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UAE Banks to Experience Strong Liquidity This Year

Dubai: The liquidity situation in the UAE’s banking sector is much more comfortable due to surging oil prices, as compared to the previous two years, and banks are expected to experience an abundance of funds in the near term, banking sector analysts and rating agencies have said.

“Loan-to-deposit ratios have been on an improving trend over the past 12 months, meaning that deployment of funds rather than lack of liquidity is the new theme amid slowing credit demand,” said M.R. Raghu, head of Research at Marmore.

The gross loan-to-de-posit (L-to-D) ratio moderated to 97.1 per cent in December-2017, down from 99.4 per cent at the end of 2016, with deposit growth outpacing credit growth. If the recovery in oil prices is sustained through 2018, it could boost the government oil revenues, reducing pressure on government deposits at banks and lowering governments’ financing needs.

UAE banks continue to maintain high levels of non-remunerated deposits, which lower the cost of funding. The UAE banks’ deposits stood at $443 billion at the end of 2017, higher than the $426 billion seen at the end of 2016. Stabilising oil prices contributed to a 14 per cent year-on-year surge in government deposits, which reached $57.7 billion (Dh211.93 billion) as of 2017.

The 2018 sector outlook for UAE banks remains stable as faster economic growth in UAE is expected to support credit growth. According to Moody’s, credit growth is forecast at 5 per cent for 2018, higher than the 2 per cent growth witnessed in 2017, but lower than the 5.8 per cent in 2016 and the 8 per cent growth seen in 2015.

The sluggish economic activity in 2017 has repercussions on loan performance and will likely push non-performing loans (NPLs) in the range of 5.5-6 per cent in 2018, compared to the expected 5.3 per cent in 2017. However, the first-quarter results of leading banks have shown a decline in NPLs. A clearer picture in likely to emerge in the third and fourth quarter of the year.

“The loan book of UAE banks continue to be skewed in favour of state-owned entities (SoEs) and real estate, which continue to be a cause of concern. If there were to be a reversal of real-estate prices and default of Dubai’s restructured debt, this could lead to comeback of asset-quality problems in the UAE. However, the loan performance of the GRI [government-related institutions] and large corporates is expected to remain resilient,” Raghu said.

Sectors sensitive to fiscal consolidation such as contracting, construction, real estate, retail and small and medium-sized enterprises are likely to face higher loan impairments.

Consumer confidence remains weak with the limited pay increase and lacklustre employment backdrop, with some areas continuing to see jobs losses. This would weaken the loan performance of household and retail borrowers as job losses and employment uncertainty constrain the repayment capacity of borrowers.

Loan performance is also somewhat negatively impacted by subsidy cuts and value-added tax (VAT) implementation in the UAE. These measures are expected to dent disposable consumer income and their debt servicing abilities, and are further expected to weaken the performance of consumer loans and of retail and commercial industries.

Retail loans account for one-fourth of the UAE banking sector’s total loans, with weak loan performance in this segment seen having heightened repercussions. The quality of the loans to small and medium enterprises (SMEs) is also expected to remain under stress.

“Defaults in the segment reflect the softer economy, which is affecting small businesses and individuals. Since the financial developments in UAE and oil price developments are interlinked, the extent of oil price recovery in the coming years will play a crucial role in determining the improvement in the asset quality,” said Irfan Ahmad Naheem, a senior analyst at Marmore.


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