Data indicates UAE banking sector exited worst of crisis

A number of recent developments suggest the UAE banking sector is regaining some degree of confidence and that the sector has exited the worst of the crisis, with both interbank lending conditions and loan-to-deposit ratios recovering.

Government and corporate banking officials told Emirates Business that after a difficult period of caution peaking in the fourth quarter of last year, banks are now more willing to lend, both to individuals and businesses as well as to each other.

The Emirates interbank offered rate (Eibor), which peaked at more than 4.6 per cent in November 2008, has fallen and currently prevails at about three per cent.

"This significant easing reflects the improvement in market sentiment over the past few months and strong appetite of banks to start lending to each other," said the Dubai Chamber's report for August. "Some observers suggest this trend is likely to continue throughout the remainder of this year."

Suvo Sarkar, General Manager, Retail Banking, Emirates NBD, said money markets have seen stabilising over the past couple of months, with customers making firmer choices on their fund placements in the medium term. "In addition, we also see money flowing in from customers in regional economies, a 'flight to quality' of banking with the largest bank in the region, as well as to maximise returns," he said.

The signs of revival in the banking sector in the UAE as well as in the Middle East are now more visible, said Sanjoy Sen, Consumer Bank Head-Middle East, Citibank.

"Yes, we see a lot of liquidity entering the market," he said. "A lot of investment that was going into the property market is now coming into the bank as deposits.

"In the past few months we have witnessed funds, which were earlier held abroad, being moved back to UAE. This is a very healthy trend for this market and consumer confidence has been further boosted by the UAE Government's deposit guarantee scheme that covers all local and foreign banks."

In addition, a report in Dubai Chamber Economist says the stabilisation of indices of both Dubai Financial Market and Abu Dhabi Securities Exchange in recent months suggests that the challenges facing the financial services sector are now clearly over. Thus the stage is set for a "strong recovery".

"The easing of liquidity conditions, cheap asset prices as well as improved market sentiment is expected to drive the UAE stock markets in the months ahead," it said.

Figures from the UAE Central Bank show that banks raised Dh56 billion in deposits in the first six months of this year. They lent only Dh13.3bn during the same period.

Personal loans for individuals and businesses, which is one of the key drivers of credit growth, fell from a peak of Dh226.4bn in December 2008 to Dh205.7bn in June 2009, a decline of 9.1 per cent.

Since January 2009, the difference between loans and deposit base of banks has narrowed significantly, despite a slight widening of the ratio in June (primarily on the back of a decrease in bank deposits).

The loan-deposit gap stood at Dh47.3bn at the end of June compared to Dh90bn at the end of January 2009.

"This clearly suggests that the gap is narrowing considerably in a short space of time. Overall, the banking sector's finances are starting to look healthier," said the Dubai Chamber report.

On a monthly basis, deposits of the banks have grown since the turn of the year. The value of loans and advances has also expanded proving that even during the slowdown and widespread risk aversion, banks were continuing to lend.

Gulf Finance, a Shuaa Capital subsidiary, for one has not totally shut its doors and is still looking at providing capital to small- to medium-sized enterprises.

"This year, we haven't closed the door," said Steve Williams, Chief Executive Officer of Gulf Finance. "We make sure that we continue to support businesses that are supporting Dubai and the UAE."

Williams said the lending market, although scaled back, has still been doing some activity. In the case of Gulf Finance, he said the firm remains attractive because they are asset-backed, regulated and licensed by the Central Bank and receive corporate rating.

"Banks still need to make money and so they like the fact that they can lend to a regulated institution, backed by security and has a strong professional management team and a listed parent," he added.

Advertisements for auto loans in the UAE have also increased, signalling a better liquidity scenario.

Most banks have eased their restrictions and are now offering auto loans to individuals with a minimum salary of Dh3,000 at an average rate of 4.5 per cent per annum. This is on top of lucrative promotions such as free insurance and longer warranties.

Similarly, retail banks have also begun calling individuals offering credit cards and personal loans at more competitive rates than those offered earlier this year.

