Deposits with UAE banks are likely to drop this year amid lower oil prices, says a top ratings agency.
Deposits may start to dwindle as government companies feel the effects of lower oil prices, Standard & Poor’s (S&P) said in its latest report on Arabian Gulf banks.
As a result, banks in the UAE and other Gulf countries may start raising interest rates to their corporate customers as the supply of cash tightens, the rating agency said.
“The key challenge will be on the deposit side of the business because what we generally see is that GCC sovereigns, government entities are important depositors in the local deposit markets and these guys generate a reasonable part of their earnings from petrochemical flows,” said Timucin Engin, S&P’s primary Dubai-based credit analyst.
“So if the oil prices are lower, the cash flow to these guys will also be lower and we might see some relative weakness in deposits this year. So this year, next year, what we might see is a potential change in that bank behaviour in terms of pricing loans probably, particularly because we expect the deposit growth to be lower.”
The result, however, won’t be catastrophic, S&P says. That is because governments in the region have amassed massive cash reserves and continue to invest in infrastructure. There has also been a sharp improvement in property prices. That makes much of the collateral that banks hold more valuable, Mr Engin said.
Consequently bank earnings in the Emirates are expected to grow in mid-single digits instead of low double digits this year versus last year, while overall loan growth may slow to 8 per cent from 9 per cent, he said.
The past three years have been buoyant for UAE banks as they climbed out of the gaping financial hole left by the 2009 debt crisis when many Dubai government entities came close to bankruptcy as property prices collapsed and capital markets dried up.
Government spending on infrastructure and low interest rates helped to propel the economy to growth of more than 4 per cent in the past two years.
Lenders were the main beneficiaries and the past year has witnessed record earnings for banks such as Emirates NBD, FGB and the National Bank of Abu Dhabi.
However, the drop in the price of oil, which has lost more than 40 per cent in the past 12 months, has put a damper on the economy, with the International Monetary Fund forecasting 3.2 per cent growth this year.
“Over the past four years, deposit growth was very strong and in many cases, stronger than credit growth, so there was ample liquidity in the banking system and the banks built visible buffers of liquidity, but this year we are seeing a bit of a change on that front,” Mr Timucin said.
Investors though haven’t been discouraged by the slowdown and bank shares have been among the least affected by the volatility in the stock market since the fourth quarter of last year.
The Russian investment bank Renaissance Capital began stock coverage of Dubai Islamic Bank, Rakbank and FGB on Monday, giving the three lenders a “buy” rating because it expects the UAE’s economy to be resilient to any shocks from the lower price of oil.
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