Commercial bank executives in the United Arab Emirates will meet central bank officials later on Tuesday to discuss a deadline for obeying new limits on lending to state-linked firms, with the lenders desperate for information after weeks of silence from the regulator.
With under a week until the curbs are due to take effect, banks in the UAE are in the dark over whether the rules will be enforced or if their pleas for more time have been heard.
"Bank chiefs will meet the central bank today and there will be lots of ranting and raving about this Sept. 30 deadline," said a senior commercial banker who is aware of the meeting, declining to be named because of the sensitivity of the issue.
The rules, announced in an early April circular to commercial banks, are apparently designed to prevent any future repeat of Dubai's corporate debt crisis, which erupted in 2009 as the real estate market crashed; the crisis was worsened by local banks' excessive exposure to state firms.
But the rules have proved controversial, given the short time frame to comply with the directive and the fact that some of the UAE's largest banks were over the new exposure limit. This led to demands for more time to comply.
However, banks have largely been working in an information vacuum over the last few months. The central bank has not communicated on the subject in recent weeks, bankers say, and according to two industry sources, it cancelled a routine meeting between its officials and treasury heads of commercial banks on Sept. 23 without citing a reason. Bankers had hoped for answers at the meeting.
Since the crisis, UAE authorities have been praised by the International Monetary Fund and others for stabilising and reforming the banking system. The central bank is introducing new liquidity requirements to prepare banks for the phase-in of Basel III global banking standards in the next few years, and it aims to modernise the money market by creating a discount window from which banks could borrow.
Nevertheless, the confusion over the new exposure limits illustrates risks related to policy and regulation in the UAE's banking market.
"We have raised some major issues on the substance of the circular and still await the central bank's response," National Bank of Abu Dhabi, the UAE's largest lender by market capitalisation, said in a statement.
The bank added that while it agreed with the principle of the circular and its conversations with the central bank had been "constructive and positive", it had requested an extension "to give time for detailed and technical discussions to take place."
Despite repeated attempts to contact central bank officials and spokesmen via telephone and email, none responded to requests for comment.
With the exact reasons for the central bank's silence a mystery, some bankers have speculated that the possibility of changes to key personnel may be responsible.
The four-year terms of central bank Chairman Khalil Foulathi and Governor Sultan Nasser Al Suweidi both expired in July and there has been no word on whether they will continue in their jobs or will be replaced, banking industry sources said. The usually forthcoming Suweidi declined to speak to reporters at a capital markets conference in Qatar last week.
Under the circular, any bank's lending to the governments of the seven-member UAE federation and their quasi-sovereign entities will be capped at 100 percent of its capital base; its lending to a single borrower will be limited to 25 percent of capital. There is no limit at present.
But some of the largest commercial banks in the UAE, which funded the country's boom in the 2000s and then supported state-linked entities during subsequent debt restructurings, were well beyond the limits set by the central bank.
According to an April 9 research note by Deutsche Bank, Emirates NBD and NBAD were at 192 and 199 percent of capital respectively. Abu Dhabi Commercial Bank, another state-owned lender, stood at 108 percent.
Offloading loans to get under the bar by the deadline appears both impractical and uneconomic for such banks because of the sheer amount of assets.
NBAD would have had to offload AED26.5bn ($7.2bn), equivalent to 16 percent of its loan book, to comply with the new rules, according to a May 23 Arqaam Capital report.
Arqaam calculated that even if ENBD, Dubai's largest bank, sold AED14bn of exposure, or 7 percent of its loan book, that would damage income without creating any substantial benefit as around 40 percent of the bank's book consisted of sovereign and government-related entities' debt.
Many in the industry therefore believe that extensions for at least some banks will have to be considered ahead of the Sept. 30 deadline.
According to industry sources, the Emirates Banks Association, a trade body chaired by Mashreq CEO Abdul Aziz Al Ghurair, has been lobbying the central bank actively for a six-month extension for all lenders in the country.
Calls to Ghurair, who is also head of the authority which oversees Dubai's financial free zone, went unanswered.
Foulathi was quoted by the Al Khaleej newspaper as saying in May that the central bank was willing to cooperate with heavily exposed banks and extend the deadline on a case-by-case basis.
However, the central bank appears to face a dilemma. If it moves rapidly to enforce the new rules, it could cost commercial banks money and even end up pushing them into more risky lending. But it is keen for banks to diversify their lending, both to limit the concentration of risk and to boost loans to the private sector, which the government wants to develop.
ENBD has suffered four successive falls in quarterly profit because of provisioning against government-related entities' debt.
So the central bank may be stuck between trying to improve the overall banking environment for the long term and accommodating banks' short-term needs.
"The central bank seems to be in a Catch-22 situation," said an Abu Dhabi-based banker. "It creates regulations but is not sure whether to enforce it or not."For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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