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Why a grace period is the only option as the lending cap looms for UAE banks
The United Arab Emirates' central bank will probably have to grant extensions to a September deadline for imposing a cap on bank lending to sovereign and government-related entities as some lenders will be unable to make the adjustments in time.
June 2, 2012 8:10 by Reuters
The new rules, announced last month, mark the first such regulatory change in nearly two decades and have caused waves in the UAE banking sector, notably at the country’s two biggest banks -Dubai’s Emirates NBD (ENBD) and National Bank of Abu Dhabi (NBAD).
Lending to governments of the seven-member UAE federation and their non-commercial entities will be capped at 100 percent of a bank’s capital base and at 25 percent for lending to individual borrowers. There is no limit at present.
NBAD would have to offload 26.5 billion dirhams ($7.2 billion), equivalent to 16 percent of its loan book, to comply with the new rules, which are due to come into force on Sept. 30, according to a May 23 Arqaam Capital report.
The situation is worse for ENBD, with Arqaam saying that even selling 14 billion dirhams of exposure, or 7 percent of its loan book, would damage income without creating any benefit as around 40 percent of its book consists of sovereign and government-related entity (GRE) debt.
“The rules will definitely affect our loan book. Not only for us but also for all commercial banks in the country,” Rick Pudner, chief executive of ENBD, said during an April 25 conference call to discuss the bank’s first-quarter results.
Discussions have since taken place between banks and the central bank over the new rules, with Michael Tomalin, chief executive of NBAD saying the bank hoped that conversations it was having would ensure “a solution that allows the bank to manage its balance sheet.”
UAE central bank chairman Khalil Foulathi said on Wednesday there could be some leeway for heavily exposed banks to extend the compliance deadline, according to Al Khaleej newspaper, but he insisted the changes would come in as stated at the end of September.
Bankers say an extension of the deadline is the only real option due to limited market capacity to digest such a vast amount of potential deleveraging in a narrow timeframe and an absence of other viable options to reduce exposures.
“They’ve said there may be exemptions on a case-by-case basis but it looks like there will be more exemptions than those able to follow the rule – there has to be an extension,” said one Abu Dhabi-based banker.
DELEVERAGING NECESSARY, NEEDS TIME
According to an April 9 Deutsche Bank note, lending by ENBD and NBAD to UAE sovereigns and GREs was at 192 and 199 percent of their regulatory capital respectively. Abu Dhabi Commercial Bank was also over the threshold at 108 percent.
“The new limits will likely prompt some balance sheet deleveraging for the most affected UAE banks, with NBAD and ENBD appearing most at risk,” the note said.
However, deleveraging would pose a number of problems. “There’s no tradeable loan market in the region,” a UAE-based banker said, pointing to one issue; secondary trading of regional debt does happen but not as extensively as in the West.
Another big problem is appetite.
“If only one bank must shed to come to the limit then you will find some takers, but if all the banks have stress about being close to or over the limit, there will be no buyers,” the Abu Dhabi-based banker said.
Demand from regional buyers is also questionable.