New loan-to-asset ratio for banks mooted

Study says the maximum value of loans should equal the value of assets plus ownership rights. The proposed ratio if amended in the nine banks will bring an additional Dh86.4bn liquidity. (EB FILE)

The Central Bank should amend the current 1:1 loan-to-asset ratio for banks so that the maximum value of loans equals the value of assets plus the ownership rights, according a new study.

If the proposed new ratio were introduced at the nine banks that account for 75 per cent of banking operations in the UAE an additional Dh86.4 billion of liquidity would be freed up to support economic activity in the country, says the report by Truth Economic Consultants.

Director-General Ridha Musallam, who compiled the study, told Emirates Business that the value of the assets of the nine banks totalled Dh663.4bn while their ownership rights were worth Dh132.4bn at the end of 2009. The loans totalled Dh709.6bn.

He said the Central Bank set the 1:1 loan-to-asset ratio but ignored the ownership rights as a precautionary measure out of concern for the banks.

"But this fear and caution is not justifiable at the moment because of the lack of liquidity in the markets," he added. "The Central Bank should intervene to provide liquidity."

The study covers the National Bank of Abu Dhabi, Union National Bank, First Gulf Bank, Abu Dhabi Islamic Bank, Emirates NBD, Commercial Bank of Dubai, Mashreq, National Bank of Umm Al Quwain and the Abu Dhabi Commercial Bank.

The report concludes that the Central Bank should reduce the nine banks' compulsory reserve and deposit certificate requirements. The banks have a total of Dh77.6bn that is held by the Central Bank and foreign banks, including Dh31.3bn of compulsory reserves and Dh46.2bn of deposit certificates.

The study stresses the need to separate the allocations set aside for bad debts from over-debt allocations and distribute them over five years. "The banking sector was intensely affected by the global financial crisis, and those effects are still deep and need decisive intervention especially that we still need time to be free from the fallout of the crisis with the least damage," it adds.

The study reveals a drop in indicators of liquidity, profitability and returns on shareholder rights. Also, the return to the capital is down at a time when the doubtful debt allocations of the nine banks have increased considerably. It says allocations to cover doubtful debts rose to Dh15.2bn in 2009 as a result of the economic crisis and the exposure of some banks to regional and international companies and banks. In 2008, allocations totalled Dh8.5bn.

Musallam said the funds withheld by the Central Bank represented 59 per cent of the value of ownership rights in 2009, seven per cent of the total budget and some 11 per cent of the total loans.

The study says 2009 saw nine per cent growth in the total funds invested by the nine banks in the UAE compared with the end of 2008. Banks operating in the country are still making profits and growing in terms of total assets compared with 2008.

The loans made by some banks rose by seven per cent in 2009 compared with the previous year, and the study adds that total customer assets went up by 11 per cent.

Banks in the UAE saw a rise in revenues of 10 per cent in 2009, and this was attributed to an increase in the interest rates charged for loans loans.

The study says liquidity in terms of the loan-to-deposit ratio fell from 1.2 times at the end of 2008 to 1.1 times at the end of 2009, and the loans-to-total assets ratio declined from 69 per cent to 68 per cent. The shareholders' rights-to-total assets ratio rose to 13 per cent in 2009 from 11 per cent in 2008. The customer deposits-to-total assets ratio rose slightly to 63 per cent from 62 per cent.

The nine banks' net profits fell to Dh12.6bn last year from Dh16.1bn in 2008. Profit indicators showed a drop as the return-to-total-assets ratio went down to one per cent at the end of 2009 against two per cent the previous year.

The nine banks' invested capital rose to Dh1.1 trillion at the end of 2009 from Dh961.6bn in 2008. Total loans rose by Dh43.5bn to Dh709.6bn from Dh666.2bn while net interest revenues totalled Dh27.2bn at the end of 2009, up from Dh21.7bn a year earlier. This is attributed to the rise in the total interest revenues in 2009 and a drop in the expenses accompanying those revenues.

Returns on shareholder rights fell to 10 per cent at the end of 2009 from 15 per cent and the return on capital fell to 55 per cent from 76 per cent. The net profit margin declined to 20 per cent from 29 per cent. The total interest revenues for the nine banks totalled Dh48.4bn, up from Dh43.5bn.

