UAE banks have work to do as Central Bank ends Covid support measures

Dubai: As UAE banks continue to report a strong recovery, analysts and bankers fear that the full withdrawal of the Central Bank of the United Arab Emirates (CBUAE) liquidity support programs and Other forbearance measures do not affect overall loan growth, asset quality and profitability in the second half of 2022.

A significant portion of direct liquidity support to UAE banks under the CBUAE’s Targeted Economic Support (TESS) program will end by the end of June.

The CBUAE had made available more than 260 billion dirhams of direct and indirect liquidity support to banks in the UAE following the Covid outbreak which impacted economic activities.

Direct liquidity support under the TESS to support included a Dh50 billion zero-cost liquidity relief offered by banks to eligible customers who wish to apply for a loan deferral and guaranteed zero-cost liquidity support of 50 billion Dh that banks could use to lend to customers in need.

Phasing out

After assessing the stability and liquidity of the UAE financial system, the CBUAE began a gradual withdrawal of direct liquidity support. In the first phase, the zero-cost financing of Dh50 billion was halted from December 31, 2021. In the second phase, the guaranteed financing of Dh50 billion is scheduled to end on June 30, 2022.

It is unclear whether the CBUAE will pursue liquidity buffer relief and the halving of reserve requirements on demand deposits for all banks from 14% to 7%.

The CBUAE recently assessed that the UAE’s financial system is stable and that the liquidity of the banking system and banks’ capital buffers are adequate. However, he reiterated that the CBUAE will continue to closely monitor banks’ asset quality and provisioning adequacy.

Earlier this month, the central bank, following discussions with bank CEOs, said it was aiming to complete Phase 2 of the TESS exit by mid-2022, while some TESS measures that support the recovery will remain in place for the time being. The CBUAE underlined that it is closely following developments in the global situation and stands ready to take additional measures if necessary.

Worries over loan growth

Bankers and analysts said the phasing out of the support program had worked well to manage liquidity while supporting their customers in times of distress and hoped some of the remaining forbearance measures would continue.

There are fears that a complete exit from the support measures could hamper loan growth which has been weak and put pressure on the balance sheets of some banks.

“The UAE government has extended the forbearance measure, the TESS program until June 2022 to support economic recovery. However, after the end of the lending forbearance period, banks may need to make additional provisions which could affect their asset quality and profitability,” said Asad Ahmed, Managing Director and Head of Financial Services Middle East. East at Alvarez & Marsal (A&M).

Growth in aggregate loans and advances from UAE banks increased by around a quarter of a percent to 1.7 percent in 2021 and still remains below pre-pandemic levels despite the strong economic recovery.

Bankers say small business lending continues to languish and continued support programs are very important.

“Despite all the hype about getting back to normal, the fact is that a number of economic sectors have been badly affected. I think the support should continue for another year,” said Varouj Nerguizian, CEO of the Bank of Sharjah group.

While many senior bank executives have echoed this view, the latest CBUAE loan growth statistics also confirm that some sectors are lagging in accessing bank funding. In Q4-2021, domestic credit increased by a modest 1% from the previous quarter, mainly due to a 10.1% increase in loans to government-related entities (GRE).

“The events in Ukraine have added another layer of stress, particularly on sources of supply and routes and, therefore, prices. Inflation is here and could be followed by a recession. The sum of all the above requires additional support,” Nerguizian said.

Probable increase in provisions

Analysts say while banks were largely successful in containing loan loss provisions last year, there could be a spike in deferred/restructured loans.

“We believe that part of the deterioration will come from deferred exposures once the CBUAE lifts the support measures and companies in still vulnerable sectors are reclassified. At the end of 2021, Group 2 exposures [under IFRS 9 reporting standards] contributed 1.8% of gross lending, and we believe some of these exposures could migrate to non-performance due to higher interest rates,” said Puneet Tuli, analyst at ratings agency Standard & Poor’s.

Sectors such as real estate, construction, hospitality, consumer-related sectors and small and medium enterprises will take longer to recover and will be the main contributors to the formation of new non-performing loans.

Bankers say amid continuing risks to asset quality, particularly deferred loans on their books, a more hands-on approach is needed in applying IFRS-9 reporting standards.

“A more acute issue for banks is the provisioning requirements under IFRS 9. National discretion must be invoked and some form of flexibility in its proposed application,” said the CEO of a local bank.

The CBUAE has not yet announced a date for its release of the additional TESS measures such as the relaxations of prudential ratios and certain macroprudential reliefs such as the reduction of risk-weighted assets (RWA) on SME exposures to 85%. by 100 percent, and a 5 percent increase in maximum loan-to-value (LTV) requirements for first-time home buyers.

Impeccable support record

The Central Bank of the United Arab Emirates and the authorities of the United Arab Emirates have proven in the past that they have both the capacity and the will to support the banking system. This situation is underpinned by strong net external asset positions, still strong fiscal measures and recurrent hydrocarbon revenues.

In 2008, banks in the United Arab Emirates found themselves in severe liquidity crunch after foreign banks withdrew 100 billion dirhams of funds from local banks following the financial crisis, amid heightened speculation on the increase in loan impairments and the potential de-anchoring of the dirham. The Central Bank of the United Arab Emirates and the Ministry of Finance have made available to local banks a total of 120 billion dirhams to provide the much-needed increase in liquidity.

In October 2008, the Ministry of Finance paid 25 billion dirhams in bank deposits to increase banks’ liquidity, the first tranche of the 70 billion dirham rescue facility. He deposited an additional 25 billion dirhams in banks in November of the same year.