UAE banks flush with cash but not willing to lend

UAE banks are flush with cash again this year, in contrast to 2010, but credit in the world's third largest oil exporter is not seen picking up strongly as lenders stay cautious following Dubai's debt woes.

"The interbank market is very liquid. All the banks are flooded with liquidity whether it is foreign or local customer deposits," a treasurer at an Abu Dhabi-based bank said.

The volume of bank deposits in the UAE surpassed loans in October last year, for the first time since at least September 2009, central bank data showed.

Higher deposits, up 4.7 per cent from a year ago in November, helped UAE interbank offered rates edge down since October and both the central bank and traders expected a further drop.

The benchmark three-month rate now holds at 2.14 per cent, near its lowest levels since February 2010 but still far above the Saudi benchmark at 0.75 per cent. Traders said activity was thin as banks had enough funds.

"You now face a situation where banks have sufficient cash to lend and corporates now have more profitable projects in which to utilise that cash," said Mark Watts, head of fixed income at National Bank of Abu Dhabi Asset Management Group. "That is a very good driver for a return to normal markets."

Lending weak

But reluctance of UAE banks to make new company loans, however, is not expected to disappear quickly.
"The continuing story is that banks are not able to take more risks because of whatever happened," a Dubai-based trader said. "The UAE story is a bit subdued at the moment."

Private sector lending had been falling for 11 months to October, unlike elsewhere in the Gulf, a stark contrast to over 20 per cent annual gains seen at the beginning of 2009, although an appetite to borrow has increased.

As a result, the UAE economy is seen lagging behind fellow crude-producing nations with growth forecast of 3.6 percent for 2011, according to a Reuters poll.

"We expect the weak bank credit growth environment to continue in 2011," said Monica Malik, chief economist at EFG-Hermes in Dubai. "Banks will likely continue to suffer from the restructuring process."

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