uae to meet tighter liquidity rules uae banks€¦ · overcapitalized (cbd, rak, fgb, tamweel,...

S e c t o r C o v e r a g e

O c t o b e r 9 2 0 1 2 Jaap Meijer, MBA, CFA [email protected] +9714 507 1744

Nisreen Assi Arqaam Capital Research Offshore s.a.l.

UAE to meet tighter liquidity rules

NBAD, ENBD and ADCB may not yet be meeting the new intermediate liquidity ratios. The UAE Central Bank has embraced the Basel III LCR and NSFR liquidity requirements and will implement two transitional arrangements: 1) UAE banks are required to meet a new interim liquid asset ratio by Jan 13e, until the LCR is adopted as of January 2015. Surprisingly, the net interbank assets are cannot be included, which could lead to a shortfall for UNB and ADCB; however both could easily free up net interbank assets to boost their short term liquidity measure. If we include net interbank assets, only NBAD would be short of the required 10%. (2) The USRR ratio (effective 1 Jun 2013) is viewed as a preliminary step until it is replaced by the NSFR, which is effective as of Jan 2018: ADCB, ENBD and NBAD will have to raise deposits, wholesale debt or alter the maturity profile of their interbank liabilities. NSFR is a bigger challenge than LCR: UAE banks are being penalized for their high share of corporate and government deposits, as Basel views only retail deposits as very sticky and the UAE CB said it would adopt the Basel rules without any amendments. Tamweel, NBAD and ENBD did not meet the LCR at year-end 2011, according to our calculations, but have partly addressed this weakness this year. NBAD, FGB, ADCB, ENBD and RAK did not meet the 100% NSFR requirement by the end of last year. UAE banks are already taking measures to address their liquidity position, as is evident in the shift toward issuing medium-term debt: NBAD recently issued a USD 750mn 7-year bond in Aug 12A while ENBD issued a USD 1bn 5-year bond in May 12A. FGB has also improved its liquidity position, completing a 5-year USD 650mn bond issuance this month. We anticipate some margin compression on the back of more expensive sources of funding: Closing the LCR gap would hurt NBAD the most, with a (9.4%) impact on pre-tax profit and 17bps margin compression; next worst hit would be Tamweel, with a (6.6%) reduction hit to pre-tax profit of (6.6%) and 7bps pressure on margins. The NSFR gap looks set to have an even higher impact. We also expect GCC central banks to fully embrace Basel III capital rules, and continue to believe that some banks are undercapitalized (ADIB, DIB, ENBD). They will need to have very controlled RWAs growth and retain a high share of earnings. Meanwhile, others are overcapitalized (CBD, RAK, FGB, Tamweel, Mashreq), which allows for substantially higher dividend pay-outs.

UAE Banks

Company Ticker UNB UH

Price Target AED 4.7 Upside (%) 51.7

Company Ticker RAKBANK UH Price Target AED 6.4

Upside (%) 51.0

Company Ticker CBD UH Price Target AED 4.2

Upside (%) 40.4

Company Ticker NBAD UH


Company Ticker FGB UH


Company Ticker TAMWEEL UH Price Target AED 1.7

Upside (%) 25.9

Company Ticker MASQ UH Price Target AED 62.4

Upside (%) 13.5

Company Ticker EMIRATES UH


Company Ticker ADCB UH Price Target AED 3.7

Upside (%) 10.6

Company Ticker ADIB UH Price Target AED 2.9

Upside (%) -11.2

Company Ticker DIB UH

Price Target AED 1.8 Upside (%) -13.8

© Copyright 2012, Arqaam Capital Limited. All Rights Reserved.

See Important Notice.

mailto:[email protected]

October 9 2012

UAE Liquidity © Copyright 2012, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 2

Tighter liquidity regulation

We welcome the new liquidity requirements as it ensures the UAE banking system will

become more liquid and better able to withstand potential, though unlikely, bank runs or

severe disruptions in funding markets.

