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The United Arab Emirates will struggle to impose new rules that are aimed at preventing a repeat of Dubai’s debt crisis by capping bank lending to government bodies, analysts and bankers say.
Local lenders are responding to the central bank’s decision in April to restrict lending to UAE government entities. The regulations limit banks to lending a maximum of 100 per cent of their capital base to government entities, with no more than 25 per cent of a bank’s capital to be loaned to any individual government borrower.
Fears over banks’ exposure to Dubai government debt in 2009 prompted concerns about the stability of the financial system. As the UAE seeks to recover from its debt woes, the authorities are trying to prevent future shocks.
However, bankers have criticised the lack of prior consultation, the limited timeframe for such a sweeping reform and a lack of risk differentiation in the regulations.
“We agree with the general direction of travel set by the central bank, but have some issues that we are discussing privately with them,” National Bank of Abu Dhabi says.
The lender, which says it is confident it can find a solution that will not “disturb the bank’s strategy”, is discussing the central bank’s definition of exposure, arguing this should not include, for example, quality bonds.
NBAD and Abu Dhabi’s Al Hilal bank bought Dubai government bonds totalling $5bn as the emirate’s debt crisis blew up in November 2009.
The central bank also imposed a 100 per cent limit for lending to federal and emirate-level state-related enterprises, with a cap of 15 per cent for funded exposure to individual borrowers.
Insiders say high levels of lending by state-owned banks cannot be reduced by the significant levels demanded by a September 30 deadline. However, banks are expected to present detailed plans for tackling their exposure at the least.
Analysts and officials argue that banks may continue to ask for waivers from the regulator given the limited lending opportunities in the market beyond omnipresent state-related enterprises.
Analysts are divided over whether banks will consider a moratorium on new loans to governments and state-owned enterprises. Some say banks may heed the central bank’s call for an end to new lending, but others say institutions will ignore it.
Domestic banks have continued to sign new loans to state-related entities since the regulation was announced in April. In the same month, NBAD issued a Dh4bn ($1.09bn) credit facility to Abu Dhabi’s Aldar, in the latest round of support for the struggling property developer.
Although it may take time to instil, other countries in the Gulf have succeeded in implementing similar limits. In Saudi Arabia, the central bank has imposed strict single obligor limits on the kingdom’s lenders to halt overexposure to the same entities.
Of all UAE banks, Emirates NBD, Dubai’s biggest, has the highest level of sovereign exposure at 153 per cent of regulatory capital, according to Deutsche Bank estimates, followed by the National Bank of Abu Dhabi at 66 per cent.
“Implementation will take time, it is impossible to reduce in a few months,” says one banker. “Discussions are going on at different levels on a timeframe for implementation.”
EFG-Hermes, an investment bank, puts ENBD’s exposure to Dubai at about Dh60bn – approximately 130 per cent of the bank’s Basel II eligible capital, or about 30 per cent of its entire loan book. This exceeds the individual limit of 25 per cent and the aggregate limit of 100 per cent, says Shabbir Malik, EFG’s banking analyst.
Emirates NBD’s exposure to government-owned conglomerate Dubai World – which last year restructured $25bn of debt – is estimated at about 20 per cent of the bank’s capital, also in breach of the new limit.
“In my view, the central bank is likely to allow some flexibility on the September deadline for the bank, as these exposures are too large to be unwound in such a short period,” Mr Malik says.