Over the weekend, the Gulf region stepped up its response to coronavirus, announcing big central bank and government stimulus packages. Analysts, though, are urging the UAE’s commercial banks to do more to support the real economy.
Outside of Iran, only one death in Bahrain has been recorded, but Gulf governments are stepping up measures to contain the spread of Covid-19.
The UAE’s central bank and the Saudi Arabian Monetary Authority announced Dh100 billion ($27.3 billion) and SR50 billion ($13.3 billion) programmes respectively, while Qatar’s government unveiled a QR75 billion ($20.5 billion) economic package. The governments of Dubai and Abu Dhabi also responded with a series of measures to help domestic economies.
Analysts say the UAE’s Dh100 billion targeted economic support scheme is positive for the financial sector, but are unconvinced that measures to stimulate bank lending are the most effective policy.
The central bank is allowing banks to free-up Dh50 billion from regulatory capital buffers to boost lending capacity while offering banks operating in the UAE access to a further Dh50 billion in loans and advances at zero cost against collateral at the central bank.
Asad Ahmed, managing director at Alvarez & Marsal in Dubai, praises the central bank’s action and adds that the onus is now on commercial banks to transmit the stimulus to the real economy.
“It is important to see how the banks individually respond to this with their own measures,” he says. “We need to make sure the dialogue between the regulators and commercial banks leads to strategic and tactical steps and there is a good monitoring mechanism of what the banks are doing, and most importantly how the combined effort is assisting the individuals and small and medium-sized enterprises most impacted.”
Ahmed notes that UK banks NatWest and Lloyds have set aside £5 billion and £2 billion respectively of working capital support for SMEs affected by Covid-19. He adds that the UAE banks could consider implementing measures such as increasing credit card limits and cash withdrawal limits for individuals affected by the current crisis.
“They need to provide relief to individuals who are affected,” says Ahmed. “At the SME level, they could defer payments and not charge fees on such deferment; perhaps increase working capital lines, etc. These could likely be funded through the targeted economic support schemes.”
A second banker in the region agrees that banks need to do more to help customers. Allowing flexibility for companies that are struggling, offering a payment holiday to people affected by the virus and offering the ability to renegotiate payments with a government backstop would be effective, he says.
The purpose of the targeted economic support scheme is to facilitate the provision of temporary relief from the payments of principal and interest on outstanding loans for all affected private-sector companies and retail customers in the UAE.
I don’t think it is a case of using the funds but building a war-chest- Debt capital markets banker
On February 29, the central bank urged commercial banks to implement measures such as re-scheduling of loan contracts, temporary deferrals on monthly loan payments and reduced fees and commissions for customers affected by the virus.
But while several bankers in the region agree that a sector-targeted response is useful, they say there is a risk banks will not transmit access to cheap liquidity to the real economy.
“I don’t think it is a case of using the funds but building a war-chest,” says a debt capital markets banker based in the region. “There isn’t actually demand for the borrowing. People think it is the banks that don’t want to lend, but most clients don’t want to borrow.
“They will say you can run lower capital ratios, but then banks just hoard it, which isn’t the desired outcome,” he says. “It’s not specific to this region but is a general mindset. Cutting interest rates isn’t really the right solution for now because people don’t want lending.”
At the moment, most banks in the UAE look robust. They are well capitalized and have plenty of liquidity – one UAE-based banker says that increasing the overall loan-to-deposit ratio from around 87% to 100% will free up around $60 billion of liquidity. That should be enough to support the UAE’s real economy over the next few months.
However, bankers warn that banks exposed to airlines, logistics, hospital and real estate will feel the adverse effects of the virus badly.
“The banks should be fine for now, but I see stress in Q3/Q4, and we’ll see that coming through on the books,” says a Dubai-based banker. “A bunch of restructurings will happen, credit quality will deteriorate and Dubai will be hit.”
The UAE central bank is also revising the current 20% exposure limit banks can have to the real estate sector to 30%.
Delaying debt-service payments is likely to force a back-log of non-performing loans, while caps on fees to SMEs will impact banks’ profitability. In addition, banks may also not be compensated for payment deferrals given to specific private customers.
“I don’t know if we’ll get compensated,” a senior banker in the region tells Euromoney. “In the UAE, we used to get phone calls saying we had to wipe off people’s debts and we didn’t get compensated. We had to take that as provisions.”
With some 49 banks operating in the UAE, bankers expect more sector consolidation before long.