Are UAE banks ready to move away from liquidity support?

Dubai: The full year financial results show that banks in the UAE are financially sound and are able to wean themselves off the various liquidity support programs put in place by the Central Bank of the United Arab Emirates (CBUAE) in response to the Covid crisis.

Bank results show that the country’s major banks have fundamentally strong balance sheets and ample liquidity backed by cheap sources of funding and no longer need liquidity support.

Asset quality gains

Overall, banks reported a steady improvement in asset quality with a significant decline in loan loss provisions for the fourth quarter and full year 2021.

While Emirates NBD reported a 26% decline in impairment provisions, Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB) reported declines of 34% and 46% respectively in loan loss provisions for the whole year 2021.

Steady improvement in asset quality matrices and strong funding profile indicate that banks are unlikely to need additional liquidity support.

The CBUAE has already begun the gradual unwinding of various support programs under its Targeted Economic Support Program (TESS). While zero-cost liquidity support for the loan repayment deferral component of the TESS program has come to an end, support measures for new loans, including those related to capital buffers, liquidity and stable funding, have been extended until June 30, 2022.

The expanded capital buffer measures include the temporary reduction of the capital conservation buffer and the capital buffer for systemically important domestic banks. Regulatory liquidity support measures include temporary prudential relief from the liquidity coverage ratio, the eligible liquid assets ratio, the net stable funding ratio and the advances to stable resources ratio.

Analysts say the extension of these measures is more precautionary in nature and banks no longer need liquidity support.

Favorable funding mix

Strong funding mix with an average contribution of more than 35% from CASA [current and savings account] Deposits Most banks have a large low-cost funding base. Additionally, many of the country’s leading banks have taken advantage of the low interest rate environment to ramp up their fundraising activity in 2021.

Emirates NBD Group, for example, raised 27.5 billion dirhams of senior term funding, taking advantage of the historically low cost of term funding. In addition, the bank managed to shift its deposit mix by replacing 33 billion dirhams of higher cost fixed deposits with CASA financing.

“The funding mix has improved as we added an additional MAD 38 billion of CASA t balances in 2021 and we are well positioned to benefit from a potential rise in interest rates,” said Shayne Nelson, Director General of Emirates NBD Group.

DIB and ADCB also saw significant gains in CASA balances optimizing their cost of funds. ADCB’s CASA deposits stood at 153 billion dirhams at the end of December, representing 58% of total customer deposits. DIB also reported MAD 90 billion in CASA balances, which accounted for 44% of the customer deposit base at the end of 2021.

With loan-to-deposit ratios well below 100% and loan growth still below 10%, UAE banks have ample liquidity to expand their loan portfolios.

Audible indicators

Key financial soundness indicators such as liquidity, funding and capital adequacy of the UAE banking sector point to healthy balance sheet trends amid modest credit growth. Banks expect to see a significant increase in credit growth this year from the current quarter, according to the latest CBUAE credit sentiment survey.

Analysts expect credit growth to pick up in the coming quarters as improving economic conditions lead to increased business capital spending. While a gradual rise in interest rates looms on the horizon, analysts say it is unlikely to have a negative impact on credit growth in the UAE.

“The Fed-led monetary tightening that we expect over the forecast horizon should not hurt private credit demand if growth continues to strengthen, but the public sector will likely lead the way, as rising oil prices and growing budget surplus are encouraging governments and businesses to accelerate the execution of their development plans,” said Simon Williams, Chief Economist, Central and Eastern Europe, Middle -East and Africa, HSBC Bank plc.

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