The UAE Central Bank issued a circular (No. 30/2012) on 12 July regarding liquidity

requirements in an attempt to ensure that liquidity risks are well managed for UAE banks and

in line with the Basel Committee recommendations and international best practices. The main

takeaways from the circular are as follow:

- The Central Bank will set up a liquidity task force to ensure smooth implementation of the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) by its implementation date.

- The UAE Central bank fully adopts the weightings that the Basel Committee has

agreed upon, without any amendments.

- UAE Central bank will adopt the LCR, which stipulates a 30-day stress scenario, as of 1

January 2015 and the NSFR as of 1 January 2018.

- The CB introduces two new intermediate liquidity ratios.

In this report, we run a liquidity screen for the banks under our coverage in the UAE,

calculating the 4 ratios introduced by the Basel III Committee and the UAE CB’s circular,

detailed below with a brief explanation:

(1) Highly liquid assets as a percentage of total liabilities – intended to help the banks

transfer smoothly to the LCR requirements

(2) USRR - the amended ratio of advances to stable deposits ratio – created to enable

transition to the NSFR

(3) 30-day liquidity coverage ratio (LCR) – intended to improve banks’ resilience against

potential short-term funding market disruptions by maintaining a stock of “high

quality liquid assets”; and

(4) Net stable funding ratio (NSFR) - addresses longer-term structural liquidity of banks’

balance sheets.

October 9 2012


Ratio 1: Liquid assets as % of total liabilities: only NBAD short Effective from 1 January 2013 to 1 January 2015, the central bank requires banks to hold 10%

of their liabilities in high quality liquid assets until the LCR comes into effect.

High quality liquid assets are defined as:

Cash at the Central Bank

Physical cash at the bank

Central Bank CDs

UAE Federal Government Bonds

Reserve requirements and other account balances at the Central Bank

UAE local government and public sector entities (PSEs) publicly-traded debt securities,

provided they have a 0% risk weight under the Basel II standardized approach and

that securities of this category, with credit rating “A” or below, do not exceed 2% of

the liquid assets ratio

We run a calculation for the banks’ high quality liquid assets as a % of total liabilities, excluding

net interbank assets. Only UNB and ADCB do not meet the 10% requirement. However, we

think the two banks could reduce interbank loans and transfer the funds to the central bank or

cash balances without any material effect on their net interest margins.

Exhibit 1: Ratio 1: High liquid assets as % of total liabilities (excluding net interbank)

Source: Company Data, Arqaam Capital Research

If we include interbank assets in the calculation, the liquid asset ratios for UNB, ADCB and ADIB

improve dramatically. However, this puts NBAD and ENBD below the required 10% as both had

a negative net interbank position in FY 11A. However, both banks have increased their net

liquid assets y-t-d, and only NBAD’s liquidity position remains inadequate, according to our

calculations.

22.4%20.7%

15.4%15.6%

14.0% 14.2%12.6%

10.9%

5.1%5.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

MA

SQ

CBD

AD

IB

DIB

FGB

NBA

D

Rakb

ank

ENBD

AD

CB

UN

B

FY 11 H1 12

October 9 2012


Exhibit 2: Ratio 1: High liquid assets as % of total liabilities (including net interbank)


Ratio 2: Uses to stable resources ratio (USRR) Currently, UAE banks use the advances to stable deposits ratio. Effective as of 1st of June 2013,

banks will have to start reporting the USRR ratio, which will be replaced by the NSFR ratio

starting 1st January 2018.

Most of the banks in the UAE fall slightly below the USRR threshold of 100%. Only ADCB, ENBD,

NBAD and FGB are above 100%. This was already the case with the existing advances to stable

resources ratio and as such we do not expect any material changes as compared to the existing

regulation. The four banks can address this by lengthening their interbank funding over 3

months, raising wholesale debt or increasing outstanding deposits.

