Deposits signal rise in confidence

Increase in deposits signals a rise in confidence in the banking sector although lending is expected to slow down this year, said a Saudi bank yesterday.

The Saudi American Bank Group (Samba) said liquidity is improving and deposits with the UAE's 24 national banks and 28 foreign units appeared to be gaining momentum despite a decline in interest rates on deposits.

"Banking data continue to suggest a gradual easing of liquidity conditions, with a small one per cent year-to-date pickup in loans and advances registered in May," Samba said in its July economic bulletin.

"Deposits also rose, ensuring the aggregate loans-to-deposit ratio continued to hold at about 103 per cent, with some banks reporting stronger improvements to below the 100 per cent mandated by the central bank. New deposits are apparently building up as confidence improves, boosted by the rally in local and world stock markets since March, and as funds previously destined for the real estate market now find their way into banks."

Samba said the recovery in liquidity following a shortage in previous months as a result of the credit crunch was accompanied with a sharp fall in inflation rates in the UAE and a decline in deposit rates offered by banks.

Citing UAE banking data, it said the rates had retreated from the six per cent highs offered in January, to about 3.5 per cent in May.

"With year-on-year inflation under two per cent in April, real deposit rates have now turned positive after years of negative returns, providing additional incentive to save," said Samba, one of the largest banks in Saudi Arabia.

"Liquidity injections by the authorities, deposit guarantees, and strong counter cyclical fiscal policies have been key in helping to ease the credit crunch brought about by reduced access to capital markets and withdrawal of foreign deposits."

But the report noted that while the prospects are encouraging that domestic liquidity conditions will continue to improve through the rest of the year, buoyed by higher oil prices, "it is clear that overall credit growth in 2009 will be substantially lower than in previous years – probably at five per cent".

"Banks remain concerned over rising non-performing loans (NPLs), and continue to operate more stringent lending criteria, and to strengthen capital adequacy ratios – which rose to 16.2 per cent in aggregate in March," said Samba.

"This will likely curtail personal loan growth. At the same time, with project and corporate finance from international banks still constrained, UAE banks are likely to struggle to provide financing to large scale infrastructure projects given the maturity mismatch with their deposits, the scale of financing needed, and the lack of access to longer term funds from the global capital and wholesale markets."

According to Samba, prior to the credit crunch, UAE banks would partner with international banks, which tended to cover about two-thirds of project financing needs.

There has also been a decline in demand for funds as projects are put on hold or cancelled due to the deteriorated economic environment, greater risk aversion, and weaker prospects, particularly for real estate.

The report said the general slowdown in economic activity is reflected in a steep fall in broad money growth.

It cited Central Bank figures showing that, having grown at an annual rate of between 25 per cent and 45 per cent during 2007-2008, growth in M2 (money in circulation and bank deposits) fell to 6.7 per cent in May.

"This decline is consistent with the recently published monthly inflation data, which shows a year-on-year drop to just 1.9 per cent in April, and suggests a sustained lack of inflationary pressure going forward."

Central Bank figures showed deposits with the UAE banks gained about Dh50 billion between December and May to peak at Dh972.4bn at the end of May. Loans growth was relatively slow as they rose by only Dh10bn to Dh1,003bn at the end of May.

M1, which includes currency in circulation and monetary deposits, grew by around 3.6 per cent to Dh220.2bn at the end of May from Dh212.5bn at the end of April, the figures showed.

M2, involving M1 and quasi monetary deposits, grew by 1.6 per cent in May to reach one of its highest levels of around Dh714.8bn compared with about Dh703.2bn at the end of April. Year-on-year, growth was 6.7 per cent.

M3, covering M1, M2 plus government deposits, edged up by 1.03 per cent in from 1.9 per cent in April.

It peaked at Dh931.9bn at the end of May.

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