Bank Deposit Hold Regulations

UAE banks weather the storm.

Summary: The Central Bank of the UAE launched its first Financial
Stability Review in September, and as the title indicates, this is not a
full-fledged report; however, it is a first attempt at giving key
information about financial stability in the UAE…

The UAE managed to have a good year in 2011 despite a difficult
international environment; it achieved an overall balance of payments
surplus and respectable growth while maintaining a low inflation

That was mainly due to capital and satisfactory profitability, the
Central Bank said in the review. UAE banks were able to weather the
impact of a further increase in non-performing loans and constitute
additional provisions. “Liquidity remained at an acceptable level
as demonstrated by banks investing

 80 billion in the Central
Bank’s Certificates of Deposits as at the 31st of December
2011,” the

 said as preparation for UAE banks towards the
implementation of Basel III requirements, in particular the introduction
of minimum liquidity ratios is under way.

Indeed, the Central Bank said after the economic contraction of the
year 2009 where
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 at constant prices decreased by 4.8 per cent, led by
a fall in manufacturing and real estate, the UAE economy has recovered.

Economic growth reached 1.3 per cent in 2010 and 4.2 per cent in
2011. The prospects for 2012 are encouraging with non-oil GDP growth
expected to reach around four per cent.

Inflation, which is monitored through the Consumer Price Index
(CPI), was close to zero during the year 2011 (plus 0.2 per cent). The
low inflation level during 2011 was driven mainly by a drop in housing
prices of 4.9 per cent while food prices increased by 7.8 per cent.

“Despite some degree of uncertainty regarding price movements
in the near future, it is likely that inflation will remain moderate in
line with

See International Monetary Fund (IMF).
 estimate of 1.5 per cent for 2012,” said the Central


The report showed that UAE banks had a total profit of AED 26.6
billion during 2011, compared to AED 22.5 billion during 2010.

As a result,
Return on Assets

 (ROA) increased to 1.54 per cent
during 2011 versus 1.36 per cent for 2010.

The increase in profit during 2011 was mainly driven by the
increase in banks’ net interest margins. While the interest expense
by banks dropped by 6.9 per cent year-on-year, however, their interest
income increased by 3.8 per cent during the same period.

“The UAE banking system was able to maintain sound levels of
profit even during periods of stress,” the Central Bank said in the
review and banks were able to increase their interest income on deposits
abroad by AED 3.2 billion during the year 2011, which is an increase of
200 per cent from December 2010.

On the other hand, the decrease of interest expense was largely
driven by the decrease of interest paid on advances to other customers
(retail and corporate), which has dropped by AED 3.5 billion during the
year 2011.

“The shift of time deposits to demand and saving deposits
which took place during the year 2011, has played a major role in the
reduction of interest expense paid on deposits. This trend should be
reversed with the planned introduction of a new liquidity
regulation,” the Central Bank said.

Banks’ non-interest income has also increased by AED 2.8
billion during the year 2011, the increase was mainly driven by the
profit made on foreign exchange (which represented 36 per cent of the
increase of non- interest income).


Banks’ liquidity is monitored through a set of indicators and
ratios. At the moment Advances to Stable Resources Ratio (

) is
currently the only regulatory ratio related to liquidity with which
banks must comply. This ratio indicates the level of stable resources
being held by banks to back their advances. Banks operating in the UAE
are required not to exceed an ASRR of 100 per cent, the central bank

As of December 2011, the ASRR stood at 88 per cent supported by the
substantial holding of stable resources and the moderate credit growth.
The improvement on

Autonomous Soviet Socialist Republic
 was due to slow down in credit demand and tight

credit standards

 by banks.

It is also worth mentioning that the banks’ Loan to Deposit
ratio reached 106.8 per cent as of December 2011, compared to 110.5 per
cent as of December 2008.

The ratio of
Liquid Assets

 to Short Term Liabilities for banks
operating in the UAE peaked during December 2009 and December 2010 at 55
per cent and 56 per cent, the Central Bank said.

The increase was due to banks parking their excess cash in liquid
assets as they slowed down their lending activity. As of December 2011,
the ratio stood at 47.8 per cent, below the 2009 and 2010 levels, but
still above the December 2008 level of 44.2 per cent

Banks have witnessed minimal growth of their liquid assets during
the year 2011, while their short term liabilities increased by 18.3 per
cent during the year. The increase of short term liabilities was
partially due to the shift of some time deposits to demand and saving

Liquid Assets to Total Assets have also dropped by 0.5 per cent
from the end of the 2010 level of 11.7 per cent to 11.2 per cent as of
December 2011.

During last year, banks saw a reduction of AED 75 billion in
deposits from their peak of April 2011. The inflow of deposits into the
system during the first half of 2011 followed by the outflow during the
second half could be attributed to various factors such as:

CaRegional instability and the UAE’s perception as a safe

uFX volatility where the strength of the US Dollar versus other
currencies played a major role in the remittances market.

CaGlobal liquidity situation.

CaDebt repayments by major resident depositors to their foreign

Overall, during 2011 total deposits grew by AED 20.1 billion or by
1.9 per cent year-on-year. Banks’ holding of the CBUAE CDs peaked
during May 2011 at AED 124 billion due to the influx of deposits into
the system. In the second half of the year 2011, banks’ holding of
CDs retreated to AED 80 billion by December 2011 due to the outflow of


Abu Dhabi Commercial Bank


) was the top UAE bank in the

CPIF California Poultry Industry Federation
CPIF Contract Cost-Plus-Incentive-Fee
CPIF Calculated Planning Impairment Factor
 100 Awards. It rose to fourth in the CPIF100, up three places from where
it finished last year. The bank’s total income rose to AED 6.6
billion ($1.6 billion) in 2011 up from AED 4.9 billion ($1.3 billion).
ADCB is 65 per cent owned by the state-controlled Abu Dhabi Investment
Council, and is the UAE’s third-biggest bank by assets. It has 33
local branches as well as two in India and an offshore office in the
Cayman Islands.