27.6%26.3%

21.8%20.1%

18.0%15.4% 14.1% 18.4%

12.1%

6.3%

-2.0%

3.0%

8.0%

13.0%

18.0%

23.0%

28.0%

MA

SQ

AD

IB

CBD

UN

B

Rakb

ank

FGB

AD

CB DIB

ENBD

NBA

D

October 9 2012


Exhibit 3: Ratio 2: Advances to stable deposits (prior to the new USRR)


Exhibit 4: Ratio 2: Uses to stable resources ratio


113%

107%105% 104%

95% 95% 96%

90%88%

81%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

105.0%

110.0%

115.0%

120.0%

AD

CB

ENB

D

NB

AD

FGB

AD

IB

UN

B

CB

D

Rak

ban

k

MA

SQ DIB

FY 11 H1 12

110%

106%105% 105%

97%95%

88%90%

87%

76%

70%

75%

80%

85%

90%

95%

100%

105%

110%

115%

AD

CB

ENB

D

NB

AD

FGB

UN

B

AD

IB

Rak

ban

k

CB

D

MA

SQ DIB

FY 11 H1 12

October 9 2012


Exhibit 5: USRR calculation


Ratio 3: Liquidity coverage ratio (LCR)

Most of the banks that fall short of the 100% threshold for the LCR requirement have already

started addressing their liquidity positions by issuing medium-term wholesale debt and

significantly cutting their LTD ratios.

LCR requires that banks should always be able to cover any net cash outflow with eligible liquid

assets at the minimum LCR of 100%. Eligible assets include Tier 1 and Tier 2 liquid assets. Tier 1

liquid assets are allowed in the LCR with no haircuts and no cap applied to them given their

superior liquidity at all times, while Tier 2 eligible liquid assets are allowed to be used in LCR at

a haircut and can be up to 40% of total eligible liquid assets.

Tier 1 eligible liquid assets include:

Cash at the Central Bank and physical cash at the bank.

Cash Reserve Requirements and account balances at the Central Bank.

Central Bank CDs and all debt issued or explicitly guaranteed by the UAE federal government or local governments.

Debt issued by multilateral development banks and the International Monetary Fund.

Foreign, sovereign or Central Bank, debt or debt guaranteed by them which receive a 0% risk weight under the Basel II standardized approach.

Uses of funds (numerator)

Gross loans and advances 100%

Illiquid investments 100%

Interbank assets > 3months 85%

Interbank assets between 1 & 3 months 60%

Interbank assets between < 1 month 0%

Sources of funds (denominator)

Capital 100%

Provisions 100%

Less: Fixed assets 100%

Less: Associates 100%

Less: Goodwill 100%

Less: Treasury shares 100%

Interbank deposits > 3 months 100%

Interbank deposits between 1 & 3 months 70%

Interbank deposits < 1 month 0%

All deposits (retail and whoesale) > 3months 100%

Retail deposits < 3 months (include SMEs < 20mn) 90%

Operational wholesale and SMEs (> 20 mn) & < 3months 85%

Non-operational wholesale and SMEs (> 20mn) & between 1 & 3 months 70%

Non-operational wholesale and SMEs (> 20mn) & < 1month 50%

October 9 2012


UAE Public Sector Entities or government-related entities debt securities which receive a 0% risk weight under the Basel II standardized approach.

Tier 2 eligible liquid assets include:

Claims issued or guaranteed by sovereigns, central banks and PSEs receiving a 20% risk weight under the Basel II standardized approach.

Corporate bonds and Sukuks (rated AA- or higher) provided they are not issued by a financial institution or any of its affiliates.

Covered bonds (rated AA- or higher) provided they are not issued by the bank itself or any of its affiliates.

