Middle East: New government-lending rules are delayed
NBAD announces six-month waiver; Rules could promote federal borrowing
Efforts by the UAE central bank to restrict lending to emirate governments and government-related entities (GREs) are facing delays after Abu Dhabi’s biggest bank said it had been given a six-month waiver.
New government-lending rules were due to take effect by September 30. However, by early October, media reports emerged that Michael Tomalin, CEO of National Bank of Abu Dhabi (NBAD), had said his bank – which is owned by Abu Dhabi’s government – was given an additional six months to meet the target.
"Other banks may also have been granted some leeway [on the rules]," says Rahul Shah, banks analyst at Deutsche Bank.
The new rules are an attempt to deal with an issue that was at the heart of the local debt crisis in 2009, when Abu Dhabi had to throw a financial lifeline to Dubai and firms linked to Dubai’s government had to restructure their debt.
On April 4 this year, the central bank amended its rules on credit exposure, limiting the total amount a bank could lend to GREs and emirate-level governments to 100% of a bank’s capital base. It also set a ceiling of 25% for loans to individual GREs and individual emirates – although it excluded lending to the federal government, whose debt and, indeed, political power has been negligible up to now.
Before Tomalin’s comments, Giyas Gokkent, chief economist at NBAD, confirmed to Euromoney that the bank had written to the central bank regarding its exposure and the new credit limit. NBAD, the banking champion of the federation’s biggest and most dominant emirate, had exposure to sovereign and quasi-sovereign debt of around 199% of its capital, according to Deutsche Bank estimates in April. Emirates NBD – Dubai’s biggest bank, owned by Dubai’s government – was not far behind, with exposure of 192%.
One problem for banks that need to offload some loans is that there are few obvious buyers for the debt. "With the eurozone crisis, some of the main buyers of Dubai’s debts, such as European banks, are withdrawing from what they consider to be non-core markets, such as the UAE," says Ayesha Sabavala, Middle East economist at the Economist Intelligence Unit. "The central bank wants to be seen to be taking the necessary steps to avoid another debt crisis such as the one [in Dubai] in 2009. But it is surprising that it is trying to bring in a limit at this point in time and giving the banks such a short timeframe in which to achieve them, knowing full well that some of the country’s largest banks are very highly exposed to these entities," Sabavala adds.
"The extension gives banks a little extra time to think about how to do this, but it is very possible there will be more extensions on a case-by-case basis. Six months is not going to give the highly exposed banks sufficient time."
Despite the problems for some institutions, analysts reckon there are likely to be large benefits in adhering to the rules for the UAE banking sector as a whole. "We see the new rules as positive over the long term, as they will help to reduce risk concentrations in the banking system and could also promote sovereign borrowing taking place at the federal, rather than local, emirate level," says Deutsche’s Shah.
Meanwhile, the extensions granted to some banks have been greeted as a sensible compromise from the central bank. "These loan limits are a positive development in helping to manage systemic risks to the banking sector," says Monica Malik, Dubai-based chief economist at EFG-Hermes. "We do not believe that the recent moves to soften loan-limit regulations are a change in stance, but rather an attempt to limit any short-term stress."
The central bank, in a separate move to restrict bank lending to individual emirate governments, is also planning to boost liquidity within the UAE banking sector.
In its inaugural financial stability review released in September, the central bank said it was introducing a discount window, called the marginal lending facility (MLF), to enable banks to borrow intra-day and overnight funds from the federal central bank, by discounting assets from a pre-approved list. No date has been announced for when the MLF will be introduced, but local bankers suggest it could be in place by the end of this year.
"This new monetary policy tool will improve local banks’ liquidity management practices," says Khalid Howladar, an analyst at Moody’s Investors Service. "It will clarify the framework within which local banks can access collateralized funding from the central bank. UAE banks should be able to draw funds from the central bank quickly and with certainty."
As of March, UAE banks held around Dh100 billion ($27.2 billion) worth of domestic securities, or 5.8% of total assets. Given the sovereign-related nature of many of these holdings, Howladar says he expects a large portion of them will be eligible for the MLF.
In addition, as the central bank has also indicated that long-dated assets will be eligible for the facility, he says the MLF might encourage UAE banks to undertake more term funding – something that would be further boosted if the federal government went ahead with a mooted inaugural bond issue.