UAE banks are unlikely to suffer from a US-style subprime crisis as their exposure to the local real estate sector remains relatively low, the central bank governor has said.
Sultan bin Nassir Al Suwaidi also said rules on new capital requirements for the country’s 51 banks would be enforced in the first quarter of 2014.
“The extent of real estate-related lending in the loan portfolios of UAE banks is not a matter of concern for the central bank. It is far below the levels that could pose significant systemic risk,” he told Oxford Business Group.
“UAE banks play a relatively minor role in real estate financing. Their exposure to this segment is less than 21 per cent of total loans and less than 20 per cent of UAE banks’ total deposits – lower than the European norms.”
Suwaidi stressed that current UAE regulations prohibit banks from allocating more than 20 per cent of their deposits to real estate financing.
“Therefore, future dynamics are limited by the growth in deposits. Presently, corporate and commercial entities represent 62 per cent of real estate-related loans, a large part of which is linked to real estate development,” he said.
“This is the share of the loan portfolio that is by far the most exposed to the real estate price dynamic, as repayment is dependent on sales. This subgroup of loans was a source of large losses during the 2008 crisis.”
Suwaidi said the recent recovery of the residential real estate market has the potential to improve cash flows of developers and that this has positively affected loan portfolios.
Asked about banks’ ability to meet Basil III capital requirements, he said the central bank is revising such requirements to bolster the UAE banking sector.
He said banks in the UAE are highly capitalized with a traditional predominance of share capital, reserves and retained earnings – the core of the newly defined Common Equity Tier 1 Capital Ratio.
“The central bank intends to begin the engagement process with the banks towards implementing the new capital regime in the first quarter of 2014 with such measures as consultations on new regulations,” Suwaidi said.
“The Central Bank is currently working on a redefined regulation on liquidity requirements in collaboration with the banking industry. The central bank will consult on potential implications prior to setting up a new, effective Basel-compliant regime, thereby making sure that the new regulation meets the Basel III standards as well as the needs of the local market.”