Exhibit 6: Ratio 3: Short-term liquidity coverage ratio (LCR)


Exhibit 7: Closing the LCR gap


0%

50%

100%

150%

200%

250%

300%

DIB

AD

IB

MA

SQ

AD

CB

UN

B

FGB

CB

D

RA

KB

AN

K

ENB

D

NB

AD

Tam

we

el

LCR 10% minimum

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

NBAD Tamweel ENBD RAKBANK

Impact on PBT Impact on NIM

October 9 2012


We anticipate some margin compression on the back of the usage of more expensive sources

of funding: Closing the LCR gap would hurt NBAD the most, with a -9.4% impact on pre-tax

profit and 17bps margin compression; next worst hit would be Tamweel, with a hit to pre-tax

profit of (6.6%) and to margins of (7bps). The NSFR gap would have a higher impact for those

banks short of the 100% threshold, as NBAD could see its pre-tax profit drop by

(16.7%) and its margin by 23bps, while ENBD and FGB would see their pre-tax profit fall by

(6.6%) and (5.9%), and margins drop by 6bps and 16bps respectively.

Ratio 4: Net stable funding ratio (NSFR)

The NSFR is set to address longer-term liquidity, as it will insure that longer-term assets are

funded by more stable medium-term liability and equity financing. The ratio aims to limit the

over-reliance on short-term wholesale funding during times of buoyant market liquidity and

encourages better overall liquidity management (on and off balance sheet).

As our calculation shows, most of the UAE banks are not far away from the proposed threshold

of 100%, though the NSFR is a more challenging ratio than the LCR. Even those banks with the

lowest ratios, NBAD, ENBD and FGB, have already begun addressing their liquidity status, as

mentioned earlier, and closing the gap would lead to an impact on pre-tax profit of (12.7%),

(6.6%), and (5.9%) respectively. Similar to LCR, it is too early to judge how the banks will

comply with the NSFR requirement by FY 18e.

October 9 2012


Exhibit 8: Ratio 4: Net stable funding ratio (NSFR)


Exhibit 9: Closing the NSFR gap


All in all, we believe the banks will be able to meet the LCR and NSFR, though the latter might

be more challenging.

0%

20%

40%

60%

80%

100%

120%

140%

DIB

MA

SQ

AD

IB

CB

D

Tam

we

el

UN

B

RA

KB

AN

K

ENB

D

AD

CB

FGB

NB

AD

NSFR 10% minimum

-0.40%

-0.30%

-0.20%

-0.10%

0.00%

0.10%

0.20%

0.30%

0.40%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

NBAD ENBD FGB ADCB RAKBANK

Impact on PBT Impact on NIM

October 9 2012


Solutions to improve liquidity ratios

We see many solutions for improving liquidity such as:

(1) diversifying the funding base away from deposits and using the sharply lower spreads on

corporate bonds,

(2) reducing lending or shortening its duration and increasing marketable securities such as

treasury bills or corporate bonds,

(3) extending maturity of deposits to at least 1 month (complying with LCR) or 1 year

(complying with NSFR),

(4) attracting more stable retail deposits,

(5) reducing guarantees or loan commitments, or

(6) CB could tweak the treatment of wholesale deposits.

UAE banks are already taking measures to address their liquidity position as we are

witnessing movements toward a medium-term wholesale market: NBAD recently issued a

USD 750mn 7-year bond in Aug 2012 while ENBD issued a USD 1bn 5 year bond in May,

followed by small-scale issues thereafter. FGB has also improved its liquidity position by

completing a 5-year USD 650mn bond issue in Oct.

