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However, this reinforcing of the balance sheets has not been accompanied by a significant rise in lending: loans made by UAE banks edged up by just 2.6% to Dhs1.052trn year-on-year as of end-July 2011, up 2% in the first seven months of 2011 but a drop of 0.4% month-on-month.
"UAE banks are in good health but the issue is growth," says Raj Madha, MENA banking analyst at Rasmala Investments. "There's little growth in the UAE at the moment and it's difficult to see where that growth would come from.
"What the banks want to see is growth in the economy leading to growth in bank lending, and that's what's missing," he continues. "When companies are investing more they tend to borrow from the banks to fund that investment. If they're not investing and they want to borrow but only to build up their working capital, that's not what banks like - it's bad lending."
Banks struggle to find lending outlet despite economic growth
Growth in the economy should be solid, but not spectacular, in the coming years. According to the National Bureau of Statistics, real GDP grew by 1.4% in 2010. The Economist Intelligence Unit, meanwhile, has forecast real GDP growth of 3.3% in 2011, and an average of 4.8% in 2011-2015. Those banks waiting for a UAE-wide economic resurgence to drag them back into double-digit growth will be forced to come up with a different plan.
"Everyone's struggling to get much growth out of current market circumstances, so while we're seeing that the appetite for lending has increased, there aren't too many takers for that lending," admits Gary Dugan, Chief Investment Officer, Private Banking, at Emirates NBD, the UAE's largest bank.
"Individuals and corporates aren't keen to leverage up, and so with the best will in the world, banks are struggling to find customers willing to take on new lending," he continues. "Banking is muddling along at around about the GDP growth of the country."
If economic growth continues to fall short of requirements, then analysts suggest UAE banks could concentrate less on growth, and more on service, in a bid to drive up market share and capitalise on the downsizing of operations among some international banks. In the wake of the worldwide economic downturn, some global giants are reassessing their presence in the region and redirecting resources back to their home markets - and local operators must be primed and ready to pick up any resultant slack.
"In fits and starts, international banks in this part of the world build up and then rein in their operations, and just now they are reducing the scale of their operations," says Dugan.
"A lot of international banks are running back to their home market because of problems there, and the scarcity of capital means that as they try to improve their balance sheets, means that they can't be so committed to these [Gulf] markets," he continues.
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