Strong economic performance boosted credits by the UAE banks to a record Dh260 billion in the first nine months of 2008 but lending activity was expected to have slowed down in the last quarter, according to official figures.
Deposits also jumped by about Dh216bn at the end of September but their growth was slower than that of credits, leading to a further widening in the deposit-to-loan ratio, showed the figures by the Central Bank.
Liquidity, including monetary and quasi money, and current in circulation outside banks, declined in September for the first time in nearly two years and was expected to have slowed down further by the end of the year.
From Dh718bn at the end of 2007, the total credits and advances extended by the UAE's 24 national banks and 28 foreign units leaped by about 36 per cent to a record high of Dh976.9bn at the end of September 2008.
The increase of nearly Dh260bn was the highest ever recorded by UAE banks in recent history as it surpassed the credits of about Dh181bn provided by the banks during all of 2007.
Bankers said the surge was caused by strong demand for loans in the first nine months of 2008 as a result of a sharp rise in oil prices, high growth in the domestic economy and an upsurge in construction and other sectors.
"I think the rapid growth in loans tapered off in the last quarter of 2008 because of the global financial crisis and the ensuing tightness in credits. Another reason is that the banks in general became more careful in lending," said an Abu Dhabi-based banker.
"Yet I believe the lending activity through 2008 was one of the strongest in many years and this explains the higher profits last year."
The surge in credits and slower growth in deposits boosted the loan-to-deposit ratio to a record 1.12, one of the highest in the Middle East. To meet demand, UAE banks continued to withdraw funds from their deposits with the Central Bank in the last quarter despite a Dh50bn emergency facility announced by it for banks to allow them to face any liquidity shortage.
The facility was further backed by Dh70bn offered by the Federal Government as a deposit with the banks.
After regaining nearly Dh69bn in the second quarter, the national and foreign banks withdrew a further Dh63bn between June and October, showed the figures.
The withdrawal was reflected in a sharp decline in the Central Bank's certificates of deposits (CDs) balance from a peak of Dh185.6bn at the end of March to Dh116.7bn at the end of June and Dh53.6bn at the end of October.
Bankers said national and foreign banks had used only about Dh10bn from the Central Bank's Dh50bn facility, indicating they still enjoy a good financial position.
"This also shows the banks have become more careful and more selective in extending credits," said another banker.
A breakdown showed that by the end of September, personal loans for business purposes were the highest component of the banks' credits, totalling about Dh159bn. Personal consumer loans stood at Dh64.9bn while real estate mortgage loans totalled about Dh115.7bn. Sector-wise, trade had the lion's share of the credits, receiving about Dh130bn. It was followed by the construction sector, which got nearly Dh107bn. About Dh68bn was extended to non-bank financial institutions, Dh62bn to the government and Dh49bn to industry.
The report showed liquidity declined for the first time in nearly two years, with M2 dipping to about Dh681.3bn at the end of September from Dh692.4bn at the end of August. M1 slipped to Dh235.2bn from Dh237.9bn.
"The decline for the first time after a rapid growth over the past two years is a sign of easing inflation in the country," said an economist at a UAE bank. The figures showed the combined assets of the UAE banks swelled to a record Dh1.446 trillion at the end of September from Dh1.223trn at the end of 2007 to maintain their position as the largest banking sector in the Middle East.