UAE loan growth likely to remain under pressure this year

Dubai: After ten successive quarters where loan disbursals by UAE banks recorded declines, the first quarter of 2010 actually saw a turnaround. Even then, the loan growth was only an anaemic 0.3 per cent.

But the gains on the loans-to-deposit ratio which is the measure of liquidity was much better at 105.7 per cent for the first quarter and an improvement over the declines in the previous two quarters. Yet, the reading is still some way off from the peak of 110 per cent hit during the third quarter of 2008.

"Loan and deposit growth has been lethargic while we see some increased retail activity, for the most part banks are just replenishing maturing loans leading to flattish growth so far this year," said Deepak Tolani of Al Mal Capital.

"With the number of unknowns that could impact banks in the near future, we are not surprised by their cautious approach. In addition, funding costs have increased considerably over the last year, further weighing down lending growth."

The overwhelming opinion within banking circles is that there will be no marked departure during the second half of the year.

Banks are more intent on streamlining operations and cutting out flab wherever it can. In recent weeks, anecdotal evidence suggests a new round of layoffs has started in earnest at some banks after tapering off towards the beginning of the year.

"Nobody knows when the turnaround will happen, but getting the costs in some sort of shape now is what the banks are doing," said a senior banker at an Abu Dhabi-based financial institution.

"Lending will not see much volume growth in these circumstances."

Muted retail lending

Property financing is still a no-go area for most, and the appetite for retail lending as a whole is muted.

Commercial lending is there, but comes strictly with its set of sectoral preferences.

But local — and regional — banks can always call upon state support as a last resort. Moody's Investors Service in its recent report on the region's banking sector attests as much.

"The fostering of a largely insulated domestic market in the Arab world was aided by the supportive and sometimes interventionist attitude of regulators and states," the report says.

That's certainly not going away. Talking about the situation in the UAE, Tolani said: "We should remember that fundamentally the banks have a strong safety net created by support from the Central Bank and the Ministry of Finance.

"The capital adequacy ratio [CAR] for the banking system at the end of March stood at 20.3 per cent, much above the 11 per cent minimum required locally and far above the 8 per cent [set] internationally."

In other words, they have the liquidity even now to open up their financing processes. They just need the resolve to do it.