UAE Banks at Risk?: ‘Weak deposits, credit to affect UAE banks’ profitability’

A heavy storm is ahead of banks within the UAE with consumers making less cast deposits compared to before. Not only has loan rates dropped due to high interest rates, but government loans are slowing down amid lower oil prices.

In 2007, cash held in time deposit accounts accounted for more than half of the total consumer savings, reaching 52%, reports indicate.

Eight years later, that number has dropped to 28%. Experts believe that it would only get worse as time goes on.

Raghu Mandagolathur, senior vice president for research at Kuwait Financial Centre “Markaz” told Gulf News that “Real-time deposit rates have been negative in UAE since 2013, which discouraged people to save in time deposits,”

Low interest rates are the main factors discouraging people from saving, said Raghu

“People in the UAE have shifted more towards short-term savings rather than having long-term deposits due to the changes in real deposit interest rates.” He added that “Rates have been negative in UAE since 2013 which discouraged people to save in time deposits.”

Loans have also reduced drastically as banks are now practical and cautious not to lend cash to poor corporate earnings, slower salary adjustments as well as employment cuts.

“In times of slow economic growth, corporate earnings would be poor and hence expansion activities will not be carried out by the businesses. Apart from these factors, banks would be more cautious in their lending, considering the slower wage growth and job losses. All these factors will lead to slower loan growth,” Raghu said.

In a previous report provided by Standard & Poor it was indicated that banks within the UAE will witness little or no growth from here till next year.

“We are likely to see a gradual but longer deterioration in operating conditions for banks over the next several quarters or years,” said Standard & Poor’s credit analyst Timucin Engin.

The drastic drop in loan growth doesn’t necessarily mean citizens are not borrowing cash. On the contrary, reports indicate that the amount of personal loans, including credit card and car loans have increased by more than 7% within the first six months of 2016, compared to the same time last year.

People take loans to cater for their own needs. However, individual loans accounted for just 14%, according to statistics.

“Loans provided for business purposes and government loans accounted for 31 per cent and 14 per cent, respectively in the same period,” Raghu explained.

Moreover, the numbers for loan loss provisioning (LLP) as well as net interest margins, are very disappointing. “As per our estimates, net interest margins will compress by 600 basis points in 2016. LLP declined by 3 per cent in 2014, however, it increased by 3 per cent in 2015. We expect the trend to continue in 2016 and 2017,” said Raghu.

“LLP is forecast to increase by 6 per cent and 3 per cent in 2016 and 2017 respectively which could be one of the reasons for the decline in net income.”

According to Marmore’s latest report, higher exposure to construction and real estate industry poses a threat to banks within the region, simply because of the cyclical nature of the property market.

“We expect UAE banks’ profitability to slow down in the 2016 and 2017.Our expectations are underpinned by tightening liquidity and subdued credit off-take. UAE banks would maintain adequate capital and liquidity, while higher loan loss provisions will affect profitability.”

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