Thursday 09, March 2017 by Georgina Enzer

Fitch: UAE banks set to take Basel Capital Rules in their stride

UAE banks are mostly well placed to meet new local capital requirements related to the global Basel III regulatory framework, given their strong levels of Tier 1 capital in particular, Fitch Ratings says.

The minimum total capital ratio, including a capital conservation buffer, has risen to 13 per cent of risk-weighted assets (RWAs) from 12 per cent under the previous regime, and most major banks are comfortably above this.

The Central Bank of the UAE issued new regulations this week, effective from 1 February, to ensure that banks' capital adequacy is at least in line with Basel III requirements. In addition, they must hold further common equity Tier 1 (CET1) of 2.5 per cent of RWAs (fully loaded) as a capital conservation buffer, and manage their capital and dividends to maintain this buffer. Fitch expects UAE banks to continue to calculate RWAs using the standardised approach, at least in 2017, as the central bank seems unlikely to allow the use of internal models to reduce capital requirements.

Most banks in the UAE and across the Gulf Cooperation Council (GCC) region are capitalised well above the new minimum regulatory requirements and will also comfortably meet the three per cent leverage ratio required under Basel III, given their high Tier 1 capital levels. Although a few banks are near the new minimum capital requirements, reflecting strong loan growth or pressure from their institutional shareholders for higher returns on equity, we believe they have the ability to raise capital if needed, through internal capital generation or rights issues.

UAE banks typically have high capital ratios by international standards. However, we consider them only adequate, given the concentrated exposure in UAE banks' loan books to individual sectors and borrowers, which makes them more sensitive to event risk. Some banks with a higher proportion of additional Tier 1 capital, which is not included in CET1, could struggle to meet the minimum CET1 requirement with the additional 2.5 per cent capital conservation buffer. But, again, we believe they have the ability to raise capital if needed.

The UAE tends to follow US interest rates as its currency is pegged to the US dollar and potential rises in interest rates could reduce capital ratios through lower mark-to-market values of banks' bond portfolios. However, most capital ratios are well above regulatory minimums and most banks have strong internal capital generation through earnings to bolster capital if needed to support loan growth.

Domestic systemically important banks in the UAE will also have to meet an individual supervisory capital guidance requirement, a capital add-on set by the central bank. It is not clear how onerous this will be or whether any banks will need to raise capital as a result.

Consistent with Basel III, regulators in the GCC region are introducing stricter criteria for Tier 2 capital and phasing out capital credit for legacy instruments not meeting the new standards. We expect GCC banks to issue more Basel III-compliant hybrid and subordinated instruments as a result.

UAE banks will have to maintain CET1 of at least seven per cent of RWAs, Tier 1 of at least 8.5 per cent and total capital (CET1, additional Tier 1 and Tier 2 capital) of at least 10.5 per cent of RWAs.

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