Cautious lending

However, Mohammed Al Sharif, Chief Financial Officer of Dubai Islamic Bank, said a change in the loan-to-asset ratio would not fundamentally change the state of the economy or the liquidity situation in the market.

"The banks have several means available to increase their loan funds, but the main problem is that most banks are wary of giving loans at the moment," he said.

"The UAE banks have abundant liquidity and they have billions of dirhams deposited with the Central Bank, both in current accounts and certificates of deposit. Also, there are inter-bank investments. And the Ministry of Finance has said the banks indicated they did not need the third tranche of the Dh20bn liquidity support scheme.

"All these indicators confirm that the banks have sufficient liquidity, but the problem is that the banks are not sure whether their clients will be able to repay loans. Most banks believe clients will have repayment difficulties. This is a psychological problem which is apparent when financial markets respond to bad news very fast. Undoubtedly, this problem is slowing the country's economic growth."

Al Sharif said most of the loans granted in the past two years went to two sectors – real estate and shares – which were clearly affected by the global financial crisis. And the banks now felt there were no active economic sectors where clients could invest loans.

"The UAE now needs a stimulation plan led by the government – the private sector is not capable of leading or enforcing such a plan. The UAE has to benefit from the US's experience in handling the fall-out from the global crisis. It solved its bank problems and is now looking for solutions for unemployment."

Al Sharif believes certain sectors, such as infrastructure and petrochemicals, need vast funds that should be pumped in.

"For the wheel of the economy to turn, the government has to take the initiative and to take loans from banks to finance new projects of infrastructure, roads, water, electricity, education and health," he added.

"The government has to build projects in remote areas to create job opportunities – and if this happens the private sector will respond. The plan should be studied carefully to prevent a return to the levels of inflation seen in the past few years when residential and commercial rents, food prices and the cost of living soared."

Overseas investments

Al Sharif said: "The UAE, and Abu Dhabi in particular, has huge investments abroad and it would be a mistake to call for the return of all these investments since there are no projects to absorb the proceeds at the moment.

"But it is important to gradually bring back part of the investment and pump it into the market through financing strategic projects. This is what Abu Dhabi is doing now, but there is a need for more such investment, which should be distributed to all the emirates because it is one economy."

He said investors from Abu Dhabi currently had funds invested in Dubai, Sharjah and Ras Al Khaimah, and expatriates invested in the emirates as well.

"I think that when strategic federal projects are built, especially in infrastructure and transport, the whole economy will move and things will go back to normal."

Sulaiman Al Mazroui, Director-General of Corporate Communications at Emirates NBD, said the loans-to-assets ratio was a carefully calculated equation and any change to allow an increase in the value of loans could subject the banks to risks that they did need at the moment.

"The important thing now is to maintain the banks' solidity and strengthen their financial positions. And it is important that banks work to attract large deposits, especially ones that will be left for more than a year."

Al Mazroui said any change could place the banks at greater risk in the event of another crisis. "Liquidity is clearly available within the banks and banks do not conceal this. But loan operations have become selective to the extent that customers think there is no liquidity. The banks' position is positive since the global financial crisis harmed the banking sector and created a liquidity shortage which prompted the Central Bank and the Ministry of Finance to pump in tens of billions of dirhams. Al Mazroui said the banks had no confidence in the new projects for which loans were being requested – and recent experience indicated that the banks were right to be selective.

"I believe that when banks are sure the market is positive and continuously improving they will go back to lending. But what would make a bank finance a residential building for Dh100 million while the real estate market is not good?"

Al Mazroui said the UAE market would recover slowly and gradually, as was the case in major countries such as the US.

"The US provided 162,000 job opportunities a few days ago. We in the UAE need to create new job opportunities and find some kind of confidence in the performance of the banks and the economy.

"It is wrong to think that the banks are responsible for the delayed recovery of the UAE economy. Banks cannot move the market wheel while the wheel is missing. And unfortunately some forget that banks are not merely a means to circulate money – this circulation comes through investments and projects launched by the government and the private sector. Of course the banks cannot launch such projects on their own."

He said the recovery would be gradual rather than sudden and "we have to work hard to strengthen banking sector."


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