UAE Central Bank CAR Related Developments - Event Update - September 2009 (PDF)

According to the reports of a circular issued by the Central Bank of the UAE, the regulator has delayed banks’ deadline for increasing capital reserves from June 30, 2009 previously to September 30, 2009. Banks will now work towards maintaining their Capital Adequacy Ratio (CAR) to a minimum of 11% by the new deadline from the previously stipulated minimum of 10%. Under the latest guidelines, banks are also required to achieve an overall CAR of 12% by June 30, 2010, of which at least 8% must be Tier-I.

Moreover, the Central Bank has also changed the proportion of Tier 1 capital which banks need to set aside. The rule, which will initially require banks to maintain a minimum Tier-I CAR of 7%, was added as a measure of "prudence and caution", as per the cited quotes of the Central Bank. Until recently, banks in the UAE did not have a fixed target for Tier-I capital; guidance was derived from the understanding that Tier-II capital could not be no more than two thirds of Tier-I.

While the changes seem neutral for Abu Dhabi banks, because of the extensive assistance enjoyed by them in terms of Tier-I & Tier-II increase by the Abu Dhabi government, banks in Dubai may be the main benefactors of the recent developments. Moreover, by limiting Tier-I ratio (to Risk Weighted Assets) to 7% (and later on to 8%) banks may have the flexibility to raise as much as Tier-II capital as required to keep their CAR at self-stipulated comfortable levels, as long as they meet the Central Bank requirements.

We believe that even though, the intention behind these changes seems to be to provide banks a breather in the current financial crisis, a spur in lending however, just because of the deferment in the CAR is still not expected. Moreover, downward revision of the CAR, may lead rating agencies to reassess banks’ individual ratings.