Post by Rajiv Sekhri on Sept 8, 2009 7:45:55 GMT 4
UAE banks should not significantly lower their capital adequacy ratios to boost liquidity during bleak economic times as they need to shore up their capital to cope with rising bad loans, analysts warn.
The country's central bank this month allowed lenders to lower their Tier-1 capital adequacy ratios - money banks hold to back loans - to 7 percent from 11 percent by the end of this month and to 8 percent by June 2010 to stimulate lending and boost liquidity.
Ratings agencies have already warned that banks risk a downgrade if they lend more. And analysts say banks, which have been reluctant to give out loans, should continue to resist lending.
While more loans would boost the economy, banks need to prepare to face rising non-performing loans, which are expected to peak next year.
"It does not make sense for banks to reduce their capital base. Most of the UAE banks raised their Tier I capital to more than 11 percent during the first half of this year. As such, they are not going to reduce it," said an analyst who requested anonymity.
Ratings agency Fitch said UAE banks, "still facing risks of higher impairments on their retail and corporate loan portfolios", could be hit with a ratings downgrade if they significantly lower their capital adequacy ratios.
Moody's said it will monitor banks' new lending quality.
"Capitalisation levels of UAE banks currently stand at adequate levels, and are higher than globally acceptable minimum requirements," said John Tofarides on Monday September 8, 2009, an analyst at Moody’s in Dubai, adding that "any material weakening in capitalisation levels might prompt ratings reviews".
Bank loans have come to a standstill in the UAE since credit crunch hit the oil-rich country last year, which caused the real estate market to collapse and property values slashed in half. Loans have grown 1.3 percent in the first seven months of the year.
Non-performing loans (NPLs) hit second-quarter profits at nearly all UAE banks. Analysts say they expect NPLs to peak in 2010 at between 2 and 2.5 percent from 1.56 percent in the second quarter of 2009.
As ratings agencies closely watch who banks lend to, analysts say banks also need to lower their loan-to-deposit gap to improve their health.
The central bank said in May that the 90 billion-dirham ($24.5 billion) loan-to-deposit gap faced by UAE banks has fallen "tremendously" and will be "eliminated", but it did not give a time frame.
"Loan growth has been quite sharp pre-crisis and banks also leveraged to increase their lending activities," the analyst said. "Though loan growth is soft, it will take a while for the (gap) to return to normal as deposit markets still remain competitive."
The country's central bank this month allowed lenders to lower their Tier-1 capital adequacy ratios - money banks hold to back loans - to 7 percent from 11 percent by the end of this month and to 8 percent by June 2010 to stimulate lending and boost liquidity.
Ratings agencies have already warned that banks risk a downgrade if they lend more. And analysts say banks, which have been reluctant to give out loans, should continue to resist lending.
While more loans would boost the economy, banks need to prepare to face rising non-performing loans, which are expected to peak next year.
"It does not make sense for banks to reduce their capital base. Most of the UAE banks raised their Tier I capital to more than 11 percent during the first half of this year. As such, they are not going to reduce it," said an analyst who requested anonymity.
Ratings agency Fitch said UAE banks, "still facing risks of higher impairments on their retail and corporate loan portfolios", could be hit with a ratings downgrade if they significantly lower their capital adequacy ratios.
Moody's said it will monitor banks' new lending quality.
"Capitalisation levels of UAE banks currently stand at adequate levels, and are higher than globally acceptable minimum requirements," said John Tofarides on Monday September 8, 2009, an analyst at Moody’s in Dubai, adding that "any material weakening in capitalisation levels might prompt ratings reviews".
Bank loans have come to a standstill in the UAE since credit crunch hit the oil-rich country last year, which caused the real estate market to collapse and property values slashed in half. Loans have grown 1.3 percent in the first seven months of the year.
Non-performing loans (NPLs) hit second-quarter profits at nearly all UAE banks. Analysts say they expect NPLs to peak in 2010 at between 2 and 2.5 percent from 1.56 percent in the second quarter of 2009.
As ratings agencies closely watch who banks lend to, analysts say banks also need to lower their loan-to-deposit gap to improve their health.
The central bank said in May that the 90 billion-dirham ($24.5 billion) loan-to-deposit gap faced by UAE banks has fallen "tremendously" and will be "eliminated", but it did not give a time frame.
"Loan growth has been quite sharp pre-crisis and banks also leveraged to increase their lending activities," the analyst said. "Though loan growth is soft, it will take a while for the (gap) to return to normal as deposit markets still remain competitive."