First quarter UAE banking sector data points to improving liquidity
Deposits and loans rose in March with NPLs on decline
Dubai: The UAE banking sector liquidity conditions in the first quarter of 2017 has eased further from year end 2016 and banks have substantially better liquidity position at the close of the first quarter of 2017 according to the latest data from the Central Bank of UAE
March data shows the gross loan-to-deposit rate fell to 99.7 per cent in March, down from 100.3 per cent in the previous month. In the first quarter of 2017, deposit growth of 2.5 per cent outstripped credit growth of 1.5 per cent. This is the lowest L-to-D ratio since May 2015. Analysts said the improved liquidity conditions are partly behind the limited rise in EIBOR [Emirates Interbank Offered Rates], especially following the 25 bps rise in the US interest rates and the subsequent UAE repo rate in March.
The overall improvement in the banking sector liquidity was supported by improvement in deposits which rose by 1.3 per cent month on month Dh20.6 billion in March after a solid increase in February of a 1.2 per cent or Dh19.1 billion. However, on a yearly basis, the deposit growth rate decelerated to 6.6 per cent year on year in March from 7.5 per cent in February.
Deposit growth was largely driven by domestic deposits in March, rising by 1.7 per cent month on month by Dh23.3 billion, with both GREs and private sector segments seeing strong increases. The GRE deposits were up by 9 per cent in March compared to February but the government deposits fell by 2.6 per cent in the same period but remained substantially higher than their recent low in October last year. Government deposits were up 20.8 per cent in March compared to October levels, and were 24.8 per cent higher year on year.
Overall non-resident deposits in the banking sector fell by 1.4 per cent month on month by Dh2.7 billion in March, their third consecutive monthly decline. “We see this as a result of banks shedding their more expensive non-resident deposits given the higher domestic ones. Non-resident deposits have fallen by 5 per cent year to date and now account for 11.8 per cent of total banking sector deposits, down from 12.7 per cent in December 2016,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB).
In March, gross credit growth continued to strengthen on a monthly basis, rising from 0.5 per cent in February to 0.7 per cent month on month, the fastest pace since September 2016. However the annual loan growth decelerated further to 5.3 per cent year on year, reflecting the soft pace of credit expansion in the fourth quarter of 2016 and January 2017.
The first quarter 2017 average monthly credit growth of 0.5 per cent was below the 2017 first quarter level of 0.7 per cent despite the pickup in credit growth in February and March. The recent strengthening in monthly credit growth was largely driven by the GRE segment, which rose 3.1 per cent in March compared to the previous month with government borrowing from the banking sector also accelerating 2.3 per cent.
The UAE’s economic growth which faced strong headwinds following prolonged low oil prices and slump in international trade are seen bottoming out this year for a turnaround from 2018, according to recent economic forecasts.
According to Bank of America Merrill Lynch the UAE has managed a soft landing, with a less pronounced cycle than in 2008. “We expect non-oil real GDP growth to have bottomed out as the fiscal drag eases and infrastructure activity picks up,” said Jean Michel-Saliba, MENA Economist of Bank of America Merrill Lynch.
The latest projections in the International Monetary Fund’s (IMF) World Economic Outlook report released last month agree. According to the IMF, real GDP (gross domestic product) growth in the UAE is forecast to slow down to 1.5 per cent in 2017 from 2.7 per cent last year and recover sharply to 4.4 per cent in 2018.
“Banks’ liquidity and capital buffers are helping them cope with lower oil prices. The central bank’s actions to phase in Basel III liquidity and capital requirements should further strengthen the resilience of the banking system,” said Natalia Tamirisa, head of IMF Mission to the UAE which recently concluded its Article IV discussions with the UAE authorities.
Pick in projects
The value of UAE projects awarded rose by a solid 42.6 per cent quarter on quarter in the first quarter of 2017, with both Dubai and Abu Dhabi seeing significant increase. The value of projects awarded was above the two-year trend level and up a moderate 2.1 per cent year on year in the quarter. Constructions projects continued to dominate total UAE awards, up 25.6 per cent year on year and there was also a yearly increase in oil and power projects in the first three month of the year led by led by Abu Dhabi.
Data continues to suggest that GREs started to implement their 2017 budgets from February and are likely to be a key source of loan demand in 2017, with a reliance on self-funding to meet spending requirements. Private sector credit growth remained weak at 0.2 per cent in March compared to February, resulting in the yearly rate decelerating to 5 per cent year n year.).
“There was a pick-up in monthly corporate loan growth to 0.4 per cent, possibly reflecting the gradual strengthening in non-oil activity in 2017. However, we need to see further months of improvement to be confident of a trend. The ongoing labour market uncertainties continue to be reflected in soft personal loan demand, which contracted by 0.2 per cent m-o-m in March,” said Shailesh Jha, an economist at ADCB.
Gulf News (22/5/2017)