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* Most UAE, Bahraini and Saudi banks halt new business
* Some big international banks reluctant to cut ties
* Qatar banks pay premium for funds, but not prohibitive
* Logistics of documentation one of biggest problems
* No sign of harsher sanctions by GCC states so far
By Tom Arnold
DUBAI, June 15 (Reuters) - A few large Asian, European and U.S. banks are providing funds to help to keep Qatari banks running smoothly after a diplomatic rift has dried up financing from the United Arab Emirates, Bahrain and Saudi Arabia, banking sources said.
The foreign banks' support is critical for Qatari banks, whose reliance on international funding has grown sharply over the years to about $50 billion as of April, or around a quarter of their domestic loans, Standard & Poor's estimated. That is up from 13.2 percent at the end of 2015.
Saudi Arabia, the UAE, Bahrain and Egypt last week severed diplomatic relations with Qatar, accusing it of support for Islamist militants and Iran. The UAE has also decided to blacklist Qatari individuals and entities.
The UAE central bank asked banks under its jurisdiction to apply "enhanced customer due diligence" when dealing with six Qatari lenders, including the biggest, Qatar National Bank .
This was tantamount to telling banks to trade with Qatari institutions "at their own peril", a Middle Eastern banker in Dubai said. Bankers said UAE, Bahraini and Saudi banks have in general halted all new business with Qatar.
But some international banks are not pulling back because they are reluctant to cut lucrative business ties with Qatar built up over the years. They also see attractive opportunities related to Qatar's multi-billion dollar infrastructure projects before it hosts the soccer World Cup in 2022.
"International banks will be less knee-jerk than the local banks as they don't want to cut off their nose to spite their face," a compliance executive at a foreign bank said.
Commerzbank, UniCredit and Mizuho Financial have been the top three lenders to Qatari banks in the past three years, according to Thomson Reuters LPC data. First Abu Dhabi Bank is the largest Gulf lender to Qatar's banks, according to the data.
Some European, Asian and U.S. banks, as well as banks from Kuwait and Oman, are still lending new money to Qatar, according to sources familiar with the matter. Kuwait and Oman belong to the six-nation Gulf Cooperation Council (GCC) but are not participating in the Saudi-led embargo.
Some Qatari banks are having to pay more to obtain funding, but they are not running out of money.
"We're unscathed so far," one Qatari banker said. "The panic has eased as we've been able to continue receiving funding, though there's certainly no complacency about the risks that remain."
He said his bank had borrowed over $100 million in unsecured three-year financing from a European bank and obtained six-month deposits from Asian and European banks in the two weeks since the crisis erupted. U.S. banks were still trading through bilateral and repo lines, he said.
Qatar central bank governor Sheikh Abdullah bin Saud al-Thani referred to such ties in a statement this week, saying Qatari banks' presence in markets including Asia and Europe were helping them to continue operating.
Qatari banks' reliance on GCC funding varies widely. Qatar Islamic Bank, the largest sharia-compliant lender, is the most dependent, obtaining 24 percent of its funding and 24 percent of deposits from the rest of the GCC, according to research published by Goldman Sachs.
Big international banks including HSBC, Citigroup , Deutsche Bank and JPMorgan declined to comment. In a statement, Standard Chartered said its operations in Qatar were unchanged; it did not elaborate.
Another difficulty facing those doing business with Qatar now is logistical, an international banker said. He said flying physical documentation for trade finance deals to Qatar has become slower and more burdensome as direct flights from Dubai have been cancelled because of the diplomatic rift.
International banks' ability to keep doing business with Qatar could face hurdles if the Saudi and UAE central banks were to announced harsher sanctions, such as curbs on the ownership of Qatari assets. So far, there appears to be no sign of that happening.
"If the sanctions had been proposed by the United Nations, we would have frozen everything, but because this is from one country to another, we don’t see any reason to freeze anything," a source at an Asian bank said.
Another potential risk is that Saudi Arabia could try to push international banks to choose between doing business with Qatar and obtaining access to its own, much larger market. But this would be difficult to enforce.
In the meantime, the premiums which Qatari banks are paying to fund themselves do not look crippling.
The three-month Qatar interbank offered rate has risen to a multi-year high of 2.31 percent from 1.92 percent before sanctions were imposed.
Some Qatari banks are paying as much as 50 to 100 basis points more than they used to in the interbank market, an Omani banker said. But the Qatari banker said the six-month deposits his bank secured in the past few days only involved a premium of 1 bp. (Additional reporting by Saeed Azhar, Davide Barbuscia and Hadeel Al Sayegh; Editing by Andrew Torchia and Jane Merriman)