National Bank of Abu Dhabi's chief executive has warned that falling margins were beginning to squeeze banks in the UAE, after the country's largest lender by market value reported flat first-quarter profit growth.

Many UAE banks have recorded impressive growth in the first quarter, continuing a trend from 2013 as the economy rebounds from a real estate crash and debt problems at Dubai government-linked entities.

However NBAD CEO Alex Thursby said fierce competition in the sector combined with global interest rate pressure was starting to drive down the profitability of lending, and would hit future earnings for the country's banks.

NBAD made a net profit of 1.41 billion dirhams ($383.9 million), unchanged from the first quarter last year, but well above the 1.20 billion dirhams average forecast of analysts polled by Reuters.

Despite the lack of growth, Thursby said he was happy with the results as the bank was continuing a strategy to move away from the lending-focused business model of many of its local peers to one which relies more on fee income from areas such as advisory, considered less vulnerable to margin pressures.

"There is no question we're starting to see margin compression," Thursby told reporters on a results call.

"It's been my belief since I arrived in July that margin compression would unfold and it's done so quicker than expected. Over the last 18 months, we've seen this spread through the United States, Europe and Asia and now it's in the Middle East."

The CEO said the strong growth in deposits which the bank registered in the first quarter - up by 11.3 percent on the end of December due to inflows from government-related entities - was compounding the problem as this forced the bank to park the cash in low-yielding assets like US Treasuries.

The pressure has been noted by other lenders - Emirates NBD's chief financial officer Surya Subramanian said on Thursday the bank was retaining its guidance on net interest margins for 2014 at between 2.5 and 2.6 percent due to the expected competition in the sector; it stood at 2.75 percent after the first quarter, stable from the previous quarter.

Thursby said the pressure on margins was showing the importance of his bank's strategy to diversify its business and earn more income from advising and less from lending. - Reuters