UAE Central Bank Changes Banks Exposure Limits Rules

A circular released by the UAE Central Bank earlier this month amending large exposure limit rules and introducing caps on loans to local governments and their related entities, has thrown some of the federation’s commercial banks into confusion and caused one potential bank issuer to call off a roadshow planned for last week.

The new regulations prevent banks from lending more than 100% of their capital to the federation’s governments and government-related commercial and non-commercial entities.

“Where there is an excess,” the circular read, “banks should make arrangements to regularize their position no later than September 30 2012.”

Bankers say that some of the UAE’s largest banks may have to reduce their exposures, and are aghast at the proximity of the deadline, after which they could incur a penalty if they do not comply.

Last week’s scheduled roadshow was cancelled “because [the potential issuer] need to understand what the UAE central bank actually means,” source told Reuters “They don’t have a clear message for investors as they’re not sure what the UAE central bank is intending to achieve.”

The interconnectedness of big business in the UAE, which is still to develop the private sector relative to its state-owned enterprises, has endowed credit lines between state-owned companies and banks with political as well as commercial significance.

“Government-owned banks are expected to show leadership in big government transactions,” said a DCM banker.

If the proposed new cap is enforced according to the current wording, these banks will have to take decisive action in the next five months before the deadline falls.

“Banks that are not going to meet these ratios have to think about what sort of contingency they have,” said a Gulf-based banker. “Perhaps the easiest option would have been to issue collateralized loan obligations, but there isn’t really a CLO market in the UAE.”

“The whole idea behind this move is to disintermediate and send borrowers to the capital markets,” the Gulf-based banker continued.

Investment bankers could be expected to approve of any measures designed to increase the desirability of their services in managing such trades. However, the cancellation of last week’s roadshow suggests that proposing to scale back lending lines will not immediately light a fire under the feet of potential bond issuers.

“The timing of this announcement is a little odd,” said the DCM banker, pointing to the IMF’s recent calculation that European banks look set to shrink their balance sheets by a collective $2.6trn over the next six months, further reducing possible sources of funding for Gulf entities.

“There will be a lot of lobbying against it. There is more of a political dimension to this than there is common sense.”

The announcement of the proposed changes may have caused short-term disruption in the market and been greeted with a degree of skepticism, but many industry experts consider the reduction of interparty lending to be a positive aim for the long term. According to one DCM official, the current concentration of lending in the UAE is “not good for business or competitiveness”, Reuters reported.

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