Interpreting Middle East Economic News and Analyzing Market Trends

UAE Central Bank holds off on tougher regulations stating banks are in a good position

Is the headline confusing?  Don’t worry, it confused me too.  Allow me to elaborate.  On January 1, 2013, the UAE Central Bank was supposed to begin enforcing new capital and liquidity ratios for banks in the country.  However, on December 17, 2012, the Central Bank postponed these new regulations until further notice.  In a country where the media is hungry for local news, this story was barely covered and wasn’t even mentioned by international media outlets.  Here’s more from the local paper Khaleej Times:

“The UAE Central Bank has postponed new regulations that limit commercial bank lending to governments and their related entities for further review in a move that is expected to give lenders sufficient time to come to grips the requirements.

The regulator also has put off the implementation of another rule on banks’ liquidity ratios. The rules, originally scheduled to come into effect on January 1, had been designed to help banks withstand market disruptions and avoid a concentration of debt payments.

  

This suggests that banks are not able to fully comply at this time and need more time to get up to speed.  The article continues…

“Under separate liquidity rules announced in July, banks were required to comply with four so-called liquidity ratios to help them prepare for complying with Basel III banking rules requiring higher capital ratios. The first of these were to be applied from January 1 when banks were expected to hold 10 per cent of their liabilities in high-quality liquid assets such as cash, Central Bank certificates of deposits and federal government bonds.

“The board of the Central Bank reviewed banks’ comments on the liquidity regulations in terms of the financial instruments accepted as liquidity tools, their limits,  implementation date and submitting reports” before announcing the postponement, the statement said.

It did not give a new timeline for implementing the rules or completing the review.

“As many of the major UAE lenders are believed to remain well over the proposed lending limit, it was widely expected that the regulator would ultimately review the rules and delay their implementation,” said an analyst.”

So after discussing these new regulations with the banks and getting their feedback, the Central Bank decided to postpone these new rules.  What happened here?  The last part of the article brings it all together…

“The (Central Bank) board reviewed report of the Assistant Governor for Monetary Policy and Financial Stability. The report showed the overall prudential ratios of the banking system, financial stability, Central Bank data and liquidity.

 The report confirmed that banking indicators are considered positive and that banks are in a good position, and are insulated from the current turmoil in financial markets.

The conclusion is simple; local banks told the Central Bank that they are in good shape and did not need new regulation.  The Central Bank agreed after confirming that the banks are in good shape and didn’t need additional regulation.  Does this make sense now?

In other news…

“Dubai Islamic Bank the world’s oldest Shariah-compliant lender, may need to boost capital to absorb bad loans stemming from a real estate slump to avert a possible ratings downgrade.

 

The biggest United Arab Emirates lender complying with Muslim banking rules was placed on ratings watch because loan quality “remains very weak compared to peers” and it hasn’t set aside enough money to cover losses, Moody’s Investors Service said Dec. 6. Competitor Abu Dhabi Islamic Bank sold perpetual debt in November to raise capital so it can lend more as the U.A.E. economy recovers from a property crash that sent Dubai home prices tumbling more than 65 percent.”

 

“Bad loans at the Dubai-based bank comprised 16.8 percent of the total at the end of 2011 and are expected “to remain elevated through to year-end 2013,” Moody’s said. That’s above the U.A.E. average ratio of 10.6 percent, it said.”

The issues with banks in the U.A.E. not making enough provisions and not recognizing the full extent of the losses on their loan book are well known,” Aliasgar Tambawala, a Dubai- based fixed income fund manager at Mashreq Capital DIFC Ltd., said by e-mail on Dec. 27. “I don’t see any material change in their credit profile on the back of these ratings action.”  Read the full article from Bloomberg.

In another Bloomberg article:

“Emirates NBD’s Islamic banking unit expects to double profit in 2013 as individuals and small businesses take out more loans amid Dubai’s economic revival, the chief executive officer said.

Banks in Dubai, still struggling with non-performing loans stemming from the 2008 real estate crash, are stepping up efforts to boost Islamic finance as the industry’s global assets are set to double by 2015. U.A.E. loan growth of 2.8 percent in October was the slowest in the Gulf Cooperation Council as lenders scaled back credit to government-related clients following efforts by the central bank to limit their exposure.

Moody’s Investors Service last month downgraded Dubai’s biggest banks, including Emirates NBD, for failing to do enough to address the bad loans that piled up following the crash.”