UAE bank customers shift cash to chase higher interest

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• Savers in Emirates are moving more money into time deposit accounts
• Central Bank has raised base rate to 4.9%, following the US Fed
• First Abu Dhabi deposits rose 11.4% in Q1, said Alvarez & Marsal

Savers in the UAE are moving more of their money into income-generating deposit accounts to capitalise on rising interest rates, according to data from the country’s top 10 banks.

The US Federal Reserve has increased interest rates by 75 basis points this year in a bid to curb rising inflation. The UAE Central Bank has followed suit, pushing its base rate to 4.9 percent in the first quarter.

The latest quarterly UAE Banking Pulse, published this week by Alvarez & Marsal (A&S), reports a rise in the number of account holders moving their cash reserves in Q1 2023.

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“Investors are certainly shifting Casa balances to interest bearing,” Asad Ahmed, managing director and head of Middle East financial services at A&M, told AGBI.

Casas – current account savings accounts – allow holders to deposit and withdraw cash frequently and usually offer lower interest rates. Time deposit accounts offer higher rates in return for leaving money deposited with the bank for an agreed extended time period.

First Abu Dhabi Bank, the UAE’s biggest lender, reported an 11.4 percent rise in total deposits in the first quarter of this year. Time deposit savers grew by 15.2 percent to AED462 billion ($125.8 billion). 

Time deposit accounts grew by 6.8 percent for the top 10 lenders in Q1, compared to Q4 2022. They accounted for 43.5 percent of all deposits in Q1, compared to 39 percent in the same quarter a year ago.

Ahmed conceded that the shift from Casa to time deposit had been "nominal" but "the quarter-on-quarter trend is clear".

Any further movement will be determined by the US Fed's decisions, but Gulf-based economists have told AGBI they believe further dramatic rate hikes are unlikely.

“I think this is the peak of the cycle for the US, and hence for the GCC,” said James Reeve, chief economist at Jadwa Investment in Riyadh.

Scott Livermore, chief economist at Oxford Economics Middle East, said: “The Fed was careful in its forward guidance not to paint itself into a corner.”

He added that there was no indication that interest rates could be cut any time soon, particularly with inflation still running well above its 2 percent target.

Vijay Valecha, chief investment officer at Century Financial in Dubai, said rising interest rates were likely to increase the profitability of UAE banks, which have already buoyed by strong first quarter results.

A&M's UAE Banking Pulse for Q1 2023 found that banks' profitability grew by 35 percent quarter-on-quarter.

The increase was attributed to enhanced cost efficiencies and lower loan impairment charges. Rising interest rates also helped deposit growth outstrip credit growth for the first time since Q1 2022.

“This has been a very strong quarter for the UAE banks. We expect that for the balance of the year, the UAE banking sector will maintain the gains of the first quarter," Ahmed said.