Lenders prefer to maintain a higher adequacy ratio

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UAE banks will maintain the higher Tier 1 capital adequacy ratio (CAR) of 11 per cent that they built after a Finance MinistryFinance Ministry ruling to that effect last year, in spite of last week's Central BankCentral Bank notification easing the CAR to seven per cent, top executives said.

The ministry yesterday said banks would need to follow the Central BankCentral Bank stipulation as opposed to its own notification, Bloomberg News reported citing a Finance MinistryFinance Ministry statement. Almost all local banks achieved the Tier 1 ratio of 11 per cent stipulated by the ministry by June 30.

At the same time, most banks are likely to witness slower asset growth for the rest of this year as they remain cautious about lending. The effect of these two factors together will not disturb the current CAR banks have built, executives said on condition of anonymity.

The Finance MinistryFinance Ministry in October 2008 stipulated that banks that received funding from a stimulus fund would be required to raise their Tier 1 CAR to a minimum of 11 per cent by June 2009 and 12 per cent by June 2010. Last week, the UAE Central bankUAE Central bank relaxed the stipulation to seven per cent and set a deadline of September 30.

Bank executives yesterday told Emirates Business their institutions would prefer to maintain the higher CAR of 11 per cent at the Tier 1 level, which they say they achieved in June. Prior to the ministry requirement, there was no mention about the Tier 1 CAR, except that the Central BankCentral Bank had said the Tier 2 ratio cannot exceed two-thirds of the Tier 1 ratio when the minimum overall CAR was fixed at 10 per cent.

"So in a typical situation, a bank with an overall CAR of 10 per cent would have a Tier 1 ratio of six per cent and Tier 2 of four per cent," an analyst explained. While the Finance MinistryFinance Ministry's notification last year had made no mention of overall adequacy ratio, the Central BankCentral Bank last week specified that the Tier 1 ratio of seven per cent would be part of an overall adequacy ratio of 11 per cent.

The reduction in adequacy ratio notified by the Central BankCentral Bank prompted one global ratings agency, Fitch Ratings, to threaten UAE banks with a rating downgrade if they brought Tier 1 CAR down to seven per cent, while another, Moody's Investors Service, said it was a good move to release liquidity into the system.

By CL Jose

© Emirates Business 24/7 2009