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January credit growth remains anaemic in UAE as deposit fall moderates

Moderate fall in interbank rates point to easing banking sector liquidity

Gulf News

Dubai: Loan growth in the UAE’s banking sector remained weak in January while the overall system-wide decline in deposits moderated in the first month of the year according latest statistics from the Central Bank of UAE.

Gross loan growth was soft in January, rising by just 0.2 per cent month on month resulting in the yearly growth rate decelerating to 5.7 per cent year on year. This was the softest annual growth rate since early 2014.

Data shows private sector credit growth picked up to 6.2 per cent year on year in January after December’s 5.6 per cent. This acceleration was driven by the corporate sector, with retail credit growth continuing to decelerate.

Total government related entities (GRE) loans contracted for a second consecutive month in January, falling 0.9 per cent month on month. Thus, GRE credit growth decelerated to 3.1 per cent year on year, down from 9.2 per cent in December and 10.1 per cent in November.

“The latest credit and deposit data point to lower domestic bank funding requirements for the GRE segment from the mid-2016 levels, though whether this trend continues throughout 2017 remains to be seen. The higher GRE borrowing requirement was a key factor behind the tightening in banking sector liquidity in 2016,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB).

System-wide deposits in the UAE fell by a marginal 0.1 per cent (Dh1 billion) month on month in January. Consequently, banking sector deposits remained comfortable following two strong months of growth at end-2016 — the usual year-end seasonal trend. Total deposits were still up at about Dh58.7 billion in January from the October 2016 level.

On an annual basis, total deposits were up 6.2 per cent year on year, steady versus December. Looking ahead, there could be a further shedding of deposits if credit demand remains weak. The January monthly drop was led by the non-resident segment down by Dh2.1 billion or 1.1 per cent, month on month. However the non-resident deposits were still higher on an annual basis up 19.1 per cent and accounted for 12.6 per cent of total deposits. Total resident deposits continued to rise in January, by Dh1.1 billion, up 0.1 per cent compared to December figures. This was largely driven by the GRE segment. All other domestic components saw a moderate monthly drop.

Liquidity easing

As a result of the small fall in deposits, the UAE’s gross loan-to-deposit ratio rose marginally to 101 per cent in January from 100.7 per cent in December. However, UAE interbank rates have fallen moderately last month, pointing to easing banking sector liquidity conditions.

“Tightening pressure could again emerge if domestic credit demand picks up in 2017, possibly on stronger economic activity. We forecast an acceleration in real non-oil GDP in 2017 to 2.9 per cent from 2.3 per cent in 2016, led by increased investment activity in Dubai,” said Shailesh Jha, an economist at ADCB.

Economists said regional developments will also be important and could feed through into the UAE.

“We expect liquidity conditions to remain tight in Qatar, as credit growth remains robust. The fiscal deficits in Saudi Arabia, Oman and Bahrain are also forecast to remain large in 2017 around 10 per cent of GDP), and these will need to be funded. We believe that foreign borrowing will be central to reducing liquidity tightening pressures in these countries. We expect interbank rates to rise in 2017, in line with US fed funds rate hikes. We currently see two 25 bps rate hikes by the Fed in 2017, in June and December,” said Malik.