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UPDATE 2-UAE lender NBAD warns over falling margins as it posts flat profit

* Impact of margin compression to grow for UAE banks - NBAD CEO

* High competition, liquidity and global rate pressure to blame

* Q1 profit 1.41 bln dhs, flat to Q1 2013

* Loans fall about 3 pct, deposits up over 11 pct in Q1

(Recasts, adds CEO call content throughout)

ABU DHABI/DUBAI, April 28 (Reuters) - National Bank of Abu Dhabi's chief executive warned on Monday that falling margins were beginning to squeeze banks in the United Arab Emirates, 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.

The bank's net interest margin - the difference between the rate it pays out on deposits and the rate it charges for lending - had dropped to 1.84 percent at the end of March, from 1.98 percent at the end of 2013.

"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 U.S. 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.

JUMP

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.

Total non-interest income - the area NBAD is looking to expand - was down 4.4 percent year-on-year in the first quarter as a big jump in earnings from fees and commissions was offset by lower revenues from foreign exchange, investments and other income.

A small rise in net interest income made up the difference, with overall operating income flat on the same period of 2013.

Loans and advances dropped 2.9 percent compared to the end of December, due to several large repayments and maturities in the first quarter of the year.

For the rest of the year, NBAD would target lending growth in the retail and commercial sectors, with wholesale lending expected to be flat as the bank used it more as an initial tool to gain fee-paying business with customers.

($1 = 3.6730 UAE dirhams)

(Editing by Pravin Char)