UAE banks can handle fresh crisis: Central Bank

UAE banks can withstand a fresh economic crisis and any increase in their loan loss provisions given their massive capital base, the Central Bank said Thursday.

Releasing its monetary quarterly bulletin, the Central Bank said a decline in EIBOR rates last year reflected a sharp improvement in the banks’ liquidity situation following government measures to support the financial sector in the wake of the 2008 global fiscal turbulence.

But it noted that EIBOR (Emirates Inter-bank Offered Rate) rebounded in June because of the economic uncertainty that followed the announcement about Dubai World debt problem and exposure of some banks to the conglomerate.

Its figures showed the combined shareholders equity of the country’s 23 national banks and 28 foreign units gained nearly Dh24 billion in the first half of 2010 to reach around Dh255.1 billion at the end of June against Dh231.4 billion at the end of 2009. The increase boosted the banks’ collective

capital adequacy to a record 20.4 per cent, far higher than the 11 per cent floor set by the Central Bank for their adequacy by September 2009 and 12 per cent in June 2010.

“UAE banks enjoy a solid base of capital and reserves, which largely boosted their capital adequacy…this of course will help them to withstand further repercussions of the economic downturn and any possible increase in their bad and doubtful loan provisions,” the Central Bank said.

The report said growth in customers’ deposits with the banks has allied with financial support from the Central Bank to bolster their lending capacity.

But it noted that credit remained slow, rising by only around 2.4 per cent in 2009 and 0.4 per cent in the first two quarters of 2010.

“Growth in credit is reasonable if we take into account the weakening corporate demand for bank loans and the cautious lending policy adopted by the banks.”

The report said the improvement in the banks’ liquidity was evident in their relatively high investment in the Central Bank’s certificates of deposit (CDs), which swelled by around 6.6 per cent to Dh67.5 billion at the end of June from nearly Dh63.3 billion at the end of March.

Total deposits edged up by 1.9 per cent to Dh985.4 billion from Dh967 billion in the same period. They stood at about Dh922 billion at the end of 2008.

According to the report, the improvement in domestic liquidity depressed three-month EIBOR rates from as high as 3.6 per cent at the start of 2009 to around two per cent at the end of October last year. It further receded to nearly 1.9 per cent at the end of that year, the report showed.

“The rate then climbed back to 2.3 per cent at the end of June this year because of the state of uncertainty that accompanied the DW debt announcement in November …despite the rise, the liquidity situation remains good.”

The figures showed three-month EIBOR, set by the Central Bank in collaboration with 12 other banks, remained at around 2.3 per cent on Thursday.

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