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Banks in UAE in the dark and waiting
With the exact reasons for the central bank's silence a mystery, some bankers have speculated that the possibility of changes to key personnel may be responsible.
September 25, 2012 11:31 by Reuters
Under the circular, any bank’s lending to the governments of the seven-member UAE federation and their quasi-sovereign entities will be capped at 100 percent of its capital base; its lending to a single borrower will be limited to 25 percent of capital. There is no limit at present.
But some of the largest commercial banks in the UAE, which funded the country’s boom in the 2000s and then supported state-linked entities during subsequent debt restructurings, were well beyond the limits set by the central bank.
According to an April 9 research note by Deutsche Bank, Emirates NBD and NBAD were at 192 and 199 percent of capital respectively. Abu Dhabi Commercial Bank, another state-owned lender, stood at 108 percent.
Offloading loans to get under the bar by the deadline appears both impractical and uneconomic for such banks because of the sheer amount of assets.
NBAD would have had to offload 26.5 billion dirhams ($7.2 billion), equivalent to 16 percent of its loan book, to comply with the new rules, according to a May 23 Arqaam Capital report.
Arqaam calculated that even if ENBD, Dubai’s largest bank, sold 14 billion dirhams of exposure, or 7 percent of its loan book, that would damage income without creating any substantial benefit as around 40 percent of the bank’s book consisted of sovereign and government-related entities’ debt.
Many in the industry therefore believe that extensions for at least some banks will have to be considered ahead of the Sept. 30 deadline.
According to industry sources, the Emirates Banks Association, a trade body chaired by Mashreq CEO Abdul Aziz al-Ghurair, has been lobbying the central bank actively for a six-month extension for all lenders in the country.
Calls to Ghurair, who is also head of the authority which oversees Dubai’s financial free zone, went unanswered.
Foulathi was quoted by the Al Khaleej newspaper as saying in May that the central bank was willing to cooperate with heavily exposed banks and extend the deadline on a case-by-case basis.
However, the central bank appears to face a dilemma. If it moves rapidly to enforce the new rules, it could cost commercial banks money and even end up pushing them into more risky lending. But it is keen for banks to diversify their lending, both to limit the concentration of risk and to boost loans to the private sector, which the government wants to develop.
ENBD has suffered four successive falls in quarterly profit because of provisioning against government-related entities’ debt.
So the central bank may be stuck between trying to improve the overall banking environment for the long term and accommodating banks’ short-term needs.
“The central bank seems to be in a Catch-22 situation,” said an Abu Dhabi-based banker. “It creates regulations but is not sure whether to enforce it or not.”
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