Profits at the UAE's biggest banks are expected to come under pressure as they struggle to comply with new Central Bankregulations taking effect next year.
Concerns around the financial sector have grown after banks failed to meet a deadline last month to implement a controversial Central Bank ceiling on lending to government companies.
But a new report from Arqaam Capital says separate liquidity regulations, intended to prepare banks for the strict new banking rules known as Basel III, will also weigh on earnings.
"National Bank of Abu Dhabi, Emirates NBD and Abu Dhabi Commercial Bank may not yet be meeting the new intermediate liquidity ratios," Arqaam said.
The report added that NBAD would take the biggest hit from fully complying with the liquidity measures of the Basel III rules, with a potential dip in pre-tax profits of as much as 9.4 per cent.
"We anticipate some margin compression on the back of the usage of more expensive sources of funding," the report said.
In July, the Central Bank published liquidity regulations intended to help bring banks into line with the Basel III banking code, itself designed to prevent a repeat of the mistakes that led to the global financial crisis.
With multiple major regulatory drives announced by the Central Bank in the past six months, UAE banks said they were being forced to reshape their institutions.
"When you have many, many changes you have to exert more effort, put in more investment and change your whole culture," said a source at one lender.
Two liquidity ratios implemented by the Central Bank could present difficulty to lenders, Arqaam said.
A requirement to hold 10 per cent of assets in highly liquid instruments takes effect in January and is currently breached by ADCB and Union National Bank, Arqaam said, although it estimates this could be easily remedied.
More problematic was the "uses of funds to stable resources ratio" - which assesses a bank's solvency based on the stability of funding sources.
ADCB, Emirates NBD and NBAD are in breach of this ratio and will have to raise new funds or source new deposits to comply by next June, Arqaam estimates.
The banks named in Arqaam capital's report did not respond to requests for comment.
Financial analysts from JPMorgan said that they expected big UAE banks to be "comfortable" with the new regulations. But the lack of a federal bond market could hamper efforts to comply for some lenders, the report said.
Other banks have said that this ratio requires more detailed knowledge of a bank's loan book than most provide publicly and is therefore impossible to assess.
Banks may be forced to surrender some of their earnings to comply with the new rules, analysts from Deutsche Bank wrote in a report released in July.
"The UAE Central Bank has marked out a clear glide path to Basel III implementation," analysts with the bank wrote. "However, shareholders, should be aware that enhanced liquidity comes at a cost."
An increase in liquid assets of 1 per cent could reduce profits by 2.4 per cent, they added.
The Central Bank said in its announcement of the regulations that it would set up a "liquidity task force to ensure a smooth implementation" of the new regulations. The Central Bank was unavailable for comment yesterday.
European banks have been hamstrung by efforts to raise capital to meet the Basel III requirements at the same time as protecting themselves from the effects of Greece's restructuring this year.
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- Premier League-standard football pitch
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- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
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- Disruption Lab and Research Centre for developing entrepreneurial skills
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
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Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
UAE currency: the story behind the money in your pockets
The rules on fostering in the UAE
A foster couple or family must:
- be Muslim, Emirati and be residing in the UAE
- not be younger than 25 years old
- not have been convicted of offences or crimes involving moral turpitude
- be free of infectious diseases or psychological and mental disorders
- have the ability to support its members and the foster child financially
- undertake to treat and raise the child in a proper manner and take care of his or her health and well-being
- A single, divorced or widowed Muslim Emirati female, residing in the UAE may apply to foster a child if she is at least 30 years old and able to support the child financially
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Banthology: Stories from Unwanted Nations
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A Cat, A Man, and Two Women
Junichiro Tamizaki
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What are the influencer academy modules?
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Syria squad
Goalkeepers: Ibrahim Alma, Mahmoud Al Youssef, Ahmad Madania.
Defenders: Ahmad Al Salih, Moayad Ajan, Jehad Al Baour, Omar Midani, Amro Jenyat, Hussein Jwayed, Nadim Sabagh, Abdul Malek Anezan.
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Forwards: Omar Khribin, Omar Al Somah, Mardik Mardikian.
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De Bruyne (70')
Man of the Match: Kevin de Bruyne (Manchester City)