"Liquidity in the country, although it remains tight, has become better. But it has not returned to normal levels," said Janany Vamadena, a banking analyst at HC Securities & Investment. This has been fuelled by lower Eibor rates, he added.

The overall loan-to-deposit ratio has declined from a peak of 109.9 per cent in January 2009 to 103.2 per cent in May, show figures from Dubai Chamber Economist.

"Thus, this is clear evidence that the prescribed level of the UAE Central Bank loan to deposit ratio of 100 per cent is becoming a reachable target," said the Chamber.

Currently, some banks are still beyond the 1:1 ratio. Emirates NBD's headline loan to deposit ratio was 127 per cent at the end of the first half of 2009.

Suvo said: "Similar to most other UAE banks, it is a function of a sector-wide shortage of deposits in relation to loans. From a balance sheet management perspective, the bank, as well as the UAE Central Bank, includes other sources of core long-term funding in the calculation, which yields a much lower ratio."

Some banks in the country such as RakBank and Citibank, on the other hand, remain within the cap.

"Our current liquidity levels are very comfortable," said Citibank's Sen.

"We are significantly higher than the regulatory benchmarks and we would match any international benchmarks. With almost all our deposits getting renewed and new deposit flows continuing, we expect this ratio to improve further," he said.

Overall, though, the banking sector is emerging in a better shape with the outlook remaining upbeat in the months ahead.

"Looking ahead, banks appear optimistic and generally upbeat about the sectors ability to bounce back from the current downturn," said Dubai Chamber.

It noted that a recent survey of banking leaders in Dubai and Abu Dhabi revealed 50 per cent of those questioned believed that interbank lending rates will continue to fall in the second half with more than 80 per cent suggesting that banks on a whole will make a profit this year.

"This can only be taken as positive news from the business community as an easing in the availability as well as the loosening of credit will enhance the drive for further expansion in the UAE," said Dubai Chamber.



Expect 'Disinflation'

The UAE should not worry about deflation, the Dubai Chamber assured residents and investors through its Economist report.

It said rising housing supply and falling demand will push down rental costs, and food and commodity prices will fall on the back of the global economic slowdown. But "disinflation" rather than "deflation" would be the more probable outcome in the coming months.

The report, authored by Ehsan Khoman, an economist at Dubai Chamber, said at the current juncture, a stronger dollar and falling energy prices, combined with a real estate correction and general business downturn, has lowered inflation rates in the UAE.

However, the dollar-pegged dirham leaves the door open for imported inflation in the coming months. Hence, once the global economy starts to recover the UAE could face the new prospect of rising inflation as a recovery in domestic demand and higher import bills push the country back into price growth.

The fundamental concern for the UAE Central Bank will be how to respond if inflationary pressures resurface, as it relies heavily on United States monetary policy.

UAE inflation has averaged at 3.4 per cent in the first half of 2009, with further price easing expected in the months ahead.

According to Dubai Chamber, the UAE consumer price index (CPI) stood at 114.24 in the first half of the year compared with 110.49 in the first half of 2008, an increase of 3.4 per cent. Citing figures from the Ministry of Economy, it said in June, the CPI slipped very modestly by 0.03 per cent to 113.05 from 113.08 in June 2008, although it was slightly higher over the previous month.

The Chamber said a countrywide slump in property rents and a decline in food prices were the main contributors to the fall. "Primarily, the very slight increase in consumer prices in the first half of this year was a result of a modest rise of 2.7 per cent in the price of food and beverages and 2.85 per cent increase in housing and utility prices," it said.

Given that these two carry the bulk of the weight (a combined total of 53.2 per cent) of overall UAE inflation, this was the main cause of the significant slowdown in inflation in the first half, compared to a large rise during the same period last year.

The UAE recorded its highest inflation rate in more than 20 years at 12.3 per cent in 2008 because of a surge in rents and food prices, higher global commodity prices and a sharp rise in its import bill due to the weakening dollar. This trend has clearly reversed in the first half of this year and some observers say inflation could average two to four per cent in 2009.

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