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Lending limit deadline hits but still no Central Bank guidance – UAE

UAE Central Bank open to some lending limit exemptions - paper

Since the largest UAE banks have been supporting GREs during debt restructurings, clarity on the issue is important for the economy.

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October 1, 2012 8:45 by



A deadline for banks in the United Arab Emirates to cut their exposure to the government passed on Sunday with no clear indication of whether authorities would enforce the new rules or give banks more time to comply, bankers said.

Under the rules, announced in early April with a Sept. 30 deadline, any bank’s lending to the governments of the seven-member UAE federation and related entities is capped at 100 percent of its capital base. Lending to a single borrower is limited to 25 percent. There was previously no limit.

The rules aim to prevent any repeat of Dubai’s corporate debt crisis, which erupted in 2009 as the real estate market crashed. The crisis was worsened by local banks’ excessive exposure to government-related entities (GREs).

Because many of the largest UAE banks are over the new limits, and it could be damaging to them and the economy if they tried to sell off loans to GREs quickly, bankers generally expect the central bank to extend the deadline.

But the central bank has not confirmed this and commercial banks have not been able to obtain information on the central bank’s intentions. A meeting between commercial banks’ chief executives and central bank officials last Tuesday failed to clarify the situation.

“Although there were deliberations, we have not received anything from the central bank as of today,” one commercial banker said on Sunday, adding that there had been no news of an extension of the deadline or anything to the contrary. He declined to be named because of the sensitivity of the issue.

Many bankers think a six-month extension is likely. “We expect the start of implementation to be extended by another six months to end-Q113 and include exceptions that would not derail the overall Dubai GRE refinancing process,” said Bank of America Merrill Lynch in a note last week.

Bankers also expect that no formal sanctions will be levied against lenders which missed the Sept. 30 deadline, given the lack of clarity in the situation.

“We have not heard anything on this,” the banker said.

IMPACT

Since the largest UAE banks have been supporting GREs during debt restructurings, clarity on the issue is important for the economy.

According to an April 9 research note by Deutsche Bank, the exposures of Emirates NBD and National Bank of Abu Dhabi were at 192 and 199 percent of capital respectively. Abu Dhabi Commercial Bank, another state-owned lender, stood at 108 percent.

A large amount of loan assets did not appear on the secondary market in the run-up to the deadline, a sign that local banks weren’t worried about the approach of the date, said aDubai-based banking source.

A massive sell-off of GRE-linked loans would have been both uneconomic and impractical; for example, 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.

However, some local banks have become less energetic in pitching for new business, bankers said.

“We’re full up so it (lending to GREs) doesn’t turn us on in the same way,” said a banker at a local lender, adding that his institution would have to think carefully about joining deals underway such as the $4 billion fund-raising for Emirates Aluminium.

Local banks have been key to funding loans to local names in the last 18 months, especially as many European banks have withdrawn from the Gulf because of problems in their home markets.

Therefore, any move by local banks to scale back their commitments could have significant repercussions for the UAE economy. Many large-scale infrastructure projects are in the pipeline, such as construction of the UAE’s first nuclear power plant.

However, bankers aren’t panicking just yet.

“They are certainly more cautious, but they are still pitching for business,” the Dubai-based source said of local lenders.



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2 Comments

  1. Tarek Aziz on October 1, 2012 7:39 pm

    Excellent initiative by the Central Bank. A quick analysis will indicate that the county’s economy is in a very tight situation indeed as its economy was constricted heavily during the period 2008-09 due to the ongoing global financial crisis coupled with a highly deflated asset prices. In addition, the Dubai real estate crash and the artificial stock market boom and subsequent crash helped to push down the economy further. To counter this, the country increased spending thereby fueling inflation and also pumped in huge amount of liquidity into the banking sector. Being a majority trading center, this was the biggest downward economic fall. What subsequently followed per standard “development economics” theory was that resulted in the now famous “Dubai crisis” as it was very heavily exposed to depressed real estate prices and a cash crunch. The Central Bank have therefore taken a excellent step now to contain the economic crisis going forward by the above method.

     
  2. Tarek Aziz on October 1, 2012 8:09 pm

    Good initiative by the Central Bank to contain the country’s inflation.

     

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