Lower deposits and cuts in lending affect overall assets of UAE banks

Lower government deposits allied with a cut in lending depressed the combined assets of the UAE banks by around Dh32.5 billion at the end of 2009 but they remained in control of the overall largest asset base in the Arab World.

From Dh1.55 trillion at the end of November, the assets of the country’s 24 national banks and 28 foreign units dipped to nearly Dh1.51trn at the end of 2009, their first decline since June, according to the central bank.

But the assets remained the largest in the Arab World after UAE banks overtook those in Saudi Arabia at the end of 2008 in terms of assets, loans and deposits.

At the end of November, the combined assets of Saudi Arabia’s 12 commercial banks totalled around SR1.378trn (Dh1.34trn).

The UAE Central Bank’s December indicators bulletin showed the decline in assets was a result of a fall in both deposits and loans although their shareholders equity recorded their largest increase through 2009. From around Dh1trn at the end of November, the collective deposits with the country’s 52 banks shrank to nearly Dh982.6bn at the end of December 2009.

Their loans and advances also receded from around Dh1.02trn to nearly Dh1.01trn in the same period, the report showed.

The report gave no reason for the decline but analysts said they believed the drop in deposits was caused partly by a fall in government deposits. The decline in loans was a result of a more cautious lending policy by banks and instructions by the UAE Central Bank for financial institutions to bridge the deposit-loan gap.

“I believe there was a decline in public deposits as the government could be withdrawing funds to meet its high spending obligations,” said Ziad Dabbas, financial advisor at the government-controlled National Bank of Abu Dhabi.

“Regarding the decline in loans, as you know banks are adopting a more careful lending approach and appear to be complying with the instructions of the central bank to bridge the gap between their loans and deposits,” he said.

Another analyst said the drop in government deposits was reflected in money supply indicators published by the central bank yesterday.

“I think the decline in deposits could be a result of a fall in government deposits… this can be seen in the difference between money supply M3 and M2 in the last quarter,” said Humam Al Shamma, financial analyst at the Abu Dhabi-based Al Fajr Securities, a key UAE financial and stockbrokerage firm.

Central bank figures showed the difference between M3 and M2 stood at Dh213bn in the fourth quarter, down from Dh221bn in the third quarter.

A breakdown showed M2, covering currency in circulation, monetary deposits and quasi monetary deposits, stood at Dh733.2bn at the end of 2009 compared with Dh674.3bn at the end of 2008. M3, which includes M2 plus government deposits, rose to Dh946.8bn at the end of 2009 from Dh895.2bn in 2008. M1, involving only currently in circulation and monetary deposits, grew to around Dh222.1bn from Dh208.2bn in the same period.

The report showed the country’s banks were pushing ahead with plans to bolster their capital in line with central bank rules, with their combined shareholders equity surging to Dh231.4bn at the end of December from Dh217.9bn at the end of November. That brought the total increase to Dh78bn in 2009, pushing their capital adequacy to a record 19.2 per cent at the end of 2009.

Banks also boosted their bad debt provisions by around Dh600 million during December, far lower than the Dh3bn allocated in November. From Dh32bn at the end of November, the combined non-performing loans provisions of the banks grew to Dh32.6bn at the end of December 2009.

It was the smallest increase in provisions in December since the beginning of 2009 although it was a record year in terms of bad debt provisions. The slight increase in December was in sharp contrast with expectations that banks would boost their provisions by December because of the end of their fiscal year and the default problem of some entities.

“This shows the banks in general, perhaps except for few institutions, have not taken large provisions for their exposure to the Dubai World debt… this in turn shows that their exposure is either minimal or the Dubai World position has improved significantly,” Al Shamma said.

The bank’s report showed provisions by the banks were Dh12.9bn during 2009, the highest annual level in the sector’s modern history.

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