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Loan-to-Deposit Gap Widens by 50 Per Cent

DUBAI - The loan-to-deposit gap for the nation’s banks increased by 50 per cent last month as lenders converted many of their government deposits into capital while also making more loans, according to data that the United Arab Emirates Central Bank released on Monday.

The difference between loans made by the banks and the deposits they held increased to Dh47.3 billion in June from Dh32.2 billion in May, creating a gap of Dh16.1 billion. Deposits fell by Dh10.7 billion, and lending increased by Dh5.4 billion.

Total deposits held by all UAE banks stood at Dh961.7 billion in June compared with Dh972.4 at the end of May. Total loans outstanding increased by 0.5 per cent to Dh1,009 billion.

The overall decrease in deposits resulted mainly from a conversion into capital of deposits that some banks had received from the federal finance ministry, said Giyas Gokkent, chief economist at National Bank of Abu Dhabi. The federal government launched a Dh70 billion facility last November to shore up liquidity and insulate local banks from the fallout of the global financial crisis.

Almost all big locally owned banks, such as National Bank of Abu Dhabi, Emirates NBD, and Mashreqbank, had earlier announced their intention to convert these federal deposits into so-called Tier-2 capital. As a result, the total reserve funds — capital plus reserves — of UAE banks rose from Dh203.1 billion in May to Dh212.4 billion in June, Gokkent said.

The banks are strengthening their balance sheets to withstand rising loan defaults by both individuals and corporates badly bruised by the financial crisis. Even though the loan-to-deposit gap has halved from Dh90 billion in January, the banks have not been able to reduce it to a comfortable level. “It is still the case that loan to deposit ratio is high… (but it) will gradually improve,” Gokkent said.

Money Supply Slows

Separately, the Central Bank reported that the total amount of currency in circulation plus demand deposits decreased in June. The money supply fell by Dh1.1 billion to Dh218 billion after increasing by Dh7.7 billion to Dh220.2 billion in May.

One measure of money supply that includes all currency notes and coins in circulation plus demand deposits — also known as M1— increased by 0.5 per cent in the second quarter compared with the first quarter, the Central Bank data showed.

Another measure of money supply called M2, which includes M1 plus time and savings deposits, increased by 3.6 per cent.

The broadest measure of money supply, M3, which encompasses M2 and government deposits, grew by 2.3 per cent, the slowest rise since the fourth quarter of 2003, according to Reuters data.

On an annualised basis, M1 contracted by more than 10.6 per cent compared with the same period last year. This, according to Gokkent of NBAD, is a result of consumers cutting back on expenditure.

“M1 contraction has been apparent for some time now —likely a reflection of a slowdown in consumption expenditure trends that one would expect,” he said.

Meanwhile, Central Bank data showed that M2 and M3 increased by 6 per cent and 13.5 per cent, respectively, during the same period.

· aruna@khaleejtimes.com