Private sector turns to banks for investment

Deposits with banks jumped by more than Dh30 billion in six months of 2010 as the private sector is turning to the banking system to invest its funds  because of economic uncertainty, financial analysts said on Monday.

From around Dh968.1 billion at the end of January, the combined deposits with the country’s 51 banks soared to nearly Dh998.9 billion at the end of  July, their biggest increase in such a period of time in nearly two years.

The Central Bank gave no reason for the surge but experts said it was mainly a result of a sharp rise in private sector deposits.

The deposits increased sharply despite a decline in government deposits from around Dh207 billion to Dh183 billion in the same period.

“The increase is a result of a sharp rise in deposits by companies…this indicates that the private sector is opting to keep its funds as liquidity in banks instead of investing in projects and expansions,” said Ziad Dabbas, financial adviser at the government-controlled National Bank of Abu Dhabi.

“I believe the private sector is taking this option to avert any risks for the time being…many listed companies made high profits in the first half of this year but they are not investing them in new projects or expansions because of the prevailing economic situation in the region and the world,” he told Emirates 24|7.

The surge in deposits allied with slackening bank credit largely narrowed the loan-to-deposit ratio to 1.02 at the end of July from around 1.04 at the end of January and as high as 1.07 at the end of 2008, the Central Bank said.

The increase in deposits was not matched by similar growth in lending, which grew by around Dh10 billion during January-July as banks appear to be maintaining a tight credit policy they adopted after the 2008 global fiscal crisis and their exposure to regional debt default problems.

Dabbas said the deposit rise coincided with a drive by some banks to attract funds by offering higher interest rates to clients.

“They still want more deposits although many of them are not lending normally…some of them are giving credit to selective clients and projects while others are trying to meet certain financial commitments,” he said.

After surging by more than 30 per cent through 2008, credit by the UAE’s 23 national banks and 28 foreign units grew by only about 2.4 per cent in 2009 and growth slowed down to only 0.7 per cent in the first seven months of 2010.

The slowdown is part of the banks’ drive to clean up their balance sheets following a post-crisis deterioration in their assets and heavy exposure by some of them to Saad and Algosaibi business conglomerates of Saudi Arabia. It was also caused by weakening private sector appetite for credit.

The banks are also believed to be exposed to the sharp downturn in the real estate sector in the aftermath of the 2008 crisis and this has prompted them to intensify a drive to build up loan loss provisions. Central Bank figures showed the 51 banks have allocated a staggering Dh17.6 billion for provisions since the end of 2008, including about Dh five billion in the first seven months of 2010.

 “In the UAE, the banking system is significantly exposed to the construction sector and the highly speculative real estate sector. Several banks in the UAE are exposed to high levels of credit risk in connection with the family-affiliated conglomerates in Saudi Arabia and government-related entities in Dubai,” said the Washington-based Institute of International Finance.

High provisions heavily weighed on the banks’ performance in 2009, with the net earnings of 16 listed banks plunging by nearly 20.6 per cent to around Dh14.87 billion from nearly Dh18.71 billion in 2008. In the first half of 2010, the net income of 12 listed banks edged up by around 2.2 per cent and analysts expect no major growth through the year because of low lending and heavy provisioning.

“The main reason for this first major decline in 2009 in many years is the high provisions taken by the banks against bad loans and assets,” Dabbas said.

 “If you look at the banks’ balance sheets, you will notice that the operating income of many of them was better in 2009 than in 2008…this means the banking sector performed well last year but its net income was negatively affected by provisions, which were the highest in the UAE banking sector.”
 

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