16 December 2015
UAE banks are facing heightened competition and tighter funding conditions. The UAE banking sector is facing a less robust economic outlook on the back of lower oil prices and prospects of higher interest rates which could raise the cost of borrowing for corporations, including for government related entities that carry substantial debt.

The U.S. Federal Reserve is expected to raise interest rates for the first time since 2006 at its Dec. 15-16 meeting. Most Gulf Arab states are expected to follow suit because their currencies are pegged to the U.S. dollar. Kuwait may have more flexibility as it is the only Gulf state that uses a currency basket.

Rising interest rates could hurt growth at a time when Gulf economies are slowing due to the sharp decline in oil prices and local banks are facing a liquidity squeeze as government deposits drop.

The United Arab Emirates is expecting gross domestic product growth of between 3 and 3.5 percent in 2015 and 2016, the economy minister said in published remarks earlier this month, below the 4 percent earlier forecast by the central bank for 2015.

The UAE banking sector reflected the widespread slow down in the third quarter, with several major banks recording single-digit profit growth. Last year, the sector collectively witnessed 22 percent growth, according to ratings agency Standard & Poor's.

National Bank of Abu Dhabi, the UAE's largest bank by assets, said in October that government deposits dropped by AED 48 billion in the past 12 months after it reported a 3 percent fall in third-quarter profit, according to a Reuters report.

Heightened competition between banks and tighter funding conditions are also impinging on banks' performance, according to the Economist Intelligence Unit. "Unsurprisingly then, the largest banks reported at best single-digit profit increases in the third quarter," it said.

The UAE Central Bank's quarterly survey of credit officers at UAE banks noted that softening demand for loans as well as less willingness to lend by banks "may slow down bank credit in the period ahead."

The bank's latest preliminary data on the banking sector showed that total bank deposits fell by AED 1.4 billion in October 2015, to reach AED 1.435 trillion.

"This decrease was predominantly attributed to a decrease of AED 2.7 billion in resident deposits," the central bank said, noting that gross bank assets fell by 0.1% to reach AED 2.422 trillion compared to September, while gross credit saw a 0.2% increase during the period."

© Zawya 2015