STOCK Central Bank of the UAE  CBUAE
A significant share of the direct liquidity support to UAE banks will come to a close by June end. Image Credit: WAM

Dubai: As UAE banks continue to report strong recovery, analysts and bankers fear the full withdrawal of the Central Bank of UAE’s liquidity (CBUAE) support schemes and other forbearance measures will impact the overall loan growth, asset quality and profitability in the second half of 2022.

A significant share of the direct liquidity support to UAE banks under the CBUAE’s Targeted Economic Support Scheme (TESS) will come to a close by June end.

The CBUAE had made available more than Dh260 billion worth of direct and indirect liquidity support to the UAE banks following the Covid outbreak that impacted the economic activities.

The direct liquidity support under the TESS to support included a zero-cost liquidity relief of Dh50 billion offered through banks to eligible customers who wish to apply for a loan deferment and a Dh50 billion collateralized zero cost liquidity support that banks could avail to use for lending to customers in need.

Phased withdrawal

After assessing the stability and liquidity of the UAE’s financial system, the CBUAE has begun a phased withdrawal of the direct liquidity support. In the first phase, Dh50 billion zero cost funding was discontinued from December 31, 2021. In the second phase, the Dh50 billion collateralized funding is scheduled to end on June 30, 2022.

It is unclear if the CBUAE will continue with liquidity buffer relief, and reduction by half the reserve requirements on demand deposits for all banks from 14 per cent to 7 per cent.

The CBUAE has recently assessed the UAE’s financial system as stable and the liquidity in the banking system and banks’ capital buffers adequate. However reiterated that CBUAE will continue to closely supervise banks’ asset quality and the adequacy of provisioning.

Earlier this month, the central bank following its discussions with bank CEOs said while it aims to complete Phase 2 of the TESS exit by mid-2022, while some TESS measures that support the recovery will remain in place for the time being. The CBUAE highlighted that it is closely monitoring the evolving situation globally and stands ready to take additional measures if necessary.

Concerns on loan growth

Bankers and analysts said the phased withdrawal of the support scheme has worked well for managing the liquidity while supporting their customers in times of distress and hoped that some of the remaining forebearnece measures would continue.

There are concerns that a full exit of support measures will hamper loan growth that has been weak and apply stress on some banks’ balance sheets.

“The UAE government has extended forbearance measure, TESS scheme up to June 2022 to support economic recovery. However, post the end of the loan forbearance period, banks might have to book additional provisions which could affect their asset quality and profitability,” said Asad Ahmed, Managing Director and Head of Middle East financial services at Alvarez & Marsal (A&M).

Growth in UAE banks’ aggregate loans and advances increased by just about quarter of a per cent to 1.7 per cent in 2021 and remains still below pre-pandemic levels despite the strong economic recovery.

Bankers say lending to small businesses continue to languish and the continuation of support schemes is very important.

“Despite all the hype about things having returned to normal the fact is a number of economic sectors have been severely affected. I believe the support should continue for another year,” said Varouj Nerguizian, Group CEO of Bank of Sharjah.

While many senior bank executives echoed this view, the CBUAE’s latest statistics on loan growth also confirms that some sectors lag in accessing bank funding. In Q4-2021domestic credit increased by a modest 1 per cent compared to the previous quarter mainly driven by an increase in lending to government related entities (GREs) by 10.1 per cent.

“The events of Ukraine have added another layer of stress, especially on supply sources and routes and by consequence prices. Inflation is here and might by followed by recession. The sum of all the above require further support,” said Nerguizian.

Likely spike in provisions

Analysts say, although banks have largely managed to contain loan loss provisions last year, there could be a spike from the deferred/restructured loans.

“We think part of the deterioration will come from deferred exposures once the CBUAE lifts support measures and companies in still vulnerable sectors are reclassified. At year-end 2021, Group 2 exposures [under IFRS 9 reporting standards] contributed to 1.8 per cent of gross loans, and we think some of these exposures could migrate to nonperformance because of higher interest rates,” said Puneet Tuli, an analyst at rating agency Standard & Poor’s.

Sectors such as real estate, construction, hospitality, consumer-related sectors, and small and midsize enterprises will take longer to recover and will be the chief contributors to new nonperforming loan formation.

Bankers say in the context of lingering risks to asset quality, especially from the deferred loans sitting on their books, more practical approach is required in applying IFRS-9 reporting standards.

“A more acute problem for banks is provisioning requirements under IFRS 9. National discretion must be invoked and some form of softening in its application offered,” said the CEO of a local bank.

The CBUAE is yet to announce a date/s for its exit from additional TESS measures such as relaxations in prudential ratios and some macro-prudential reliefs such as the reduction in risk-weighted assets (RWAs) on SME exposures to 85 per cent from 100 per cent, and an increase in maximum loan-to-value (LTV) requirements for first-time home buyers by 5 per cent.

Impeccable record of support
The Central Bank of UAE and UAE authorities have proved in the past that they have both the ability and willingness to support the banking system. This is underpinned by solid net external asset positions, still strong fiscal metrics and recurring hydrocarbon revenues.

In 2008, the UAE banks landed in a serious liquidity squeeze after foreign banks withdrew Dh100 billion worth of funds from the local banks following the financial crisis amid heightened speculation of rising loan impairment and potential de-pegging of the dirham. The Central Bank of the UAE and the Ministry of Finance in total made available Dh120 billion to the local banks to provide the much-needed liquidity boost.

In October 2008, the finance ministry poured Dh25 billion into bank deposits to boost liquidity at banks, the first tranche of the Dh70 billion rescue facility. It deposited another Dh25 billion into banks in November of the same year.