UAE banking sector in ‘more solid position’

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UAE banking sector in ‘more solid position’

Vulnerability of foreign bank funding to the UAE has moderated, underscoring the country’s economic recovery, increased foreign assets as well as continuing business ties to regional entities, BofA Merrill Lynch Global Research said in a report on Sunday.

By Issac John

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Published: Mon 16 Sep 2013, 1:42 PM

Last updated: Fri 3 Apr 2015, 5:35 AM

Although, this would provide government related entities some comfort at the onset of refinancing challenges of 2014-15, deleveraging and asset sales of the GREs would be needed to contain banking sector exposure and address refinancing challenges going forward, particularly for restructured debt, the report argued. The bank report noted that following strategic official support during the global financial crisis and progress on the deleveraging front thereafter, the UAE banking sector appears in a more solid position.

“The loan-to-deposit ratio stood at 92 per cent in July, from a peak of 112 in September 2008, and the capital adequacy ratio stood at 19 per cent in second quarter 2013, from 13 per cent in 2008 third quarter.”

The research found out that liquidity in the UAE has improved as cash, bank deposits and certificates of deposits (CDs) held at the Central Bank increased to Dh198 billion in April, from a low of Dh92 billion in January 2009. Referring to locational statistics of Bank for International Settlement, the report said the UAE’s net external position versus BIS banks turned positive in the first quarter, which helps moderate the vulnerability to withdrawal of foreign bank funding.

According to the report, the cumulative drop from third quarter 2008 in BIS banks’ UAE exposure was $18 billion in forex-adjusted terms, with the bulk of the retreat occurring over the first year but remaining broadly stable thereafter.

“In terms of consolidated statistics, incorporating the domestic subsidiaries of foreign banks, on an ultimate risk basis, exposure to banks and non-financial corporates was reduced the most. This largely took the form of lower cross-border lending, though claims of domestic subsidiaries of BIS banks appear to have increased their lending to UAE entities meanwhile,” the report said.

BofA Merrill Lynch observes that increased domestic banking sector support to Dubai has brought exposure to the public sector to the highest level since the late 1970s. “There appears to be a modest increase in exposure of non-European banks at the expense of European, but the largest foreign claims are still owned by UK-based banks (52 per cent of total BIS consolidated claims on UAE entities). BIS consolidated claims on UAE entities are now at 20 per cent of total banking sector liabilities, from a peak of 33 per cent in 2008 third quarter, the highest in the Mena,” said the report.

The UAE also witnessed modest credit growth on liquidity and economic recovery. M2 growth increased markedly in July to 11.9 per cent year on year, broadly likely still supported by government and public sector deposits (which represent a combined 26 per cent of total deposits). “In counterpart, growth in loans and advances accelerated in July to 6.4 per cent, the fastest pace since mid 2009. This comes largely on the back of lending to the government and to the public sector, which has grown by an average of 13 per cent this year, and represent a combined 30 per cent of total loans,” the report said.

“Private sector loans are now expanding by a modest two to three per cent year on year in the first half on a stronger non-oil economic activity, after contracting for 40 consecutive months. Credit to the manufacturing, construction sectors has had a noted rebound,” the bank’s report said.

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