UAE liquidity boosts 'unlikely to relax lending rules'

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MONEY MATTERS: EFG Hermes said on Monday that the liquidity boosts to the banking sector in the UAE were unlikely to loosen lending rules.

Liquidity injections into the UAE banking sector are unlikely to prompt banks to start relaxing their tightened lending criteria, EFG Hermes said on Monday.

Measures by the UAE Central Bank to improve liquidity in the banking system will have limited impact on lending due to growing risk aversion, the regional investment bank said in a research note.

“It is no longer just an issue of tight liquidity. Risk aversion by the banking system has increased due to the deteriorating economic outlook, especially given the correction in property prices and job losses. This will limit the improvement in the liquidity situation being translated into credit growth,” a team of analysts wrote.

Retail banks in the country have hiked the minimum salary required to get a loan in the past six months.

In February, the Ministry of Finance modified the terms of the AED70 billion liquidity package launched in October.

Banks were previously hesitant to use the facility due to a clause allowing the government to take equity stakes in participating banks.

The government can now only convert the funds into equity under certain conditions that include banks being unable to pay interest and failure to uphold the terms of the facility.

The amendment also allows banks to convert the full amount into Tier 2 capital, which previously only applied to the first tranche.

Separately, EFG Hermes cautioned that Bahraini wholesale banks, which control over 75 percent of the sector’s assets, have exposure to European and US assets that poses “a considerable threat to the overall sector”.

“We believe support will be extended to the fullest extent, but in an extreme, and highly unlikely, case of a systemic collapse we think there will be a bias towards retail banks that enjoy more equity interest from the government and are beneficiaries of higher and increasing levels of government deposits,” it said.

“The more domestically and regionally focused banks employ more Bahraini nationals, which is a key government focus, than their wholesale peers.”

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READERS' COMMENTS

lending
Posted by matthewwuillemin, dubai, UAE on Monday 9 March 2009 at 19:36 UAE time


Fair call about risk etc but given that banks lend on valuations , which are themselves already lowered by the likes of Cluttons and other valuers, and then they apply the lower LVR on this figure ,the degree of risk taken is quite low actually. Indeed most banks require undated cheques to cover the loan so if you default you go to jail here in DXB.. unlike the States where you just walk away. Although prices could indeed fall further the outline above means there really is very little risk on the part of the lenders ( it would take another significant fall ie another 50 % to put lenders funds at risk.. possible.. maybe but not likely....but anything is possible in todays scared marketplace :-(

quite right
Posted by paul, Dubai, UAE on Monday 9 March 2009 at 12:58 UAE time


Banks have a duty to their savers and themselves. Any bank that wants to survive must look at the real estate market and realise that prices could fall a lot further still. It would be risky even to lend only 50% on a property at the present time.

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