x Abu Dhabi, UAEThursday 18 January 2018

Funds harder to come by for UAE banks

UAE banks face continued difficulties in raising funds and have begun to pull back on some types of lending.

First Gulf banks' shares are down for the week.
First Gulf banks' shares are down for the week.

UAE banks face continued difficulties in raising funds and have begun to pull back on some types of lending that could, in turn, hurt local equity and property markets. Banks in the GCC have seen their share prices plummet amid concerns that their profits could be hurt as they rein in lending in the face of a contracting deposit base and a rise in overseas funding costs. The financials sub-indices on both the Dubai Financial Market and Abu Dhabi Securities Exchange last week fell more than 10 per cent, with some banks' shares falling markedly. Abu Dhabi Commercial Bank shares were down 25 per cent on the week, while shares in First Gulf Bank dropped 19.4 per cent.

Banks' deposits ballooned late last year and early this year as foreign money flooded into the region seeking higher returns than western markets offered at the time. Many investors were also betting that the region's governments would eventually stop tying their currencies to the dollar, which could have resulted in additional gains for investors as the dollar depreciated. About 90 per cent of the money that flowed into the UAE during that surge has now left, according to the UAE Central Bank. Those shrinking deposits have forced banks who want to keep expanding their lending to turn to international markets. But that route, too, has grown difficult, or at least more expensive. In June, the Emirates interbank-offered rate was a mere 1.87 per cent.

Since then it has steadily increased to nearly double that figure - 3.28 per cent - as international lending rates have climbed. Last week, banks were all but completely cut off from international markets amid the global financial turmoil. While these results are unlikely to threaten the stability of any banks, credit for things such as margin trading in equities could be affected, putting further pressure on equity markets.

"We'll probably see some liquidity crunch and see the funds previously allocated for margin trading getting narrower and narrower if the markets do not start pushing up," said Wadah al Taha, a market analyst based in Dubai. Individual investors, especially wealthy ones with exposure to both international and regional markets, could lose in the current downturn. "A dent to such investors could be a lot more significant than that for a retail investor," said Sharjeel Hassan Vijdani, the second senior vice president at Habib Bank AG Zurich.

Traders and investors are watching closely for any signs that the reduction in lending is cooling the housing market. "Property is what is driving everything here," said Ali Khan, a director at Arqaam Capital, based in Dubai. But some analysts thought the region could escape the worst of the fallout from the global turmoil. "The UAE economy is more resilient than most people think," Mr Vijdani said.

While local commercial banks are being hit by a shortage of money, there have been renewed hopes that the GCC could emerge as an investment banking and private-equity hub. Kohlberg Kravis Roberts (KKR), one of the world's biggest private-equity groups, has announced that it will expand into the Middle East and has hired Makram Azar, a former head of sovereign wealth at Lehman Brothers, to head the venture. .

KKR has committed ?1.5 billion (Dh7.93bn) to invest and believes it will be able to harness oil and gas revenues in the region, despite the recent price falls in the fuels. Mr Azar said the project would launch in several months and focus on three aims: investing in the GCC, raising money from the region, and co-investing around the world in conjunction with local players such as sovereign wealth funds.

He said he was not concerned about possible impacts the apparent liquidity crunch in the GCC would have on the new venture. "We have the money ourselves," he said. afoxwell@thenational.ae skhan@thenational.ae