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UAE banks’ capital needs ‘manageable’

Loan growth to remain sluggish.

August 2, 2010 9:49 by

UAE banks, exposed to a falling real estate sector and non-performing personal loans, are, on average, well-placed to withstand a deterioration in asset quality, said a report which forecast slow loan growth in 2010.

The report by Dubai-based Shuaa Capital said some individual banks could need additional liquidity injections to meet the central bank’s capitalisation requirements under various “stress” assumptions examined in the study.

Banks in the United Arab Emirates have suffered from substantial exposure to bad loans, particularly from the region-wide real estate slump which hit cities likes Dubai hard.

Some banks booked record provisions in 2009 as a result.

Entitled “UAE banks put to the test”, the report found that the banks’ capital requirements to meet UAE central bank regulations of 8 percent Tier One capital adequacy ratio would extend from 2.5 billion dirhams to 15.8 billion dirhams ($680.6 million to $4.30 billion) under a base case assumption under the “conservative” worst case scenario.

“However, in this (unlikely) event, we have no doubt that the UAE authorities would provide the required financial support to these banks, particularly as the government has already stepped in to recapitalise some UAE banks at the height of the financial crisis,” the report said.

Sophia el Boury, UAE banks analyst at Shuaa Capital, told reporters in a conference call that five of the banks studied would need additional capital under the UAE Tier 1, or core, capital requirements in the worst case.

But she added that it was very unlikely that banks’ average Tier 1 percentage would fall below base case assumptions, and certainly very unlikely to reach the worst case.

Abu Dhabi Commercial Bank, which on Saturday reported a net quarterly loss of 531 million dirhams, would need the largest liquidity shot, followed by Dubai’s Emirates NBD. Both banks are thought to hold the largest local exposures to indebted conglomerate Dubai World.

UAE banks remained well capitalised, and any additional capital needs were “manageable”, but lenders would remain cautious in the short term, Boury said.

“We’re not very optimistic in terms of lending growth. From now until the end of the year, banks will still be prudent and cautious to lend; the current operating environment is still challenging,” she said.

The report tested eight local banks which accounted for almost 70 percent of banking assets at the end of 2009 using real estate and personal loans extended in 2008, at the height of the credit boom, which Shuaa considered the riskiest assets.

Shuaa said additional measures, such as removing high risk assets from the balance sheets of banks and replacing them with low-risk government securities, could be considered in the UAE.

(Reporting by Rachna Uppal; Editing by Firouz Sedarat)

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