Monica Malik, Chief economist of Abu Dhabi Commercial Bank Image Credit: Pankaj Sharma/Gulf News

Dubai: The UAE’s total banking sector credit returned to positive monthly growth in July, reaching 0.2 per cent month on month after a contraction of 0.5 per cent in the previous month, according to UAE Central Bank data.

Modest monthly improvement credit offtake saw the annual credit growth rate ticking up to 3.5 per cent year on year from 3.1 per cent in June.

The domestic loan growth expanded by 0.3 per cent last month as all domestic sectors saw a monthly rise in loan growth, with the government sector seeing the strongest increase.

“Within the private sector, monthly retail credit growth has outstripped the expansion in the corporate segment for the last two months. However, this could be partly due to seasonal factors, with weaker corporate credit demand over the summer and some payback for the soft consumer loan growth of the previous few months,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank.

Overall, the data still point to weak credit demand, with gross monthly credit growth averaging 0.2 per cent month on month in the seventh month of this year, down from 0.5 per cent over the same period in 2016.

Banking sector deposits rose by a moderate 0.2 per cent (Dh3.1 billion) in July, which helped to push up the annual deposit growth rate to 7.1 per cent from 6.4 per cent in June. The increase was driven by the non-resident deposit segment, which had seen six consecutive months of decline before July. “It is yet to be seen whether this is a one-off or will develop into a trend, though it could tentatively indicate a reduced ability to raise deposits domestically,” said Malik.

Non-resident deposits rose by 2.8 per cent (Dh5 billion) month-on-month in July, though they are still down 7.1 per cent year to date. The fall in non-resident deposits in the first half of 2017 was likely due to improving system-wide liquidity, partly due to higher government deposits, allowing banks to shed their more expensive deposits. Non-resident deposits accounted for 11.6 per cent of the total in July, down from 12.7 per cent in December 2016.

Domestic deposits fell by 0.1 per cent month on month, the second consecutive monthly drop, albeit less than the 1.7 per cent contraction in June.

The greatest monthly fall in deposits was from the government related entities (GRE) sector, of 3.4 per cent month on month though this was after a strong rise of 4.9 per cent in the previous month. Government deposits also saw a monthly drop in July, falling 0.9 per cent month on month, but are still up 5.8 per cent year on year. In July both the government and GRE sectors remained net depositors in the banking system.

Liquidity conditions have eased year to date in 2017 versus 2016, with deposit growth largely outstripping credit growth. This trend has helped to limit the upwards pressure on market interest rates. Loan-to-deposit ratio for the banking system remained steady at 100.1 per cent in July.