UAE banks’ financial soundness measures remain robust: Central Bank
Direct liquidity support to UAE banks under TESS programme will end in June
Dubai: Financial soundness indicators of UAE banks are robust and improving as the economy picks up momentum, according to the UAE Central Bank.
The eligible liquid assets as a per cent of total liabilities rose to 19.6 per cent in 2021, well above the 10 per cent minimum requirement. Total liquid assets of banks were at Dh529.3 billion.
The UAE banking system remains well capitalised, with average capital adequacy ratio (CAR) at 17.2 per cent, the Tier 1 capital ratio at 16.1 per cent, and Common Equity Tier 1 ratio (CET 1) at 14.2 per cent. The Central Bank is in the process of withdrawing the liquidity support schemes and other forbearance measures in a phased manner while some schemes that support economic growth will continue.
The improving financial indicators of banks allowed the regulator to complete direct liquidity support to bank customers in two phases. In Phase 1, loan repayment deferrals supported by Dh50 billion interest-free liquidity came to a close on December 31, 2021. A significant share of direct liquidity support under the Targeted Economic Support Scheme (TESS) will end in June.
Measures to boost lending
Despite a strong increase in bank deposits and liquidity, lending remained weak last year. In this context, the UAE Central Bank has assured that it will continue to support credit growth vital to economic growth. Customer deposits with banks operating rose 5.9 per cent in 2021 to Dh1.99 trillion. Total loans and advances increased 0.8 per cent to Dh1.79 trillion.
According to the latest credit sentiment survey by the regulator, credit appetite and demand for loans - especially demand for business loans of large firms - are on the rise. With the UAE GDP projected to grow 4.2 per cent in 2022, the regulator has indicated its keenness to support credit growth even with the continuation of some forbearance measures.
Although it is not clear what support measures from CBUAE will remain beyond June, a senior banker said the central bank is likely to retain relaxations in capital reservation buffers, easing of IFRS 9 (International Financial Reporting Standards) and continuation of relaxations in macro-prudential norms in terms of loan-to-value ratios in mortgages and some collateralised lending.
While the relaxations in IFRS 9 will continue until the end of 2024, it is widely anticipated that relief such as the reduction in risk-weighted assets on SME exposures to 85 per cent from 100 per cent and an increase in maximum loan-to-value requirements for first-time home buyers by 5 per cent will likely remain.
As part of the UAE Central Bank’s response to the pandemic, banks were allowed to temporarily tap into the capital conservation buffer (a capital buffer amounting to 2.5 per cent of a bank’s total exposures) up to a maximum of 60 per cent without supervisory consequences, effective March 15, 2020. The Domestic Systemically Important Banks’ (DSIB) buffer remains the same. However, DSIB may use 100 per cent of their D-SIB buffer without supervisory consequences.