The global credit shortage has forced banks into a price war as they attempt to attract funds by raising rates on deposits. The competition is creating large movements of deposits between banks as clients shop around for the best rates, according to Moody's, a credit ratings agency. The agency said that this competition could put increasing pressure on the banks, which are already vulnerable to the international credit shortage.
"The financial sector of the United Arab Emirates... cannot remain immune to the global financial crisis," said the report. "A continued rise in loan-to-deposit ratios and sustained challenges in global liquidity conditions will lead to an intensification of negative rating pressures." The report followed several measures taken by the Government during the past few months to help shield the banking system, including injecting as much as Dh120 billion (US$32.67bn) available to them.
"In light of the current liquidity stress in the UAE banking sector, Moody's believes that, without government support, some banks (irrespective of size) would have faced significant difficulties in servicing their loan commitments," it said. Should international sources of funding remain tight, local banks may need additional government support to meet the country's credit needs. Moody's rates 11 deposit-taking banks in the UAE, out of a total of 52 banks. The company says that these 11 institutions, which comprise 75 per cent of the market, amount to a selection "large enough to allow us to draw reliable conclusions about the overall banking sector". In the third quarter of this year, loans at the 11 banks outstripped deposits by an average of 114 per cent, it said.
UAE banks have taken on a significant amount of liabilities during the past few years, especially in terms of unfunded loan commitments, Moody's said. By the end of September, these commitments amounted to about Dh150bn, about 30 per cent to 40 per cent of which will become due over the next 12 months. "Moody's notes that meeting these obligations is crucial for the overall confidence in the UAE banking system. Indeed, we caution that a failure to meet these commitments could provoke a variety of reactions with potentially serious consequences for the affected bank," it said.
The funding shortage may hit Dubai harder than Abu Dhabi, according to the report. "Unless debt capital market conditions improve in 2009, we expect that a significant portion of the (announced) unexecuted projects will most likely be cancelled or postponed, especially in Dubai and the northern emirates. However, we expect less pressure on Abu-Dhabi-based projects." tpantin@thenational.ae
