Higher capital levels among UAE banks mean they are unlikely to be significantly concerned by tougher global rules requiring them to bolster the amount of cash they keep in reserve. Local lenders already have to hold larger capital buffers to guard against financial risks than are stipulated by the new Basel III regulations. "With UAE banks being amongst the best capitalised on a global scale, they are on the safe side compared to their European or US counterparts," said Sofia el Boury, a banking analyst at Shuaa Capital.
Under the international requirements, banks will have to increase to at least 6 per cent their Tier 1 capital ratio, an important measure of banks' financial strength. The UAE Central Bank minimum Tier 1 capital ratio is 8 per cent. Basel III's minimum total capital requirement of 8 per cent is lower than the 12 per cent capital requirement the Central Bank asks lenders to meet. The new regulations also mean the amount of common equity, the best capital for absorbing losses, that banks have to hold will increase from 2 per cent of their loans and investments to 7 per cent.
That includes a 2.5 per cent "capital conservation buffer" to shield banks against financial stress. Janany Vamadeva, a senior analyst at HC Brokerage, said the common equity requirement could have implications for UAE banks as it may not take account of capital injected by the Government. Starting in late 2008, the UAE made available a total of Dh120 billion (US$32.67bn) to shore up its banks after the financial crisis.
"The UAE banks are quite solid," said Ms Vamadeva. "The Government has been pretty prudent and the capital injections into these banks mean they have had high Tier 1 ratios even before these new regulations were discussed." Sultan al Suwaidi, the Governor of the UAE Central Bank, was not among regulators who on Sunday agreed to the Basel III rules designed to boost lenders' ability to withstand losses in future crises without the need for government bailouts.
The agreement, due to be phased in over several years - up to 2019 in some cases - still needs approval by the Group of 20 leading and emerging nations at its summit in November. As part of a move to gradually tighten regulations on capital adequacy, the Central Bank told lenders they needed to start complying with Basel II regulations from November last year. Basel II, in addition to differentiating further between types of risk, also requires lenders to improve their disclosure by showing different kinds of risks on their balance sheets, among other things.
Until the Central Bank came up with its own set of rules for banks operating in the UAE, it was too early to assess the full consequences of the latest rules, said Ms el Boury. "However, until further analysis is made, we believe local banks could elect to conserve capital through constrained dividend payout," she said. The economic crisis and the collapse of property prices have led some banks' loan books to suffer, highlighting the need for an extra capital cushion.
@Email:tarnold@thenational.ae