UAE banks may need liquidity injection

UAE money supply sharply slowed down in the first four months of 2010, raising the prospect of fresh liquidity injection by the Central Bank, analysts said.

Many banks are offering high interest rates of up to seven per cent on deposits to attract funds after negative growth in some months this year, but such offers have so far failed to reverse that trend, they said.

The situation has been complicated by a steep fall in government deposits with the country's 23 national banks and 28 foreign units and a sharp slowdown in the deposits of private establishments, says official data.

"The liquidity situation in the UAE banking sector is uncertain and ambiguous. I have heard many bankers saying the sector needs a fresh injection of liquidity," said Ziad Dabbas, financial adviser at the government-controlled National Bank of Abu Dhabi, the UAE's second largest bank by assets.

"Many banks are now offering high rates on deposits, ranging from five to seven per cent. This means they are in bad need of liquidity, but I can't see any major increase in such deposits and this might prompt the Central Bank to intervene again as it did just after the eruption of the global economic crisis."

In Arabic press comments this week, a UAE Central Bank official said banks do not need new liquidity injections given what he described high capital adequacy, which stood at 20.3 per cent at the end of March.

"National banks do not need new support for the time being considering their high adequacy and their dealings with the Central Bank," said Hadef Al Shamsi, Executive Director of the Treasury at the Central Bank.

But Central Bank figures showed money supply, which had raced by at least eight per cent in 2007 and the first half of 2008, has sharply slowed down over the past few months due to slackening growth in loans and deposits with banks.

Quarter-on-quarter M2, involving currency in circulation, monetary deposits and quasi monetary deposits, swelled by 8.3 per cent to about Dh676.4 billion at the end of the second quarter of 2008. Growth tumbled to just 0.7 per cent in the third quarter of that year and declined by 1.1 per cent in the fourth quarter.

In the first quarter of 2009, M2 picked up by 2.6 and accelerated by 3.7 per cent in the second quarter following massive cash injections by the Central Bank. It then slowed down to 1.3 per cent in the third quarter before slightly rebounding by about 1.6 per cent in the fourth quarter.

The Central Bank figures showed M2 growth receded to about 0.9 per cent at the end of the first quarter of 2010. At the end of April, M2 grew by only about 0.3 per cent over the previous month, according to the report.

Despite their drive to lure depositors, the combined deposits with the country's 53 banks declined by nearly Dh10bn from about Dh982bn at the end of 2009 to about Dh972bn at the end of April. The decline was mainly a result of a drop in government deposits from around Dh207bn at the end of 2009 to Dh191bn at the end of April.

The figures showed private sector deposits grew by only about Dh3bn in the first quarter of 2010 to reach Dh375bn at the end of March after leaping by about Dh34bn through 2009, a quarterly average of Dh8bn.

Deposits by individuals also slowed down, rising by nearly Dh9bn in the first quarter of 2010 after soaring by Dh34bn in the second half of 2009.

Analysts blamed the slow deposit growth, a cautious lending policy and reluctance of private firms to seek large loans for the weakening credit activity.

"It is this lean lending activity that appears to be holding the banks from seeking fresh support from the Central Bank," said an economist at an Abu Dhabi bank. "Banks might be short of liquidity, but it seems they do not need it right now."

After they were jolted by the global credit squeeze, UAE banks turned to the Central Bank, which provided a Dh55bn short-term liquidity facility. It also allowed the banks to withdraw up to 100 per cent of their Central Bank reserves, and introduced a dollar swap facility.

In a study last week, a major Saudi bank said stagnant domestic credit in the UAE has created a large funding gap and spoke of possible Central Bank moves. "Credit growth in the UAE continues to be weak, with bank loans only up 0.5 per cent in the first four months of 2010 while deposits declined by one per cent, keeping the average loan-to-deposit ratio elevated at around 105 per cent, representing a notional funding gap of around $13.5bn," the Saudi American Bank Group said.