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Dubai: Growing demand for loans, widening asset-liability mismatches and the high cost of funds on international markets could compel many UAE-based banks to seek medium to long-term dirham-denominated bond issues this year, according to banking industry experts.
Abu Dhabi Commercial Bank (ADCB) last week announced its plan to raise Dh4.8 billion in bonds, close on the heels of a similar Dh56 million convertible sukuk issue by National Bank of Abu Dhabi.
With the soaring cost of funds in the international markets, many banks, which used to bridge their funding gaps through foreign currency-denominated medium term note (MTN) issues, are now expected to go for domestic debt issues.
With the increasing share of longer-term loans such as mortgages and project financing, most UAE banks are facing medium to long-term asset-liability mismatches.
According to recent research on the UAE’s banking industry by The National Investor (TNI), an Abu Dhabi-based investment bank, customer deposits of the UAE banks grew at a compounded annual growth rate (CAGR) of 35 per cent from Dh229 billion in 2004 to Dh563.1 billion in 2007.
Similarly, net loans grew at a CAGR of 42.4 per cent, from Dh195.3 billion in 2004 to Dh564.0 billion in 2007. As a result, loan to deposit ratio of the UAE banks increased from 85.3 per cent in 2004 to 100.2 per cent in 2007.
"During the last few years, most of the banks focused on medium term notes as a way of increasing their funding base. In our view, tight credit markets globally may result in increasing thrust towards domestic resource mobilisation by banks to support asset growth," said Mihir J. Marfatia and Burhan Ali, analysts with TNI.
While there has been significant growth on the asset side of banks’ balance sheets, on the liability side, deposits - particularly the government and public sector ones - have declined.
"During the last four years with respect to deposit mix, we observe declining contribution of sovereign and public sector deposits and increasing share of private sector deposits," they said.
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