 1.48 per cent on 4 October.

Provisioning at the banks has continued to rise throughout the year-to-date. Specific provisions, for assets in distress, have risen 11.1 per cent so far this year, to AED49.2bn, while general provisions, used in anticipation of specific provisions have risen by 21.6 per cent to AED15.2 per cent.

The rise in general provisions is partly attributed to banks trying to meet new central bank guidelines that they should put aside 1.5 per cent of risk weighted assets, up the previous requirement of 1.25 per cent. Banks have been given four years to meet the new guidelines, from late 2010 when the new rules were introduced.