Cost of funding seen rising

Sunday, Oct 11, 2015

Dubai: Interbank lending rates have been increasing from their record lows seen in late 2014 as banking sector liquidity tightens. This tightening was also reflected in the loan-to-deposit ratio rising to 102.3 per cent in August 2015, from 97 per cent in December 2014.

Banks are both turning to the loan market and issuing bonds to meet their funding requirements. Financial institutions issued 86 per cent of the $19.8 billion (Dh72.72 billion) of bonds sold by GCC entities in first nine months of 2015, according to Bloomberg.

“We see interbank interest rates [and banking sector lending rates] continuing to rise in the fourth quarter of 2015 and 2016 on the back of the likely further withdrawal of liquidity from the domestic banking system. However, the expected moderation in lending growth could partly offset the tightening liquidity. Moreover, deposit growth may well receive a boost from the higher expected deposit rates,” said Monica Malik, chief economist of the Abu Dhabi Commercial Bank.

Deposit growth is expected to contract further the closing months of 2015 and in 2016 as the government and GREs continue to tap deposits. This could lead to a further tightening in liquidity and an increase in the cost of funding (including deposits) for the banking sector.

“We believe that the higher expected funding costs would likely cause lending rates to increase in the outlook period,” Malik said.

By Babu Das ?Augustine Banking Editor