Dubai: Basel III capital requirements present an opportunity for Middle East banks and regulators to embrace new rules and improve the sector’s asset quality and risk-return profiles, according to a study by management consultancy Strategy&, formerly Booz & Company.
The study, which analyses the ability of a sample of 22 banks in the Gulf Cooperation Council (GCC) and the Levant to meet BASEL III capital requirements, said regional banks which do not address the new capital requirements will find themselves with capital adequacy ratios ranging from shortfalls of -10.4 per cent to excesses of +10.5 per cent of Basel III minimums. The study shows that some of the banks could face up to 25 per cent of total regulatory capital required by 2019 as per Basel III rules, assuming current growth rates.
Fast-growing banks in Qatar, Kuwait, and the Levant will be the hardest hit, as any growth in assets requires accompanying growth in Tier 1 capital to meet new standards. By contrast, countries that have witnessed relatively slower growth in recent years — including Bahrain, Saudi Arabia, and the UAE will have little difficulty meeting or even exceeding required capital adequacy requirements if they continue along that trajectory. However, the new capital requirements will hinder their growth if they want to ramp up regional and international expansion; therefore, they too would need to rethink their business and asset mix with an eye to capital requirements.
Banks with the greatest potential capital shortfalls as a result of not addressing Basel III requirements could see corresponding declines in return on average equity (ROE).
Forward-looking banks
Complying with Basel III regulations should encourage Middle East banks to take a more calculated and strategic approach to decisions about businesses, asset choices, and growth, while allocating capital toward opportunities that fit the bank’s actual risk and return profiles.
For forward-looking banks, the Basel III requirements can be much more than a technical burden and a drag on growth and profitability. Rather, financial institutions should consider the new rules as a catalyst to upgrade their capabilities, as well as a clear call for thoughtful, balanced and better articulation of their risk-return profile and strategic choices. “The new regulation, once implemented across the region, should benefit the regional banking system not just during times of financial crisis or market dislocation, but for decades to come,” said Jihad K. Khalil, Senior Associate with Strategy&.
The new regulations will force regional banks to take a closer look at their capital allocation and deploy their capital more strategically. However, it is expected to slow down some banks’ rapid expansion abroad.
The study urges bank executives to develop a clear understanding of the new requirements that cover six areas of reform, to be able to support the compliance with Basel III regulations. These areas are: definition of capital; countercyclical buffers, enhanced risk coverage; new leverage ratio; new liquidity standards; and other general risk guidelines.
