190312 uae central bank
The UAE Central Bank located on the Baynoonah street in Abu Dhabi. Image Credit: Gulf News archives

Abu Dhabi: Financial safety indicators for the UAE banking sector remained positive during the fourth quarter of 2018 after the UAE Central Bank looked at Capital Adequacy Standards in accordance with international regulatory framework Basel III. The Central Bank said banks operating in the UAE have a high level of profitability and capital.

The capital adequacy ratio stood at 18.2 per cent and the Tier-1 Capital Ratio posted 16.9 per cent. The capital adequacy ratio is used to test a bank’s capital in relation to its risk-weighted assets. Tier 1 capital refers to the core capital of a bank, which includes equity capital and disclosed reserves.

Common Equity Tier 1 ratio reached 14.9 per cent, which is much higher than the regulatory requirements set by the Central Bank.

This type of capital absorbs losses without requiring the bank to cease its operations, and includes Common Equity Tier 1 (CET1), a component of Tier 1 capital that consists mostly of common stock held by a bank or other financial institutions.

The loan-to-deposit ratio for the entire banking system fell from 94.8 per cent in September 2018 to 94.4 per cent until the end of fourth quarter 2018, which is lower than the ratio achieved in fourth quarter 2017, which stood at 99 per cent. This is mainly attributed to the growth in deposits compared to lending. The minimum capital adequacy ratio that banks must maintain is 8 per cent, under rules set by Basel III.

Dividing banks into traditional and Islamic, the loan-to-deposit ratio for traditional banks was 94.7 per cent and 93.1 per cent, respectively, falling 4 percentage points compared to the previous quarter.

Meanwhile the loan-to-deposit ratio for Islamic banks increased by 5 percentage points. The ratio of loans to deposits in national banks was 94.1 per cent, a decrease of 0.6 percentage points, compared to September 2018.

The loan-to-deposit ratio for foreign banks accounted for 96.7 per cent compared to 95.5 per cent at the end of the third quarter of the same year.

At the same time, the ratio of liquid assets, including obligatory reserves imposed by the Central Bank, Certificates of Deposit, low-risk government bonds, public sector debt and bank cash increased from 16.1 per cent at the end of Q3 2018 to 17.4 per cent at the end of Q4 2018.

The total liquid assets in banks at the end of Q4 2018 stood at Dh407.6 billion, an increase of Dh35.4 billion compared to Q3 2018, an increase of 9.5 per cent in Q4 of 2018.

This explains the increase in the ratio of liquid assets. On a year-on-year basis, total liquid assets in banks increased by Dh9.7 billion, an increase of 2.4 per cent.