UAE: Loan to deposit ratio remains a constraint

• Text size
•  
•  

Despite an improving loan-to-deposit ratio, the outlook for the UAE banking sector is still in a convalescence and balance sheet stabilisation mode, and it's likely to remain like that for most of the year, a senior banking analyst has said.

The loan-to-deposit ratio of banks currently stands at 104 per cent, down from a peak of 106 per cent at its peak, and 105 a year ago.
 
"I believe the drop in the ratio is primarily due to an increase in public sector deposits. The decline in ratio means deposit growth will be less of a constraint, but it still remains a constraint," Raj Madha, Senior Banking Analyst of the UAE-based Rasmala Investment Bank, told Emirates 24|7.
 
Data from the UAE central Bank show that the capital adequacy ratio of the UAE banking sector currently stands at 20.4 per cent, while their loan-deposit gap is thinning.
 
UAE banks' deposits have increased 2.4 per cent from June last year to June this year, while loans and advances (net of provisions) have grown slower by just 1.6 per cent during the same period, the data show.
 
Banks' deposits last month stood at Dh985.4 billion ($268.3 billion) from Dh961.7 billion ($261.91 billion) in the same month last year. Loans and advances, on the other hand, rose to Dh1.025 trillion ($279.3 billion) last month from Dh1.009 trillion ($274.7 billion) in June last year.
 
Nonetheless, the drop is a cause of relief for the banking sector, as when the loan-to-deposit ratio decreases, the requirement for banks to compete aggressively for deposits gradually diminishes. As a result they don't have to pay as much for deposits and their cost of deposit comes down, he added.
 
"I expect the ratio to continue to fall, because some banks have bond redemptions falling due and they're likely to need to replace this with deposit funding," Madha said.
 
Additionally, high bank provisions continue to be a cause of concern for banks, he added.
 
"The high provisions are the result of the difficult operating environment faced by a number of corporates and personal accounts. Within many areas of business, slowing revenues has resulted in weaker cash flow, and that has led to problems with operations. Difficulties for personal accounts primarily reflect weakness in the labour market, although in some cases it may also be driven by an over-leveraged consumer," he said.
 
A recent report by Rasmala noted that while provisioning has hammered [banks'] profitability in the short term, stabilisation of NPLs around the end of 2010 should mean a recovery next year.
 
At first this recovery will be limited, given the excess capital built up for prudential reasons, it noted, adding that returns around 20 per cent level would be achieved as leverage levels are regained, and could be maintained in the medium term.

By Sunil Kumar Singh

© Emirates Business 24/7 2010