The liquidity in the UAE banking system has weakened during the nine months to September 2008 owing to several major factors, says a new report from Moody's Investors Service.
The key factors include the departure of speculative money which was increasing in line with expectations of a likely revaluation of dirham; sustained disruption to foreign market funding; the substantial irrevocable loan commitments to existing clients that need to be serviced and the potential need for refinancing existing corporate debt as it matures, the Moodys said.
The rating agency in its report entitled 'The Impact of the Global Crisis on Liquidity of UAE Banks,' pointed out that the UAE financial sector cannot remain immune to the global financial crisis and said it will continue to monitor the liquidity profile of UAE banks.
'A continued rise in loan-to-deposit ratios and sustained challenges in global liquidity conditions will lead to an intensification of negative rating pressures,' cautioned John Tofarides, a DIFC-based analyst in Moody's Financial Institutions Group.
As international debt capital markets are now effectively closed to most issuers and overall risk tolerance is reduced for financial institutions, risks related to liquidity and external funding needs have increased, he observed.
In order to alleviate the liquidity shortage, the UAE government has
intervened by providing two forms of liquidity support: (a) a repo type facility from the Central Bank worth a maximum Dh50 billion ($13.5 billion), and (b) a direct deposits scheme from the Ministry of Finance for a maximum of Dh70 billion ($19 billion).
In addition to this, the federal cabinet last month reportedly decided to guarantee banking deposits for three years, covering both national and foreign banks with significant operations in the UAE, the report said.
'Moody's believes that the government's measures contribute to providing a short-term solution and renewing confidence in the banking sector,' Tofarides pointed out.
'However, Moody's also notes that liquidity stress may inhibit asset
growth over the medium term. Moreover, the intense rivalry among banks to attract deposits is also creating large movements of deposits across banks, with clients 'shopping around' to place funds with the highest bidder,' he explained.
According to Moody's, this price war coupled with the high level of deposit concentration creates additional volatility in the funding base, thus exerting pressure on banks to maintain more liquid (and often low return) positions and to raise funding costs, thereby affecting core profitability.
Moody's expects the liquidity crisis to have the following impact on the UAE banking sector in the future: (i) a slowdown in domestic loan growth for 2009, with some banks possibly showing negative growth; (ii) increased pressures on net interest margins due to high borrowing costs; (iii) stringent regulation by the central bank in terms of scrutinising loans and advances; and (iv) a restructuring of the project finance industry with large loan agreements being redrawn, restructured or postponed.
Given the global constraints in external funding, the task of raising long-term finance for projects in the Gulf has become challenging, the report said.
Unless debt capital market conditions improve in 2009, Moody's expects that a significant portion of the (announced) unexecuted projects will most likely be cancelled or postponed, especially in Dubai and the northern emirates.
However, the rating agency said it expects less pressure on Abu-Dhabi-based projects.
Moody's will present a more detailed assessment of the UAE banking sector's dynamics and prospects in its Banking System Outlook on the UAE, which is scheduled to be released in early December.-TradeA