Basel III relaxation brightens outlook for regional banking

Respite for banks from stringent international lending rules could help to counteract a decline in international lending to the region.

On Sunday, global regulators agreed to water down the Basel III lending rules, which institutions in Europe and America have struggled to meet and which presaged a shift away from the Middle East by many banks.

Bank lending to the region has fallen sharply in the past few years and staff have been withdrawn, as the cost of setting aside capital to comply with Basel III constrained lenders' ability to invest in the Middle East.

The change to the Basel III rules could "potentially" alter banks' strategy in the region and convince international lenders to return to the region, said Martin Kohlhase, a corporate finance analyst at Moody's Investors Service.

"Some of the international banks were refocusing around some of the strongest entities in the region, ie the government-related entities," he said. Banks "only wanted to deal with those institutions with very strong governance".

Bank credit proved scarce in the Middle East last year, forcing many companies to tap bond markets instead.

Banks last year arranged a total of US$39.5 billion (Dh145.09bn) in syndicated loans, compared with a peak of $109.5bn in 2007, according to Bloomberg data.

In the meantime, companies in the region have tapped markets directly with $48.8bn of bond and sukuk sales last year. The Arabian Gulf alone accounted for $42.7bn, marking a record year for the region's debt markets.

While UAE banks had been sufficiently well-capitalised to avoid feeling an impact from Basel III, tight liquidity ratios had constrained lending in the UAE, said Philippe Dauba-Pantanacce, senior economist for Turkey, the Middle East and North Africa at Standard Chartered.

"What will really be the main determinants of the UAE banks' lending environment in the upcoming months will be the shape and forms of the recent rules - especially the reality of their implementation - that we heard regarding maximum exposure to the sovereign and caps on mortgage lending," he said.

The Basel Committee eased a deadline to comply with a liquidity ratio which global banks were facing a €1.8 trillion (Dh8.62tn) shortfall to meet at the end of 2011.

Bank shares leapt on the news of the reprieve from the Basel rules, with Credit Agricole shares up 4.5 per cent and stocks in Deutsche Bank rising 3.5 per cent in noon trading in Europe.

The agreement was a "compromise between competing views around the world", said Mervyn King, the chairman of the Group of Governors and Heads of Supervision at the Bank for International Settlements and outgoing governor of the Bank of England.