Bank deposits in UAE lenders fell for the first time in six months in December, mirroring a decline in bank lending and assets.
Deposits at UAE banks shrank by 1.3 per cent compared to November, falling to AED1,167.8bn ($317.9bn). Total bank loans fell by 0.7 per cent to AED1,099.1bn, while total assets fell 0.2 per cent.
The loan-to-deposit ratio rose for the first time in five months, to 94 per cent, as deposits fell faster than loans. A year ago the loan-to-deposit ratio was narrowly above 100 per cent, meaning that system-wide, the banking sector was just above the guideline limit of 100 per cent set out by the Central Bank of the UAE.
Overall, loan growth in the country has remained weak since the financial crisis of 2009. In December, loan growth dropped to 2.62 per cent, compared to a year ago. Over the past 12 months, it has failed to exceed 4 per cent.
Weak loan growth is a sign that real economic activity remains subdued. Banks are reluctant to lend to all but the best companies and many private sector firms say raising money from lenders is currently not that attractive. Across the region, the total volume of syndicated loans in the Middle East and North Africa (Mena) region fell by 3 per cent to $40.5bn, according to figures from the UK’s Dealogic. The UAE accounted for 39 per cent of those deals, up from 27 per cent in 2011. Most of the money raised in the country has been for the refinancing of existing deals, rather than fresh capital raising, meaning it has little impact on the loan books of the UAE’s domestic banks.
The country’s banking sector has also faced rising costs of funding associated with the government liquidity support given to them during the peak of the financial crisis. This funding becomes more expensive the longer banks hold on to it, leading many to now start raising money from the capital markets to repay the state.
In addition, UAE banks face a degree of regulatory uncertainty. Several initiatives by the central bank were delayed shortly after being announced, including plans to put caps on how much banks can lend to the government and government-related enterprises, and how much they can lend on mortgages.
There is currently no clear timeline for the implementation of these regulations, leaving banks concerned about booking new exposures, knowing that the regulatory backdrop is about to change.
Bankers say that as a result credit growth will likely remain weak in 2013, despite it ramping up in other parts of the region. Bank lending in Saudi Arabia rose by 16.2 per cent in January, and was even higher in Qatar in late 2012.