Central Bank caps will curb lending

Already contending with the fallout from the Eurozone crisis and high provisions for bad loans, banks in the UAE face a further challenge in the second half of the year — new Central Bank regulations that may further curb their sluggish lending growth.

While there have been exceptions — First Gulf Bank saw its loans grow 5.9 per cent in the first half — UAE Central Bank data show total loans and advances in the system grew by just 1.8 per cent in the first six months of 2012.

Lending growth is a key driver of the UAE banks’ profits, and analysts fear any chance of a revival could be further delayed by a recent Central Bank circular that caps lending to local governments and related entities at 100 per cent of capital, with effect from end of September. Another regulation requires banks to have at least 10 per cent of their liabilities in liquid assets by the end of the year.

The regulations may prompt banks to reduce lending to governments and focus for the remainder of the year on building up liquid assets instead of making new loans, analysts say.

UAE banks face several challenges “but if I had to pinpoint the most dominant theme, that would be the new tighter regulatory era that UAE banks have entered into” with the new Central Bank regulations, Naresh Bilandani, a financial sector analyst with JPMorgan in Dubai, said.

National Bank of Abu Dhabi and Emirates NBD, the two largest banks in the UAE, will have to greatly reduce their lending to government entities or else seek exemptions from the Central Bank regulations due to the high level of their lending. Even if they get exemptions, the two banks are likely to have to curb future government lending.