October 9 2012


Exhibit 10: Bond issuances in the region in FY 12


Ticker Coupon Currency Issue Amount (mn) Issue Date Maturity

NBAD UH 4.60% HKD 100 Jan-2011 Jan-2021

Tamweel UH 5.15% USD 300 Jan-2012 Jan-2017

FGB UH 3.00% CHF 200 Feb-2011 Feb-2016

ADCB UH 3.00% CHF 150 Mar-2011 Dec-2015

BJAZ AB 2.63% SAR 1,000 Mar-2011 Mar-2021

Emirates UH 1.99% USD 332 May-2011 May-2018

Emirates UH 1.67% USD 200 Jun-2011 Jun-2013

BYB LB 7.00% USD 300 Jun-2011 Jun-2021

NBAD UH 2.60% JPY 10,000 Jul-2011 Jul-2026

FGB UH 3.80% USD 650 Jul-2011 Jul-2016

NBAD UH 4.80% USD 20 Sep-2011 Sep-2036

Emirates UH 2.04% USD 193 Nov-2011 Nov-2013

ADCB UH 4.07% USD 500 Nov-2011 Nov-2016

Emirates UH 1.60% USD 5 Jan-2012 Jul-2012

Emirates UH 1.89% USD 25 Jan-2012 Jan-2014

Emirates UH 1.75% USD 6 Feb-2012 Aug-2012

Emirates UH 1.94% USD 100 Feb-2012 Feb-2014

Emirates UH 1.70% USD 4 Feb-2012 Aug-2012

Emirates UH 3.74% USD 20 Feb-2012 Feb-2017

QNB QD 3.38% USD 1,000 Feb-2012 Feb-2017

Emirates UH 1.52% USD 7 Mar-2012 Sep-2012

Emirates UH 4.88% CNY 1,000 Mar-2012 Mar-2015

MASQ UH 2.17% USD 50 Mar-2012 Mar-2014

Emirates UH 1.92% USD 15 Mar-2012 Mar-2014




NBAD UH 3.25% USD 750 Mar-2012 Mar-2017

Emirates UH 4.63% USD 1,000 Mar-2012 Mar-2017

SABB AB 2.09% SAR 1,500 Mar-2012 Mar-2017




Emirates UH 2.21% USD 32 Mar-2012 Apr-2013

CBQ QD 3.76% USD 500 Mar-2012 Mar-2017

ADCB UH 5.10% USD 50 Apr-2012 Apr-2027

NBAD UH 3.95% HKD 335 Apr-2012 Apr-2022

Emirates UH 2.10% USD 6 Apr-2012 Apr-2013

Emirates UH 1.32% USD 19 Apr-2012 Oct-2012

DIB UH 4.75% USD 500 May-2012 May-2017

EIB UH 4.15% USD 500 Jul-2012 Oct-2018

NBAD UH 3.00% USD 750 Aug-2012 Aug-2019

FGB UH 2.86% USD 650 Oct-2012 Oct-2017

QIB QD 2.50% USD 750 Oct-2012 Oct-2017

October 9 2012


Capital is a bigger concern than liquidity

We think capital ratios are a bigger concern than liquidity, particularly for ADIB, DIB and ENBD,

which may need to reduce dividends, contain risk-weighted assets growth or improve profitability

in the next few years to shore up their capital positions. Meanwhile others are overcapitalized

(Tamweel, RAK, CBD, Mashreq, FGB), which allows for substantially higher dividend pay-outs.

Exhibit 11: CET 1 ratio FY 12e


Exhibit 12: Dividend yield (vertical) vs. CET1 13e (horizontal): Buy CBD, FGB, UNB & RAK


0%

5%

10%

15%

20%

25%

MA

SQ

CB

D

AD

IB

DIB

FGB

NB

AD

ENB

D

RA

KB

AN

K

UN

B

AD

CB

Liquid assets as % of TA 10% minimum

ALINMABOUBYAN

TAMWEELQNBK

QIIK

QIBK

RAKBANK

KCBK

CBD

ALBI

MARK

RJHI

SIBC

RIBL

NBK

MASQSAMBA

EGBE

COMI

SABB

GBK

NSGB

FGB

UNB

ARNB

HBMO

BOB

BSFR

BURG

AAAL

NBAD

BYB

CBQK

BLOM

CIEB

ADCB

KFIN

BKMB

DHBK

ENBD

AUB

DIB

HDBK

AUDI

BKSB

ADIB

BOB

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

High pay-out but with weak capital base

High pay-out supported by high capital base

Low pay-out and low capital base

Low pay-out with strong capital base

October 9 2012


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uae to meet tighter liquidity rules uae banks€¦ · overcapitalized (cbd, rak, fgb, tamweel,...

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