UAE waters down bank exposure rules
Abu Dhabi, November 5, 2013
The central bank of the UAE has eased planned curbs on commercial banks' exposure to state-linked debt, giving them five years to comply after the banks complained that the rules could hurt their business.
As part of efforts to reduce risk for banks and prevent any repeat of Dubai's 2009-2010 corporate debt crisis, the central bank announced early last year that banks would have until the end of September 2012 to restrict their lending to the government and state-linked entities.
Each bank would have to cap such lending at 100 percent of its capital base, with lending to a single borrower limited to 25 percent.
The rules were suspended after lobbying by the banks, however, and central bank governor Sultan Nasser Al-Suweidi on Tuesday outlined substitute rules that were much less harsh.
Banks will have five years to comply fully with the rules, Suweidi said; they will have to cut their excess lending by 20 percent every year until they reach the ceiling for exposure.
"We think that is a reasonable time frame. Most banks will be compliant," he told reporters on the sidelines of a financial conference.
Bonds that are rated by credit rating agencies will not be counted as exposure for the purposes of the rules, Suweidi said - a provision that will remove pressure on banks to cut their holdings of bonds, and could prompt Dubai, which lacks a rating, to seek one.
Also, the debt of "commercial" state entities which can stand on their own will not be counted, Suweidi added. He did not elaborate on whether this meant banks could, for example, lend without restriction to real estate developers in which the governments of emirates in the UAE own major stakes.
The new rules will come out within one week and will then be published in the official gazette, taking effect thereafter, Suweidi said.
Taken together, the new rules appear to be much less disruptive to banks' earnings and the growth of the UAE economy than the original ones could have been.
In a report in September, analysts at Bank of America Merrill Lynch calculated the UAE's domestic banking sector had extended a whopping $42 billion in credit to the government and related entities since 2008, bringing its exposure to the state and non-financial public enterprises to 104 percent of capital - the highest ratio since the late 1970s.
For some major UAE banks, the ratios are believed to be considerably higher, so a sudden cut to the 100 percent level could have saddled them with losses while making it difficult for the emirates to finance ambitious development plans.
The International Monetary Fund has warned that the concentration of loans to the government at Emirates NBD , Dubai's top bank, is high, raising corporate governance and risk management concerns.
ENBD has said it is managing its loan book prudently, and Suweidi said on Tuesday that Dubai, where property prices have been rebounding strongly this year, did not risk another boom-bust cycle.
"There is no possibility of a new bubble in the real estate sector. Banks have gone through the experience of 2006, 2007 and the first half of 2008. They know that things cannot go up forever," he said.
"Most loans in the UAE are in the form of mortgage loans. That will balance the issue and it will not permit banks to overextend themselves."
Last week, the UAE central bank issued restrictions on mortgage loans in order to limit speculation in the real estate market; the caps were not as stringent as initially planned because of lobbying by the banking industry.
Suweidi also said he did not expect UAE inflation to rise beyond a normal rate of around 2 percent. "We are not seeing anything beyond normal credit growth, inflation and general expansion of real estate loans."
The UAE's annual consumer price inflation was at 1.3 percent in September for the fourth month in a row, but rising rents in Dubai and upward pressure on prices in Abu Dhabi have raised the possibility of higher inflation nationally. -Reuters