Loan growth remains sluggish

Dubai: The cautious approach to lending has taken its toll on loan growth across the board.

Emirates NBD reported one per cent decline in loans in the second quarter as most banks reported single digit loan growth in the second quarter.

With the exception of NBAD, most leading banks in the UAE are projecting loan growth in the mid-single digits. While NBAD has projected a 10 to 15 per cent loan growth this year, Emirates NBD said it recognised the sustained improvement in loan demand but has projected three per cent growth for the whole year.

Despite the sustained recovery caution is the watchword in bank boardrooms. "We continue with our prudent approach to stabilising our balance sheet through increased portfolio impairment allowances to cover future contingencies," said Rick Pudner, Emirates NBD's Chief Executive Officer.

The rising burden of provisions has also seen the cost of risk rising for banks restricting loan expansion.

"The UAE banks continue to face the challenge of high cost of risk as banks are forced to strengthen their loan loss reserves," said Jaap Meijer, the head of banks research at AlembicHC.

With new restrictions imposed on retail loans and the fees charged on bank services, from the second quarter of this year banks have to face squeeze on both interest incomes and fee incomes. Although the impact has been modest in the second quarter, on larger banks there were clear indications that non-interest incomes are on decline.

While the non-interest income of Union National Bank declined 10 per cent year on year in the second quarter, the impact has been more pronounced on smaller banks with more retail focus.

While First Gulf Bank reported a 22 per cent decline in non-interest income, RAKBank's fee and commission income declined 10 per cent.

"Fee income and, therefore, total non-interest incomes have been weak for these banks due to the new retail banking regulations," said Naveed Ahmad, senior Financial Analyst with Global Investment House.

The positive side of balance sheet deleveraging and prudent lending practices has been an overall improvement in loans to deposits ratios and liquidity. With significant improvement in liquidity in the banking system many analysts expect banks to loosen lending in the coming quarters.

The gap between the UAE three-month interbank rate and the US three-month interbank rate has narrowed to about 125 basis points, the smallest since 2008, indicating an improving liquidity situation that supports more lending.

Increased external deposits from some of the countries facing political unrest in the region combined with fund inflows from recent bond issues have helped to improve liquidity in the system in the second quarter.