The United Arab Emirates central bank (CBUAE) on Tuesday unveiled a package to help bolster banks’ liquidity, marking its most significant policy move since the pandemic as Gulf economies move to weather the impact of the Iran crisis.
UAE banks, whose stocks have seen double-digit losses since the war began last month, jumped on Wednesday morning, with Dubai’s Emirates and Abu Dhabi Islamic Bank gaining more than 6%, and Abu Dhabi Commercial Bank up more than 5%.
First Abu Dhabi Bank was losing about 1% by 8.25am GMT.
The war, in its third week and without an end in sight, has thrown global energy markets and transport into chaos as the conflict has spread, with many attacks on Dubai and other countries across the Gulf.
Regional lenders, who in recent years benefited from rising credit demand as governments invest to diversify their economies, have proved resilient, but they are being severely tested.
The UAE’s financial system “has demonstrated resilience during the current extraordinary circumstances affecting the global and regional markets without any material impact on the banking sector’s health and payment systems”, the CBUAE board said.
Under the package approved on Tuesday, banks will gain enhanced access to reserve balances of up to 30% of the cash reserve requirement and term liquidity facilities in UAE dirhams and US dollars, the CBUAE said.
Other measures include stopgap relief in liquidity and stable funding ratios and the temporary release of the countercyclical capital buffer (CCyB) and capital conservation buffer (CCB), it said.
“We think this news should be positive for sentiment near term as it provides temporary liquidity and capital relief for the banks in what is a difficult time,” Goldman Sachs analysts said in a note.
They said the temporary lifting of CCyB and CCB could boost capital buffers by up to three percentage points, giving lenders flexibility to keep writing loans and potentially absorb potential losses if asset quality deteriorates over the near-to-medium term.
While the measures introduced on Tuesday are larger than a similar package introduced to withstand the impact of the Covid-19 pandemic, “asset quality pressures could still emerge should the conflict persist and its economic effects deepen”, the bank said.
Gulf banks could face domestic deposit outflows of $307bn (R5-trillion) if the Middle East conflict deepens, S&P Global Ratings said in a report on Monday. The ratings agency said, however, it had seen no evidence of major outflows of foreign or local funding from banks.
The CBUAE said in Tuesday’s statement the overall stock of liquidity held by UAE banks at the regulator, combined with their net eligible assets for central bank operations, had reached close to $250bn (R4.1-trillion), of which banks’ reserve balances exceed $109bn (R1.8-trillion).
Reuters
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