Interview: Sultan bin Nasser Al Suwaidi,
How is continued deleveraging and financial uncertainty in the eurozone impacting the sector?
SULTAN BIN NASSER AL SUWAIDI: European banks’ continued deleveraging has had a limited impact on the UAE financial sector. Foreign banks’ share of total loans in the UAE is less than 20% and has been relatively unchanged for the past few years. Loan growth was 5.8% year-on-year as of the end of June 2013 and has remained broadly in line with GDP growth. There are also signs that European banks’ lending to the region has picked up recently and is back to pre-crisis levels.
The UAE’s national banks have high liquidity levels and limited dependency on overseas financing. Furthermore, the banks have diversified their funding sources in recent years to include financing from Asian and GCC sources as well as continued funding from European markets. European investors continue to be a significant holder of UAE corporate debt, much of which will mature over the next few years. If European investors are reluctant to roll over, UAE banks have more than sufficient liquidity to take up these maturities. Regional and Asian investors have also demonstrated strong appetites for UAE paper, as well.
Are institutions’ exposure to real estate liabilities still a concern for the central bank? What proportion of lending to the sector is most appropriate?
AL SUWAIDI: The extent of real estate-related lending in the loan portfolios of UAE banks is not a matter of concern for the central bank. It is far below the levels that could pose a significant systemic risk. UAE banks play a relatively minor role in real estate financing. Their exposure to this segment is less than 20% of both total loans and the UAE banks’ total deposits – lower than the European norms.
Current UAE regulations prohibit banks from allocating more than 20% of their deposits to real estate financing, therefore future dynamics are limited by the growth in deposits. Presently, corporate and commercial entities represent 55% of real estate-related loans, a large part of which is linked to real estate development. This is the share of the loan portfolio that is directly linked to the real estate price dynamic, as repayment is dependent on sales.
This subgroup of loans proved to be challenging during the 2008 crisis. The recent recovery of the residential real estate market in the UAE has the potential to improve the cash flows of developers and, in this way, has positively affected loan portfolios.
In your assessment, how well-positioned are banks in terms of meeting Basel III requirements?
AL SUWAIDI: To maintain and enhance the strength and resilience of the UAE banking sector, the central bank is in the process of updating regulatory capital requirements in the UAE in line with international best practices. Banks in the UAE are highly capitalised with a traditional predominance of share capital, reserves and retained earnings – the core of the newly defined Common Equity Tier 1 Capital Ratio. Minimum capital requirements have been set above the Basel recommendations for the last couple of years and the central bank will likely keep the requirements above the internationally agreed upon minimum standards, such as with an additional conservation buffer.
Given the nature of the local market, banks are not as leveraged as some of their peers in other markets.
Consequently, banks will be able to meet the leverage ratio requirement proposed at 3% by the Basel Committee. In accordance with Basel III, the timeframe for the full implementation of the new capital regime is the end of 2018. The central bank intends to begin the engagement process with banks towards implementing the new capital regime in the first quarter of 2014.
The Central Bank of the UAE is now working to redefine liquidity requirements for banks in collaboration with the banking industry. The central bank will assess the potential implications of the revised regulation to ensure that it meets the Basel III standards and takes into account the specifics of the UAE local market.
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