The bank was assigned a stable outlook by Standard &
Poor’s Ratings (S&P) Services’. The rating agency said
that the rating reflected their expectations that ADCB will remain a
major player in the UAE, with no significant change in its business and
financial profiles over the next 12 to 24 months. “We anticipate
that ADCB’s capital and earnings will remain stable, and project
that our risk-adjusted capital (

) ratio before adjustments for ADCB
will reach more than 12 per cent in the next 18 to 24 months,”
S&P said in a July release.

Ajman Bank was the fastest growing bank in the UAE, and the first
Shari’ah bank in the
1. The office of an emir.

2. The nation or territory ruled by an emir.

Noun 1. emirate – the domain controlled by an emir
 of Ajman. The bank is supported by the
Government of Ajman, which owns 25 per cent. The bank staged an initial
public offering (

) of 55 per cent of its equity to raise capital to
fund its roll-out strategy in 2008. The IPO for Ajman Bank was more than
85 times oversubscribed. Ajman Bank ranked overall 15 in asset growth,
which rose by 23 per cent to $1.1 billion.


The UAE issued 2011 official GDP growth figures that showed the
economy grew by 4.2 per cent. The Government expects it to grow by three
per cent this year.

Dubai’s real estate recovery appears to have continued in
second quarter for 2012. Prices for almost all categories of housing
rose in April through June, according to data from Cluttons. Mid range
villa prices rose 18.5 per cent year-on- year in June, outpacing the
14.6 per cent year-on-year rise in high-end villa prices. Apartment
prices rose more modestly, while price declines in the
tr.v. be·lea·guered, be·lea·guer·ing, be·lea·guers
1. To harass; beset:

2. To surround with troops; besiege.
 low-end apartment sector have slowed.

“We maintain our 2012 forecast, and believe growth will be
supported by a positive non-oil sector environment in Dubai, and a
pick-up in spending on non-oil projects in Abu Dhabi in H2-2012,”
said Standard Chartered in a July research note, adding the UAE’s
economy enters second half of 2012 in good shape, with oil output
elevated, and oil prices above estimated budget break-even level (of

It also anticipates the performance of Dubai’s non-oil sector
to be strong for the remainder of the year.

The hospitality sector is performing exceptionally well, it said,
with hotel occupancy rates back to pre-global financial crisis levels,
airport traffic up 14 per cent year-on-year in the first quarter.

No surprises then when S&P affirmed a stable outlook on Abu
Dhabi while Moody’s assigned an ‘Aa2’ rating; a high
investment grade rating based on Moody’s assumption that the
Government of Abu Dhabi, the richest of the seven emirates, stands fully
behind the federal Government

“Although the federal Government does not have significant
amounts of direct debt, domestic Government-related issuers (GRIs), are
highly indebted both as a share of GDP and also by international
comparisons. This raises the issue of the extent of potential,
contingent liabilities on Abu Dhabi’s and the UAE’s balance
sheets should
 finances deteriorate. Given the UAE’s high degree
of political solidarity, its interest to protect the economic health of
the federation as well as an interest in protecting its
reputation,” it said in a June 2012 disclosure.


The UAE’s objective of achieving “Emerging Market”
status is coming closer thanks to several contributing factors, the
Central Bank said.

First is the implementation of a comprehensive framework of rules
and regulation to allow the development of the markets. The UAE
Securities markets’ regulation has introduced the following

CaFinancial Analysis Regulation

CaCorporate Governance Regulation

CaDelivery Versus Payment (

See delivery versus payment (DVP).

CaMutual Funds Regime

CaInvestment Management Regulation

CaCustody Regulation*

CaShort Selling Regulation

CaSecurities Lending and Borrowing Regulation

CaMarket Maker Regulation.

The second contributing factor is increasing of market
participation by companies and by investors: stable economic growth,
foreign and institutional investment, and the substantial value of
trading are all key aspects to consider in assessing this factor.

The third contributing factor is acknowledgement by international
investors’ bodies, including index managers such as

 or MSCI,
which ultimately means international investment reaching the UAE stock
markets when searching for “Emerging Market” exposure.

The combination of these three factors over the years 2010 and 2011
shows that the UAE has made significant steps forward toward achieving
“Emerging Market” status, but lacked the catalyst of global
economic stability. As the global economic conditions improve and
liquidity is restored, the UAE stand to capitalise on its structural and
economic advancements.uBME

Ajman Bank was the fastest growing bank in the UAE, and the first
Shari’ah bank in the emirate of Ajman

We anticipate that ADCB’s capital and earnings will remain
stable, and project that our risk-adjusted capital (RAC) ratio before
adjustments for ADCB will reach more than 12 per cent in the next 18 to
24 months

To achieve immunity from financial crisis is difficult, simply
because of the fact that banking systems are based on a risk – return
mechanism. The aim of the Central Bank is to identify early signs of
risks and threats to its financial system and to utilise available
macro- prudential policy measures to mitigate the potential impacts of
these risks before they gain traction.

The UAE banking system was able to maintain sound levels of profit
even during periods of stress

2012 CPI Financial. All rights reserved.

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