Banking sector maintains strong liquidity despite a drop in deposits

Dubai

The UAE’s banking sector liquidity continued to remain strong in the month of April despite sluggish growth in both deposits and credits, according to monetary data from the Central Bank of UAE.

An analysis of April data by Abu Dhabi Commercial Bank’s (ADCB) Economics Team showed a monthly drop in both system-wide credit and deposits. Gross credit contracted by 0.1 per cent month on month in April (Dh1.5 billion) after seeing three consecutive months of positive growth. The yearly rate remained steady at 2.1 per cent year on year, as in March. The monthly contraction in April was led by domestic loans.

The government related entities (GRE) segment saw positive loan growth of 0.2 per cent — its first since November 2017. Within the private sector, there was also a change of trend with retail credit growth seeing its first monthly increase in 2018. This, according to analysts could tentatively point to some normalisation in consumer demand following the introduction of VAT in January, though further data is awaited.

“We expect the drivers of private consumption, especially those related to the labour market, to remain weak, and do not expect to see a meaningful strengthening for the remainder of the year. Overall, the data points to a weak credit demand backdrop so far in 2018, largely due to the retail and GRE segments,” said Monica Malik, Chief Economist of ADCB.

System-wide deposits fell marginally by 0.1 per cent month on month (Dh2.3 billon) in April but deposits were up 3.4 per cent year on year and 2 per cent year to date. The monthly contraction was driven largely by both the government and GRE segments. Government deposits fell by 9 per cent month on month April after increasing by a robust 15.1 per cent in March. Government deposits were still 6.2 per cent year-on-year higher and flat on an YTD basis in April.

Combined net government and GRE net deposits also remained high compared to recent levels but down from the multi-year high in March. Meanwhile, non-resident deposits rose for a second consecutive month, by 0.7 per cent month on month and 3.6 per cent year on year.

Overall liquidity levels remained high with the loan-to-deposit (L-to-D) ratio rising marginally to 96.8 per cent in April from 96.7 per cent in March. The ratio remains well below the recent high of 99.8 per cent seen in August 2017. Despite the comfortable banking sector liquidity conditions, Eibor [Emirates Interbank Offered rates] have risen in 2018, partly reflecting the increase in the US Libor rate, especially in the first quarter. However, the differential between the Eibor and US Libor rates has widened since April.

Analysts expect the UAE interest rates to go up this month following the expected US rate hike. “We see the UAE Central Bank raising its benchmark repo rate by 25 bps again to 2.25 per cent in June, in line with the Fed. The Fed is expected to hike the fed funds target rate (FFTR) to 2 per cent (the upper bound) on 13 June,” said Malik.