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Banks Face Dh40b Liquidity Shortfall

DUBAI — Banks in the UAE face a liquidity shortfall estimated at Dh40 billion, a top executive of Standard Chartered Bank said on Tuesday.

UAE banks are also suffering from bad debt because of unsecured lending, Shayne Nelson, the bank’s chief executive officer for the Middle East and North Africa, said at a banking conference.

“Liquidity is still short by Dh30-40 billion,” Nelson said. “The whole system lacks (this amount).”

The loan-to-deposit gap for the nation’s banks increased to Dh50.3 billion in August compared to Dh46 billion in July this year, according to the data released by the UAE Central Bank 
last month.

Although liquidity in the banking system has largely improved, it will take time for banks to gain back the confidence to begin growing assets, Nelson said. Giving examples of recent bonds issues of Abu Dhabi’s Tourism Development & Investment Company, Abu Dhabi Commercial Bank and Abu Dhabi National Energy, known as Taqa, Nelson said, “Capital markets are opening up for good names to bring in liquidity, bond issues are bringing in liquidity at a faster pace.”

Despite tight liquidity and persistent worries about Dubai’s debts, the UAE managed to sell six per cent more bonds in the first nine months of this year than last. Nelson said that the performance of banks was hurt by the increase in bad debt, in particular as a result of unsecured lending.

Specific provisions for non-performing loans increased to Dh26.3 billion in August compared to Dh25.3 billion July, according to the central bank data.

“We also seen higher capital requirements and guidelines,” Nelson said. The minimum capital adequacy ratio will increase from 11 per cent to 12 per cent by June 2010 while the minimum tier one ratio will increase from 7 to 8 per cent. While denying to comment on acquiring a stake in Saudi Hollandi, he said, “But I will say that Saudi is a market that we have been serving out of Bahrain for a long time and it is a market we continue to be interested in.”

He said that the new Gulf banking model has to address the inherent liquidity risk in banks balance sheets. “This new model should include processes to identify, measure and manage liquidity risk along with contingency planning, a prudential holding of liquid assets, measured credit growth and managed reliance on wholesale inter-bank funding,” Nelson said. He said that the world economy and financial markets are showing promising signs of recovery, but there is no room for complacency as growth remains fragile. — abdulbasit@khaleejtimes.com