Deposits in the UAE banking system fell by 1.6 per cent in June, largely as a result of government deposits built up during the first quarter flowing out of Abu Dhabi banks.
Just over AED18bn ($4.9bn) left the UAE banking system in June, according to the latest figures published by the Central Bank of the UAE.
The withdrawal of deposits, which has been ongoing since March, reverses an increase that had taken place since November last year. It has also brought the overall loan-to-deposit ratio back up to 98.5 per cent, about the same level as at the end of 2011.
Economists say the build-up in deposits during the first quarter was oil money being set aside for payments due in the second quarter.
Despite this, the UAE banking system is considered to be fairly liquid and in good health. “The Eibor [Emirates interbank offered rate] has been coming down, so that is a reflection of good levels of liquidity in the UAE banks,” says Giyas Gokkent, chief economist at the National Bank of Abu Dhabi.
Bank liquidity, however, is not transferring into new loans. By the end of June, UAE bank loans had risen only 1.8 per cent. Gokkent says this is indicative of several trends that point to disappointing economic activity in the non-oil sector. “Banking sector developments are a good indicator of non-oil trends, so we know that the non-oil sector is growing only very slowly,” he says.
After the rapid economic growth during the five years up to 2008, which was coupled with rapid expansion in bank loan books, lenders are still digesting all the business booked during the boom years, adds Gokkent.
The pace of loan growth will also be tempered by new regulations limiting how much banks can lend to retail customers, as well as a second set of new rules putting caps on exposure to the government and government-owned firms.
Banks have until October to comply with the state-related lending restrictions, but implementation of the rules is still unclear. Most banks are still consulting with the central bank as they are expected to have to sell on much of their government-related exposure in the secondary markets to comply with the lending caps. Bankers say this will also affect their ability to build up their loan books in the future.
For its part, the central bank appears relatively unconcerned about forcing through regulations that will limit growth in the banking sector. “The central bank has indicated that it is happy with the pace of growth at the moment and to see profit growth start to come from declining provisions rather than new deals,” says one senior banker in the UAE.
“The banks are entering a new period of being healthy rather than wealthy,” adds Gokkent.