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MIDEAST DEBT-Grace period only option as UAE lending cap looms
May 30, 2012 / 4:12 PM / 6 years ago

MIDEAST DEBT-Grace period only option as UAE lending cap looms

DUBAI, May 30 (Reuters) - The United Arab Emirates’ central bank will probably have to grant extensions to a September deadline for imposing a cap on bank lending to sovereign and government-related entities as some lenders will be unable to make the adjustments in time.

The new rules, announced last month, mark the first such regulatory change in nearly two decades and have caused waves in the UAE banking sector, notably at the country’s two biggest banks - Dubai’s Emirates NBD (ENBD) and National Bank of Abu Dhabi (NBAD).

Lending to governments of the seven-member UAE federation and their non-commercial entities will be capped at 100 percent of a bank’s capital base and at 25 percent for lending to individual borrowers. There is no limit at present.

NBAD would have to offload 26.5 billion dirhams ($7.2 billion), equivalent to 16 percent of its loan book, to comply with the new rules, which are due to come into force on Sept. 30, according to a May 23 Arqaam Capital report.

The situation is worse for ENBD, with Arqaam saying that even selling 14 billion dirhams of exposure, or 7 percent of its loan book, would damage income without creating any benefit as around 40 percent of its book consists of sovereign and government-related entity (GRE) debt.

“The rules will definitely affect our loan book. Not only for us but also for all commercial banks in the country,” Rick Pudner, chief executive of ENBD, said during an April 25 conference call to discuss the bank’s first-quarter results.

Discussions have since taken place between banks and the central bank over the new rules, with Michael Tomalin, chief executive of NBAD saying the bank hoped that conversations it was having would ensure “a solution that allows the bank to manage its balance sheet.”

UAE central bank chairman Khalil Foulathi said on Wednesday there could be some leeway for heavily exposed banks to extend the compliance deadline, according to Al Khaleej newspaper, but he insisted the changes would come in as stated at the end of September.

Bankers say an extension of the deadline is the only real option due to limited market capacity to digest such a vast amount of potential deleveraging in a narrow timeframe and an absence of other viable options to reduce exposures.

“They’ve said there may be exemptions on a case-by-case basis but it looks like there will be more exemptions than those able to follow the rule - there has to be an extension,” said one Abu Dhabi-based banker.

DELEVERAGING NECESSARY, NEEDS TIME

According to an April 9 Deutsche Bank note, lending by ENBD and NBAD to UAE sovereigns and GREs was at 192 and 199 percent of their regulatory capital respectively. Abu Dhabi Commercial Bank was also over the threshold at 108 percent.

“The new limits will likely prompt some balance sheet deleveraging for the most affected UAE banks, with NBAD and ENBD appearing most at risk,” the note said.

However, deleveraging would pose a number of problems.

“There’s no tradeable loan market in the region,” a UAE-based banker said, pointing to one issue; secondary trading of regional debt does happen but not as extensively as in the West.

Another big problem is appetite.

“If only one bank must shed to come to the limit then you will find some takers, but if all the banks have stress about being close to or over the limit, there will be no buyers,” the Abu Dhabi-based banker said.

Demand from regional buyers is also questionable.

“It depends on what the assets are. If they are good Abu Dhabi names then there will be a market but if there’s a lot of Dubai and Dubai GREs then I don’t think there will be many takers,” said a loan banker at a Bahrain-based bank.

As for Western banks, much has been made of the withdrawal of European institutions from the Gulf region, undertaking their own deleveraging programme since the back-end of last year to raise cash after renewed euro zone debt problems.

However, there are others out there with long-established links to GRE lending, such as Standard Chartered, HSBC and Barclays, Jaap Meijer, director of equity research at Arqaam Capital, said in a phone interview.

Regardless of the number of buyers, the sheer volume of debt which could potentially flood the market ahead of September’s deadline would be indigestible. Plus, sales would have to be at fire-sale prices, something both banks and the authorities would want to avoid.

“If you’re to assume a secondary sale scenario, naturally you would also have to assume the seller would have to price the assets at a discount to motivate the buyer, meaning incurring potential losses,” Timucin Engin, associate director at Standard & Poor‘s, said.

OTHER OPTIONS LACKING

Apart from deleveraging, other options to reduce the levels of exposure at local banks are limited.

Securitisation would have the twin benefit of taking GRE debt off the balance sheet and raising longer-term liquidity, thereby improving another aspect of the local banking sector and the predominance of short-term deposits backing long-term loans.

However, the market isn’t in place in the Gulf region.

“You need a standardisation history in terms of loan losses, and you need a long-term horizon for that, but unfortunately, the regional market is dominated by expatriate bankers on limited-term contracts,” the UAE-based banker said.

“Also, the quality of people in this region is not yet sophisticated enough to be able to structure a securitisation and sell it internally to senior management.”

Not renewing existing exposures is another route but one which would take time to implement. And it would not be possible before the September deadline in any serious guise.

Such measures will also be complicated by the restructurings undertaken by Dubai GREs in the last couple of years, with large amounts of cash termed out for significant periods of time - Dubai World’s $25 billion restructuring saw bank debt extended for between five and eight years.

Talks on the ongoing restructuring of $6 billion of bank debt at Dubai Group, a unit of Dubai Holding, could also be affected as banks might be reluctant to swallow the proposed extension of up to 12 years.

ENBD holds around 40 percent of the Dubai Group debt.

The impending restrictions are already having an impact on new lending, with one Dubai-based banker saying a syndication of DIFC Investments’ $1 billion loan was important as the banks involved were conscious of wanting to offload some of the exposure because of the changes.

Future bond issuance from sovereign and GRE names could also be affected as banks are the main buyers of these offerings in the region, Engin at Standard & Poor’s said. ($1 = 3.6730 UAE dirhams) (Additional Reporting by Rachna Uppal and Raissa Kasolowsky in Abu Dhabi; Editing by Susan Fenton)

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