Increasing cash for banks a good sign as loans climb

Deposits at the UAE's banks surged in the first quarter of the year, but analysts say the rise is linked to government deposits of oil revenues, not to an influx of money from unrest-plagued countries in the Middle East.

The UAE's banks are more flush with cash than a year ago, according to Central Bank data, a sign analysts say is encouraging for lenders trying to recover from the downturn.

Both loans and deposits climbed last month, the Central Bank said in its monthly data release yesterday. Deposits rose by 5.3 per cent in the first quarter of the year to more than Dh1.1 trillion (US$299.5 billion) compared with the same quarter last year. Loans were up by a more modest 1.6 per cent to Dh1.05tn.

"Banks continue to see an improvement in liquidity and hence expect costs to go down in the deposit market going forward," Jaap Meijer, a banking analyst at Alembic HC Securities in Dubai, said in a note. The lower cost of funds should support banks' margins, Mr Meijer said, but the amount of money banks make on loans could also "come under pressure".

While Dh48.1bn in deposits flowed into UAE banks in the first three months of this year, analysts said the influx was largely unrelated to unrest rocking parts of the Middle East. Any flow of hot money into the UAE's banks from Tunisia, Egypt and other countries reeling from political turmoil has so far failed to show up in Central Bank data.

Deposits have spiked in recent months, but Mr Meijer said most of that was accounted for by governments.

As oil prices rose in the first few months of the year, government deposits increased by 7.4 per cent between February and last month while private-sector deposits rose by just 1.3 per cent.

The Central Bank also released data yesterday on the money supply, a broad measure of the amount of money, certificates of deposit and other instruments held by individuals and institutions. It showed a climb of 6.1 per cent in the money supply, a rise economists said dovetails with healthier lending by banks and stronger consumer demand as well as oil revenues making their way into the broader economy.

Tim Fox, the chief economist at Emirates NBD, said the growth was a positive sign. Economists often point to money supply as an indicator of inflation, but annualised inflation in the UAE stood at just 1.2 per cent last month.

"When you've got the beginning of a recovery process, money supply growth is welcome," Mr Fox said. "There's excess capacity, which means you can grow significantly before you see any inflationary impulse. We're not at a stage where you could consider money supply growth as a problem."

The rise in loans and deposits at banks comes as the biggest lenders begin to report their first-quarter results. First Gulf Bank of Abu Dhabi on Monday posted a 4.8 per cent decline in profits compared with same period last year, while Emirates NBD announced a 27 per cent surge in profits on Tuesday. While deposits are growing, banks are still trying to address a raft of loan defaults caused by the financial crisis.