UAE credit growth picks up on government demand

Dubai

Credit growth in the UAE picked up pace in July for the second consecutive month according to the latest data from the Central Bank of UAE analyses by the Economics team at Abu Dhabi Commercial Bank.

Data showed, gross credit expanded by 0.7 per cent month on month in July for the second consecutive month, its strongest pace seen so far this year. Annual gross credit growth accelerated to 5.1 per cent year on year in July on the back of the monthly expansion, up from 4.3 per cent year on year in the previous month.

According to ADCB economists, the government and the GRE [government-related entities] segments were behind the solid monthly loan growth in July, both rising by 2.4 per cent month on month. Overall, the government and GRE segments have seen strong growth in 2019 year to date (YTD), rising by 7.8 per cent and 7.6 per cent respectively.

“We believe that this potentially reflects some progress being made with projects in Abu Dhabi and greater investment activity in Dubai to complete infrastructure ahead of Expo 2020. However, the data continues to point to a loss in momentum of private sector credit growth, which contracted by 0.1 per cent month on month in July with a fall in corporate loans of the same magnitude,” said Monica Malik, Chief Economist of ADCB.

Data showed private businesses’ credit growth steadily decelerated to 4.3 per cent from a recent high of 7.5 per cent year on year in October 2018. “This likely reflects the ongoing domestic challenges and the rising external headwinds. There were further signs of a stabilisation in retail credit demand, after it fell on a monthly basis for seven consecutive months until May 2019,” said Thirumalai Nagesh, an economist at ADCB.

Tepid deposit growth

System-wide deposit growth decelerated to 0.2 per cent month on month and 4.9 per cent year on year in July, from 0.9 per cent and 5.3 per cent, respectively in June. Resident deposits contracted by 0.2 per cent in July, with government deposits declining 5.3 per cent and private sector deposits falling 0.3 per cent.

Gross government deposits were still up by a solid 10.1 per cent in July, thanks to the rise seen in the second half of 2018. Within the resident segment, only GRE deposits saw a monthly increase in July and were up a solid 10.7 per cent YTD.

Data shows combined net government and GRE deposits in the banking sector fell in July, with the solid loan growth and the fall in government deposits, but remain high on a historical basis. Non-resident deposits rose by 3.2 per cent in July, likely due to banks looking to compensate for the fall in resident deposits.

The loan-to-deposit (L-to-D) ratio rose gradually in July to 95.9 per cent from 95.4 per cent in June with credit growth outpacing deposit growth.

“The L-to-D ratio still points to ample liquidity in the banking system, albeit rising from the low seen in December 2018. Meanwhile, we see the Central Bank of the UAE lowering its benchmark repo interest rate by a further 25 bps in mid-September, in line with the Fed,” said Malik.