UAE banks need to further raise deposits: expert

The loan-to-deposit ratio of UAE banks, which has improved to 104 per cent at present from a peak of 106 per cent, needs to drop further, a senior banking analyst has said.

“I believe the drop in the ratio [from 105 per cent a year ago] 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 stands at 20.4 per cent (June 2010), while their loan-deposit gap is thinning.

Despite an improving loan-to-deposit ratio, the outlook for the UAE banking sector remains in balance-sheet stabilisation mode and is likely to remain like that for most of the year, he said.

UAE banks' deposits have increased 2.4 per cent in the 12 months to June 2010 while loans and advances (net of provisions) have grown slower by 1.6 per cent during the same period, data shows.

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.

However, 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.”
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 brokerage firm Rasmala noted that while provisioning has hammered the banks’ profitability in the short term, stabilisation of non-performing loans (NPLs) around the end of 2010 should mean a recovery next year.

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