The head office of the National Bank of Abu Dhabi. The UAE Central Bank rules restricting lending will lead to a period of consolidation in the banking sector, according to analysts. Image Credit: Gulf News archive

Abu Dhabi: Loan growth in the UAE is set to expand in the months ahead as there’s an improved liquidity in the financial system and fiscal third quarter results suggest provisioning for bad loans are beginning to weigh less on banks’ profitability. However, experts say the growth would be stuck in the lower gear, at least in the foreseeable future, since the central bank rules restrict lending to the government and puts limits on personal and retail credit.

“The UAE registered a very rapid credit growth prior to 2008. The current period represents a consolidation period and is expected to persist in 2013,” Giyas Gokkent, chief economist at the National Bank of Abu Dhabi (NBAD) told Gulf News.

He added: “A number of banks have yet to report third quarter results. For those that have reported, we estimate assets were up 11 per cent year-on-year (+3.8 per cent quarter-on-quarter) driven in particular by the largest bank in Abu Dhabi (NBAD). Most of the reporting banks saw an improvement in quarterly profit, but the biggest recovery occurred at Emirates NBD, which registered a bounce from poor 2011 third quarter results.”

Gokkent said the UAE central bank data as of August indicates that in the country’s banking sector overall, net assets were up by 3.8 per cent year-on-year, net loans were up 3.2 per cent year-on-year, while deposits rose 3.5 per cent year-on-year. Total provisions were up by 26.7 per cent, year-on-year to Dh81.6 billion or about 7 per cent of estimated gross loans.

Subdued credit growth

“The rise in provisions has slowed down compared to 2010. General provisions are largely unchanged from March 2012 at about 1.5 per cent of gross loans. Specific provisions have continued to rise from 4.8 per cent of gross loans at end-2011 to about 5.5 per cent by August. We expect continued subdued credit growth in 2013 given the operating environment,” said Gokkent.

As matters stand, the UAE interbank lending rates, used as benchmarks in loan pricing have fallen since July to record lows, according to media reports.

Janany Vamadeva, an independent banking analyst told Gulf News improving liquidity and saturating credit costs bode well for the UAE banking sector.

“However, the other side of the equation — demand from corporates — still need to pick up given the curb on lending to government related entities and retail. This shifts the onus to the private sector from the public. Despite signs of improvement in the macro picture, it will take some time for bank lending to pick up speed,” added Vamadeva.

Jitendra Gianchandani, chairman of Jitendra Consulting Group in an email said the central bank’s restrictions to lend to government entities and to those in personal and retail sector will create an organic lending environment in the long run, as banks have been exhausting their funds to big and the same clients over a period of time.

Global risks

“With the restriction in place, new and diverse sectors other than retail will get the benefit of bank loans, which will be good for the economy,” said Gianchandani.

He said in spite of the improved liquidity at the banks, globally, the economic risks are still hovering, adding many companies are vigilant about the over-trading and want to play it safe which means they may not be keen to go in for more loans and amid higher risks.

“The tricky issue is, with the new regulations in place, banks now have to look for new clients with sound financial track records. This may be challenging in today’s times. I think, this will create more competition among the banks as they have to offer a competitive price to their customers. This in turn, may result in lower cost to business entities and ultimately, the consumers could benefit,” Gianchandani said.