Treasury Today Country Profiles in association with Citi

Basel III to create more active UAE money market?

Corporates operating in UAE are watching closely as the country’s central bank ramps up its new capital and liquidity framework ahead of Basel III compliance. The UAE is preparing local institutions for the Basel III banking supervision standards, set to start in 2014, by requiring them to hold 10% of their liabilities in liquid assets. The new measure will start early next year and as the implementation of the latest Basel Accord draws closer, banks may start to pass on the cost of compliance.

The Central Bank’s 10% liquid assets requirement applies only to ‘high quality liquid assets’. Those qualifying include cash, certificates of deposit, and highly-rated local government bonds. The new ratio, described by the central bank as ‘interim’, comes into effect in January 2013. However, it will make way at the end of 2014 for the more complex liquidity coverage ratio (LCR) of Basel III.

Banks also have until June 2013 to comply with the Central Bank’s ‘Uses to Stable Resources Ratio’ as further preparation for the introduction of Basel III, this covering the Accord’s Net Stable Funding Ratio (NSFR) which arrives in 2018. LCR is a means of short-term stress-testing banks’ liquidity, covering a 30-day period. NSFR is directed at ensuring banks have sufficient long-term funding. The central bank has helped local banks during the financial crisis, providing liquidity support and lower interest rates on borrowing.

The new 10% rule will not have a significant impact on UAE banks, says Hussain AlQemzi, GCEO of Noor Investment Group and CEO of Noor Islamic Bank. “Many, including Noor Islamic Bank, already have adequate quality of capital to meet the requirements of the new regulation.”

Kamal Goyal, Chief Financial Officer of Alumco, an architectural design and construction firm located in Dubai, agrees, adding that the interim ratio will therefore not unduly affect corporates operating in UAE. “We don’t expect there to be much of an impact, either on the financing cost or the availability of financing from the banks,” he states. “Most of the big banks have a lot of liquidity and we, as corporates, are seeing that the banks are still competing with each other for business.” However, Goyal believes it may be an issue for some smaller banks which have “lagged behind” with their deposits. There is also a limited choice of liquid instruments in this market, compared to the more developed financial centres such as the UK and the US. The Central Bank is aware that this may pose a problem for some institutions. It is looking to issue federal bonds as means of easing the pain. But, says Goyal, “the central bank is still in the process of formulating the regulation to put this in place.” Plans have, he adds, been under discussion “for at least two years”.

Daniele Vecchi, Group Treasurer at the Dubai-based operator of shopping malls and real estate facilities, Majid Al Futtaim, sees the interim liquidity demands as “a simple validation of what the market has already addressed.” He believes that the overall banking landscape in the UAE, from a perspective of solidity, is at least on a par with the rest of the region, and certainly better than some beyond the region. Although he feels some provisioning, such as the write-off of non-performing loans, has been “less aggressive” than it could have been, UAE banks have “learned the lesson” from onset of the crisis in 2008, where some banks found themselves “a little bit stretched” in terms of loan-to-deposit ratios.

Having perhaps lacked that aggression, many banks are now “extremely liquid on the front-end of the curve”. For these institutions it is, Vecchi continues, not now a matter of liquidity, but “a matter of profitability”, with the cost of funds in USD of even the UAE’s largest institutions varying by just a few basis points from what a strong corporate player may achieve.

The move by the authorities to provide federal bonds is not a “game changer” for Vecchi. However, the appetite to push towards Basel III compliance could, he says, provide “a great opportunity” to create an active money market in the country and this would be a boost for corporates. The current environment in the UAE, he comments, is “very promising”.