Moody's: UAE Central Bank takes steps to stimulate bank lending

These measures are aimed at restarting bank lending in an economy that has come to a standstill following several years of rapid growth.

Banks in the UAE, and particularly in Dubai, have been reluctant to lend despite supportive measures taken by the CBUAE.

Moody's views these measures positively, as the rating agency believes that they will provide greater incentive to banks to extend lending to creditworthy borrowers.

However, Moody's will monitor the banks' new lending quality as well as possible weakening in capitalization ratios. In Moody's view, capitalization levels of UAE banks currently stand at adequate levels, and are higher than globally acceptable minimum requirements.

Going forward, Moody's would like to see capitalization levels at the UAE banks remaining strong and higher than in other rapidly developing markets due to both high industry correlation and borrower concentration. The rating agency cautions that any material weakening in capitalization levels might prompt rating reviews.

Following its announcement, CBUAE reduced by 100 bps to 1.5% the interest rate on its liquidity support facilities provided to the banks. These facilities were established in September 2008 to alleviate the liquidity crunch by allowing banks to repo eligible securities with the CBUAE.

Moody's believes that the recent move of the CBUAE to encourage banks to make use of its liquidity support facilities is aimed at increasing lending at a time when the economy is in a slowdown and there is sufficient liquidity at the central bank level to be used.

Moody's observes that the banks have so far made very limited use of this facility, while they have been more eager to keep their funds in the interbank market benefiting from a high Emirates Interbank Offered Rate (EIBOR). The CBUAE on 27 August 2009 announced the initiation of a new procedure for calculating EIBOR that will most likely lead to a lower rate.

According to the latest banking indicators published by CBUAE, aggregate growth in net loans for the first seven months of 2009 was just 1.3%.

This compared to an average compound annual growth rate of 37% for the last five years. Banks have significantly tightened credit standards and been mainly focused on servicing their existing clients. Although part of the tumbling in loan growth was due to the higher credit risk aversion, especially in 2009 following the severe property market collapse in the first two months of the year, much of it was also driven by tight liquidity as market funding remained disrupted and customer deposit levels had to be supported by sizeable injections of government funds.

In addition to the rate reduction, CBUAE clarified its position on minimum capitalization levels to be maintained by the banks. Confusion was created earlier in the year from the Ministry of Finance's requirements of 11% for Tier 1, which related to conditions attached to the funding support provided to banks. CBUAE has now mandated a 7% minimum Tier 1 level effective from 30 September 2009, increasing to 8% by end June 2010.

Moody's recently conducted a stress test on the UAE banks on the basis of their standalone fundamentals and current capitalization levels, as of mid year 2009.

The UAE banks' current capitalization levels are considered appropriate for their risk profiles, but Moody"s cautions that any material reduction in capitalization levels would need to be reviewed.