UAE banks likely to slash lending rates by year-end

Central bank urges UAE lenders to cut interest rates amid ‘abundant’ liquidity in market
UAE banks likely to slash lending rates by year-end
UAE central bank governor Sultan bin Nasser Al Suwaidi has urged banks to cut interest rates
By Elizabeth Broomhall
Mon 30 May 2011 03:52 PM

UAE banks are likely to reduce interest rates and ramp up lending again by the end of 2011 as the emirate’s debt woes ease, a senior financial analyst said Monday.

Banks have ample liquidity but remain wary of lending following Dubai’s debt crisis and ongoing weakness in the property market.

“Banks are reluctant to lend given some of the credit uncertainties that persist in the environment, as such, this liquidity is not finding its way into the system,” said Khalid Howladar senior credit officer for GCC banks at Moody’s.

“In the long term such behaviour would be unprofitable but once they feel the economy has turned this won’t last. I think come Q3/Q4, as long as things continue on the current growth path with no more large credit distresses... we will see a resumption of lending.” 

UAE central bank governor Sultan bin Nasser Al Suwaidi on Sunday urged local lenders to slash interest rates on loans to businesses amid “abundant” liquidity.

In a statement to state news agency WAM, Al Suwaidi said the interest margin for banks was high and asked them to “consider the condition of borrows, traders and businesspersons.”

Small and medium-sized enterprises account for 95 percent of businesses in Dubai and contribute around 40 percent of the emirate’s GDP.

Bank deposits in the OPEC member rose in March to their highest level in at least more than two years as depositors stored money in banks due to social unrest in the region.

However, UAE private sector credit was up only 2.0 percent year-on-year in February, a second monthly rise in a row following at least 13 consecutive months of declines. It showed annual growth rates of above 50 percent at the height of the oil and property boom in 2008.

Ministers for the world's No.3 oil exporter have renewed their calls for banks to resume lending in a bid to boost economic growth in the Gulf state.

“Without the banking sector [and] without providing for the liquidity, we will not be able to move on with this economy to the speed that we would like it to be,” UAE Minster of Economy Sultan Al Mansoori said last week. “We should not lose the opportunities… that are now calling for the support from the financial system.”

Rahul Shah, an analyst with Deutsche Bank, said hesitancy on lending should dissipate thanks to clearer visibility in terms of earnings growth.

“A number of UAE banks reported a decline in margins in Q1 this year; although funding costs are declining, so are asset yields. We believe risk premia has already started to decline as visibility on asset quality trends improves,” he said. “Banking system liquidity has improved in recent months.”

The Gulf state has also benefited from the fallout of the Arab Spring protests that roiled governments in Egypt, Oman and Bahrain, sending investors fleeing safe haven economies. Banks may be holding out for sustained economic improvement, rather than the domino effect of recent political unrest, said Howladar.

“The disturbances that we saw across the Middle East have been a bit of a boost to the Dubai economy and so that’s improving the local economy maybe a bit faster than it ordinarily would have,” he said.

“The central bank can make encouraging statements about what they want the banks to do... but I think the business environment improving will be a larger lending driver.”

*With agencies

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