Dubai: Credit and deposits growth in the UAE’s banking sector eased in June according to the monetary data from the Central Bank of UAE.
Gross loans fell by 0.5 per cent month on month. While the on ongoing weak credit demand has contributed to slower credit growth, decline last month is largely attributed to seasonal factors.
On a yearly basis, credit growth decelerated further to 3.1 per cent year on year in June, down from 6 per cent in December 2016. Loans to government related entities (GREs) dropped 2.5 per cent month on month for the third consecutive month. Private sector credit growth also fell in June on a month on month basis, led by the corporate sector.
Deposits saw a greater fall, contracting by 1.6 per cent month on month. However, following the previous four months of solid growth, deposits are still up 1.7 per cent year on year and 6.4 per cent year to date.
“We await further data to see if the June fall was a one-off development, possibly impacted by seasonal factors such as the timing of Ramadan. Banks could also have looked to reduce liquidity at the end of the quarter given softer loan demand, especially heading into the traditionally quieter summer period,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB).
June numbers show most areas of resident deposits fell, except GRE deposits. The GRE sector returned to being a net depositor in the banking system in June after the monthly rise in deposits and contraction in credit. This partly helped to compensate for the moderation in the government’s net deposit position from the previous month.
After reporting strong growth in May, government deposits fell by 8.1 per cent in June. Non-resident deposits declined for a sixth consecutive month in June, falling 1.3 per cent month on month. “We believe that this likely reflects banks shedding their more expensive non-resident deposits given the improved liquidity conditions in the economy,” Malik said.
The second quarter 2017 data on both credit and deposits point to some deleveraging by GREs. Analysts believe factors such as greater reliance on other borrowing sources such as the debt market; and ongoing adjustments by GREs to adapt to the weaker oil could be behind the weaker demand.
“We believe that other forms of funding are also likely reducing the demand for private sector corporate loans, such as from international export-credit agencies, especially given signs of a pickup in investment activity.”
While the banking system continued to face some tightening in liquidity, overall liquidity remained comfortable in June. The gross loan-to-deposit ratio rose to 100.1 per cent in June, from 99 per cent in May, after a greater drop in deposits versus loans. Nevertheless, banking sector liquidity conditions remain comfortable and substantially better than at end-2016.
The overall improved liquidity conditions in 2017 have supported the relatively limited rise in Emirates interbank offered rates (EIBOR), despite the Central Bank of the UAE raising the benchmark repo rate by 50 bps in the first half of 2017 following the Fed hikes in March and June.
