Banks with huge exposure to realty may face more scrutiny
The Central Bank of the UAE plans to further tighten regulations to avoid excessive real estate exposure and encourage banks to maintain diversified assets.
The apex bank has issued a framework for banks' real estate exposures for consultation, which includes additional regulatory requirements for banks, with higher real estate exposure who cross the set threshold limit.
"The refined measures are expected to improve flexibility for bank lending to the real estate sector, while ensuring that banks with higher real estate exposures, above a set threshold, will be subject to supplemental regulatory requirements," the central bank said in a note on Thursday.
"In addition, through the application of a backstop, the proposed measures avoid excessive real estate exposures and encourage banks to maintain diversified assets," it added.
Banks are expected to respond to the new proposal by October 31.
Abdul Aziz Al Ghurair, head of the UAE Banks Federation, said earlier this week that the federation had received the draft paper and will give feedback to a property policy in lending cap for the real estate sector.
"This is to protect the whole economy; you can't have all your lending in one sector. If the sector is impacted, the whole banking industry gets impacted, this is a prudent decision," Al Ghurair said.
The UAE's property sector has been consistently declining due to oversupply and a softened demand, resulting in pressure on banks which are heavily exposed to real estate sector.
Moody's Investors Service said in a note in March that the banks' loan losses are to rise on high exposure to subdued construction and real estate sectors.
"The key driver for increased loan losses will be the banks' high exposure to the subdued construction and real-estate markets. This subdued market combined with higher interest rates are reducing borrowers' cash flows through lower rental prices and higher financing costs. In addition, banks will increase loan-loss provisioning as their real-estate collateral declines in value," Moody's said in its note.
Analysts believe that the central bank's initiatives will bring more transparency into the banking sector also ring-fence banks who may go overexposed to the real estate sector.
Bilal Moti, managing partner of Windmills Valuation Services, said that the apex banking regulatory authority's decision to reformulate regulatory measures to govern banks' exposure to the real estate sector within prudent boundaries seems to be a pro-active balancing act.
"It is expected to specially ring-fence the banks that are or may go overexposed to the real estate sector. The measure may also be conducive to higher liquidity/lending possibility to other important industrial sectors of the country," he concluded.
Though a precise view can only be developed when the framework is concluded with the UAE Banks Federation and made public, he said the measure is perceived to upgrade the flexibility for bank lending to the real estate sector, and the financial stability of the country.
Sundar Nurani, vice-chairman of the ICAI Dubai Chapter, said that the central bank is continuously adopting global best practices and this particular regulation will improve the level of transparency and enhance the stability of the banking system.