Strong oil prices could prompt the UAE government to place more funds with national banks and this will allow the sector to prop up its deposit base and reduce funding costs, a key Saudi bank has said.
Deposits with the UAE’s 23 national banks and 28 foreign units recorded one of their highest monthly increases of around Dh15 billion in June but the surge has failed to spur banks to resume normal lending, the Saudi American Bank Group (Samba) said in its economic bulletin.
Its figures showed domestic credit growth in the UAE, which has the largest banking sector in the Arab region, remains weak, with data for June showing that the annual rate of increase has slipped to just 1.6 per cent.
Although they are well capitalised, with their capital adequacy ratio peaking at around 20.4 per cent at the end of June, the banks remain reluctant to lend in the face of rising non-performing loans and weak balance sheets, the study said.
SAMBA said banks are also awaiting finalisation of the Dubai World restructuring and notice from the central bank related provisions.
“In addition, concerns have mounted about the possibility of further restructuring in Dubai’s other government-related entities, and large exposures to declining real estate assets. Such concerns have raised funding costs with the 3-month Eibor rate still holding at over two per cent in July,” Samba said.
Citing Central Bank figures, the report showed UAE money supply growth stood at 5.4 per cent in June as annual deposit growth picked up to 2.5 per cent, which in turn saw the loans to deposit ratio fall back to 104 per cent.
“It is hoped that growing oil revenues and fiscal stimulus in Abu Dhabi will see further deposit growth through the year. This will be important as banks in Dubai continue to face some difficulties in accessing funding at a competitive price.”
Samba gave no breakdown for deposits but Central Bank data showed government deposits alone edged up from around Dh186 billion at the end of the first quarter to nearly Dh191 billion at the end of April. They remained almost unchanged at the end of May before slipping to Dh188 billion at the end of June.
But they remained far higher than their level of nearly Dh130 billion at the end of the first quarter of 2008 despite higher oil prices at that time.
By the end of June, the combined deposits with the UAE banks totalled around Dh985.4 billion compared with Dh970.8 billion at the end of May.
Turning to the UAE economy, SAMBA said it saw signs of a recovery although growth remains stifled by the slowdown in bank credit.
“The weak domestic credit conditions are not helpful, but anecdotally it appears that there is some positive momentum in the traditional core non-oil sectors (i.e. trade, logistics and tourism),” the report said.
“Despite the large scale delay and cancellation in the UAE‘s enormous project list (estimated at $1.9 trillion by Meed Projects), priority public investment projects are also being implemented, especially in Abu Dhabi. The value of projects under execution as of June is estimated at $273 billion, the bulk concentrated in construction and infrastructure. While considerably lower than the listed total, this still represents project spending in excess of nominal GDP.”
Samba said this trend is supported by growing hydrocarbon output by the UAE and other producers within the 12-nation Organization of Petroleum Exporting Countries (Opec). While Opec quotas have checked the rise in crude supply to an average of just 1.7 per cent (2.3 mb/d)through the first half of the year, this has been bolstered by a seven per cent rise in NGL output (554,000 b/d).
“With average oil prices also up close to 26 per cent for the first half of the year compared with the first half of 2009, the UAE hydrocarbons sector is set to make a major contribution to both nominal and real GDP growth in 2010. This will offset weakness in the non-hydrocarbons sector where 2010 deleveraging and oversupply in the real estate sector remain a drag on growth.”