UAE banks’ funding conditions improve: Moody’s


DUBAI — The Central Bank of the United Arab Emirates recently published its September 2017 Monthly Statistical Bulletin, which showed the United Arab Emirates Aa2 stable banking system’s net loan/deposit ratio had improved to 91% as of 30 September 2017, from 96% as of 30 September 2016, a credit positive.

The net loan/deposit ratio had been deteriorating, peaking at 96% in September 2016 after rising to 94% at year-end 2015 from 90% at year-end 2014.

Stabilization in UAE banks’ funding primarily reflects higher oil prices: the Brent crude oil price averaged $52 during the first nine months of this year, up from $44 during 2016 and lows of around $26 earlier that year.

Increased oil prices have improved corporate and government revenue (hydrocarbon contributed 41% of UAE central government’s revenue in 2016) and supported their deposits into banks.

Loans refer to domestic credit, which includes lending to resident non-banking financial institutions, trade bills discounted and loans and advances for government and public sector, and private sector (corporates and individuals) in local and foreign

currency. Deposits exclude inter-bank deposits and bank drafts but include commercial prepayments and borrowings under repurchase agreements.

In addition, weak economic growth this year amid constrained public spending has reduced domestic business activity, limiting UAE banks’ lending opportunities and funding needs.

Government spending is an important driver of economic growth in the UAE, accounting for 30% of GDP in 2016. Weak credit growth also reflected a reduction in the system’s balance sheet after the First Gulf Bank and National Bank of Abu Dhabi merged in March 2017 to create First Abu Dhabi Bank PJSC (FAB, Aa3 stable). Given FAB’s large 23% market share by assets as of June 2017, post-merger balance sheet optimization affects system growth in 2017.

Credit growth slowed to 0.1% over the 12 months that ended 30 September 2017 (down 0.5% non-annualized during the first nine months of 2017) from 5.8% during the 12 months that ended 30 September 2016.

A third driver of the stabilized funding conditions is the government’s international debt issuances of $10 billion in October 2017 and $5 billion in April 2016 (which also supported bank liquidity), compared with no international bond issuance between 2010 and 2015.

Deposits from the UAE government and its related entities accounted for 25% of system deposits as of June 2017. The assumed full backing of the Government of Abu Dhabi supports the credit quality of the UAE. — SG