Dubai: Monetary data form the Central Bank of UAE for August showed a monthly drop in system-wide credit and deposits in the banking sector.
Gross credit fell by 1 per cent month on month in August, with domestic loans contracting by a greater 1.3 per cent.
The main drivers behind this trend were the government related entities (GREs), and the private sector, whose credit offtake contracted by 1.8 per cent and 1.6 per cent respectively.
The government segment saw positive loan growth of 0.9 per cent.
August data also showed that on a yearly basis, credit growth decelerated further to 2 per cent year on year, from 3.5 per cent in the previous month.
“Overall, the data points to weak credit demand backdrop in 2017, despite signs of a measured pickup in economic activity,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB).
Year to date credit growth has been anaemic with total loans expanding by just 0.3 per cent at the close of the eighth month of 2017.
“We believe that a number of factors are behind the weaker credit demand such as greater reliance on other borrowing sources; ongoing adjustments by GREs to adapt to the weaker oil price; and soft consumer demand,” Malik said.
Retail credit growth fell by 5.8 per cent month on month and by 3.5 per cent year on year in August.
“Consumer confidence remains weak with the limited pay increased and lacklustre employment backdrop, with some areas continuing to see jobs losses,” said Thirumalai Nagesh, an economist with ADCB.
In contrast to retail credit growth, corporate (private) credit growth was positive in August, and is expected to see support in the last few months of the year with signs of a pickup in project awards. However, other forms of funding, including from international export credit agencies, are likely reducing demand for banking sector loans.
System-wide deposits also fell in August by 0.6 per cent month on month with both resident and non-resident deposits moderating by 0.5 per cent and 1.4 per cent respectively.
“We believe that banks could have been looking to reduce liquidity, especially given the weak credit demand backdrop. The monthly fall in resident deposits was due to the GRE and private sectors. Notably, the government saw a 5.8 per cent month on month increase in deposit, resulting in the yearly growth accelerating to 18.7 per cent year on year,” said Malik.
Net government deposits in the banking system increased in August, despite the monthly increase in government credit growth.
The rise in net government deposits more than compensated for the GRE sector returning to becoming a net borrower from the banking sector in August. Non-resident deposits returned to is contractionary mode in August, falling by 1.4 per cent month on month.
The loan-to-deposit (L-to-D) ratio moderated to 99.8 per cent in August compared to 100.1 per cent July as credit witnessed a greater monthly drop than deposits.
Banking sector liquidity remains comfortable in 2017, as partly reflected in the contained rise in the interbank rates. The Central bank of the UAE noted that it continued to withdraw excess liquidity from the banking sector in August, bringing the total for the last two months to Dh11.3 billion. This is reflected in increased bank holdings of Certificate of Deposits.
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