Total loan growth and deposit growth in the UAE’s banking system declined in August Image Credit: Supplied

Dubai: Total loan growth and deposit growth in the UAE’s banking system declined in August according to the latest data from the Central Bank of UAE (CBUAE).

The data analysed by ADCB’s Economics Team showed credit growth primarily driven by government slowed to 4.6 per cent year on year in August compared to 5.1 per cent growth in July and 0.2 per cent month on month.

“The weaker pace of monthly loan growth could have reflected the traditionally quieter summer period alongside some payback from the solid growth seen in the previous two months,” said Monica Malik, chief economist of ADCB.

Credit to private sector grew at a sluggish rate of 0.1 per cent month on month and slowed further in annual terms to 2.3 per cent year on year from 2.6 per cent growth in July and the recent high of 5.4 per cent in October 2018. This overall deceleration likely reflected the challenges facing the key non-oil sectors. Gross loans to individuals have shown some signs of stabilisation from mid-2019 in monthly terms, though are still down 1.4 per cent year to date (YTD) and 1.8 per cent year on year in August.

The government sector largely drove the credit growth in August. Gross government loan growth expanded by 1.1 per cent month on month (Dh2.3 billion) in August against 2.4 per cent in July. The government sector saw its strongest credit growth YTD at 9 per cent, followed by the government related entities (GRE) segment at 6.4 per cent YTD. However, gross credit to GREs contracted by 1.1 per cent in August compared to July after three consecutive months of growth.

“We believe that the higher government and GRE credit demand overall this year likely reflects a pickup in investment activity; and the government’s shift to a more expansionary stance,” said Malik.

Overall banking sector deposits declined on monthly basis including resident and non-resident deposits, system-wide deposits fell by 0.8 per cent in August from July and have been broadly flat year to date.

The sharp deceleration in annual deposit growth to 3.6 per cent in August from 9.1 per cent in February is largely attributed to the high base after the marked rise in deposits in the second half of 2018 led by the government sector.

Data showed all components of total banking sector deposits including resident deposits, government and GRE deposits dropped in August. Combined net government and GRE deposits in the banking sector also fell in August with the expansion in credit to the government and the moderation in deposits.

Net government and GRE deposits still remain historically high. Non-resident deposits fell in August, by 3.2 per cent month on month and are down 7.9 per cent year to date. “This likely reflects banks having shed their generally more expensive foreign deposits on the back of having sufficient domestic liquidity. Non-resident deposits accounted for 11.1 per cent of total gross deposits in August, down from 12.2 per cent at end-2018,” said Thirumalai Nagesh, an economist at ADCB.

The loan-to-deposit ratio (L to D) saw a small rise in August to 96.8 per cent pointing to credit growth outpacing deposit growth. The ratio has been on gradual rise from January 2019.

“The loan-to deposit ratio and wider monetary data still points to comfortable system-wide liquidity, albeit seeing some tightening from the beginning of the year. Again, we believe that this reflects the sharp rise in government deposits in the second half of 2018, which boosted liquidity,” said Nagesh.