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Tue 11 Jan 2011 07:44 PM

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UAE lending seen weak despite higher deposits

Banks are flush with cash but credit in UAE is not seen picking up strongly as lenders stay cautious

UAE lending seen weak despite higher deposits
New money was hard to come by but high deposit rates after a September Dubai World restructuring deal have drawn in fresh funds (Getty Images)

UAE banks are flush with cash again this year, in contrast to 2010, but credit in the world's third largest oil exporter is not seen picking up strongly as lenders stay cautious following Dubai's debt woes.

New money was hard to come by after Dubai's $25bn debt crisis hit the second largest Arab economy over a year ago. But high deposit rates and an improved mood after a September Dubai World restructuring deal have drawn in fresh funds.

"The interbank market is very liquid. All the banks are flooded with liquidity whether it is foreign or local customer deposits," a treasurer at an Abu Dhabi based bank said.

The volume of bank deposits in the OPEC member's economy surpassed loans in October last year, for the first time since at least September 2009, central bank data showed.

Higher deposits, up 4.7 percent from a year ago in November, helped UAE interbank offered rates edge down since October and both the central bank and traders expected a further drop.

The benchmark three-month rate now holds at 2.14 percent, near its lowest levels since February 2010 but still far above the Saudi benchmark at 0.75 percent. Traders said activity was thin as banks had enough funds.

"You now face a situation where banks have sufficient cash to lend and corporates now have more profitable projects in which to utilise that cash," said Mark Watts, head of fixed income at National Bank of Abu Dhabi Asset Management Group. "That is a very good driver for a return to normal markets."

But reluctance of UAE banks to make new company loans is not expected to disappear quickly due to exposure to Dubai and its state-linked firms, which have some $30bn of bonds and loans to repay over the next two years.

"The continuing story is that banks are not able to take more risks because of whatever happened," a Dubai-based trader said. "The UAE story is a bit subdued at the moment."

Private sector lending had been falling for 11 months to October, unlike elsewhere in the Gulf, a stark contrast to over 20 percent annual gains seen at the beginning of 2009, although the appetite to borrow has increased.

As a result, the UAE economy is seen lagging behind fellow crude producing nations with a growth forecast of 3.6 percent for 2011, according to a Reuters poll.

"We expect the weak bank credit growth environment to continue in 2011," said Monica Malik, chief economist at EFG-Hermes in Dubai. "Banks will likely continue to suffer from the restructuring process."

Conglomerate Dubai Holding's main unit had to postpone its loan repayment three times before reaching a deal with creditors last month. Another unit missed two payments on separate loans, sources said in November.

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