Abu Dhabi: The margin compression that the UAE banks faced last year has possibly stopped, but the impact could be felt for another six to nine months, said Alex Thursby, Group Chief Executive of NBAD.

“I think the banks as a whole are still having some margin compression coming through. Do I see wholesale rates coming down much more from where they are now? No. I think they have stabilised. By the time it gets through the bank’s books end to end, it will take about another six to nine months,” said Thursby.

On the retail side of the business, he expects margins to start rising this year. Although analysts and rating agencies have warned that the banking sector could face a potential liquidity squeeze in the context of prolonged low oil prices, Thursby said liquidity will be less of a constraint to banks including NBAD while reduced loan demand could be a concern.

“What will constrain the market as a whole is that people are just getting a little bit more conservative. I don’t think they’ve lost confidence, but are becoming a little bit slower in their decision-making, so I do think this year will be different from last year,” he said.

NBAD expects to offset the potential slower growth in retail and commercial business with robust growth in wholesale and wealth business. “I think it will be a tougher year than last year but I still think it will be a good year,” he said.

Although the UAE banking sector is adequately liquid, Thursby said, going forward, the tightening global dollar liquidity will eventually result in a rise in cost of funding.

Strong liquidity

While the impact of quantitative easing has stopped and a rate hike by the US Fed is anticipated, Thursby expects to see a squeeze on dollar liquidity. “I think that’s a global phenomenon, and we have seen examples of that all over the globe with the exception of the US where people are starting to bid up for US dollar deposits. So, I do think that this year you will see tightness in US dollar liquidity,” he said.

Given the strong liquidity in the UAE’s banking sector, it will not be a big concern for UAE banks initially, but eventually the tighter dollar liquidity is expected to result in higher cost of funds and consequently higher pricing of loans.

“I think pricing change is going to start to happen. It hasn’t yet happened, though. I think retail lending got a little too cheap too quickly and there will be a gradual correction in pricing,” said Thursby.

NBAD’s CEO believes that the key to success in the next two years will be cost of funding because the new liquidity rules and the tightening dollar liquidity. “We’ve been very clear; we want to run a very conservative core liquidity ratio. We run a very conservative loan to deposit ratio, so we don’t have much immediate effect on us. If anything, we’re well prepared,” he said.

On cost of funding, he said the bank is comfortable as it has diversified sources of funding with top ten of its depositors are from offshore. “I think that’s what we’re trying to continue to drive because we see ourselves in this unique situation with the AA- rating, being able in our network wholesale proposition to raise funds not just from here but from outside,” said Thursby.