The Targeted Economic Support Scheme allows banks to reduce their capital conservation buffer by up to 60 per cent/Bloombergby Kudakwashe Muzoriwa
Moody’s said that the UAE’s AED 100 billion ($27.2 billion) Targeted Economic Support Scheme and other measures which were introduced to reduce the economic effects of Covid-19 will limit UAE banks’ likely material asset quality deterioration from the virus.
The Central Bank of the UAE (CBUAE) said that the Targeted Economic Support Scheme consists of an AED 50 billion aid package for banks through collateralized, zero-interest loans. Banks will also be allowed to free up capital buffers, which will make another AED 50 billion in liquidity available to lenders.
According to Moody’s, the overall scheme equates to 6.4 per cent of UAE banks’ domestic credit as of January 2020.
The support scheme provides funding for banks to grant relief from principal and interest payments for up to six months on loans to all private sector and retail borrowers economically affected by the coronavirus.
Central banks around the world have unveiled emergency stimulus packages as coronavirus forces authorities to restrict international travel, shut schools and even go into full lockdown in a bid to contain the spread and prevent it from overwhelming health services.
The rating agency said that although we still expect UAE banks’ asset quality to materially deteriorate amid the current difficult environment, the support scheme will mitigate the extent of the deterioration by keeping some borrowers' liquidity issues from becoming solvency issues.
UAE banks must have a minimum 11 per cent Tier 1 capital ratio, including a seven per cent minimum CET1 capital ratio, 150 basis point (bp maximum in Additional Tier 1 (AT1) capital and a 250 bp capital conservation buffer (CCB) in the form of CET1 capital, said Moody’s.
The Targeted Economic Support Scheme allows banks to reduce their CCB by up to 60 per cent.
Moody’s expects Covid-19 to negatively affect the UAE's key non-hydrocarbons sectors such as tourism, transportation, trade and real estate—which is likely to result in a broad-based shock to the economy.
Furthermore, trade is also exposed because the UAE is a global trade hub and China is the largest non-oil trading partner for the emirates. As such, sectors that rely on investor sentiments such as real estate and construction, would be materially affected should the coronavirus and extreme measures to curtail it persist.