More stringent capital requirements
The UAE Central Bank (CBUAE) has issued Basel III capital regulations - effective as of 1 Feb 2017 (source: WAM). Considering the min. capital & the supplementary buffers, we believe the minimum core capital ratio (CET 1) could reach 12.0% by 2019 and up to 14.5% for systematically important banks. Islamic banks look relatively under-capitalised: ADIB might need to address this in the ST while DIB may have 12-18 months breathing space. ENBD, which is our preferred bank in the UAE, is well positioned with CET 1 at 15.0%. We also believe that FGB/NBAD, the merged entity, is well positioned with CET 1 at 14.5% as of 2016.
 
Islamic banks relatively under-capitalised
Most of the UAE banks were well capitalised as of 2016 based on reported 2016 capital ratios. However, the two Islamic banks – ADIB: CET 1 of 9.1%; DIB: CET 1 of 12.6% – look a bit stretched. ADIB has flagged that it is looking at options to replenish its capital and has already contained its loan growth. DIB has suggested that a rights issue is off the table in 2017, but we believe given its strong growth ambitions – loan growth guidance for 2017 is 10-15% - and relatively high pay-out (78% in 2016), DIB will have to consider recapitalisation options in the next 12-18 months.
 
Minimum CET 1 ex-supplementary buffers of 7.0%
Basel III has tightened the definition of Tier 1 by focusing on min. core capital requirements (CET 1), which were not there under Basel II. Earlier banks were required to maintain a min. Tier 1 ratio of 8%, and there was no distinction between CET1 and additional Tier 1 capital (AT 1). CET 1 is primarily made up of share capital and retained earnings. Meanwhile AT1 is primarily made up of eligible perpetual notes. The CBUAE now requires banks to maintain a minimum CET 1 ratio of 7.0% and overall Tier 1 (CET1+AT1) ratio of 8.5%, excluding all supplementary buffers.
 
Additional buffers of 2.5% to 6.5% over min. CET 1
CBUAE has asked banks to maintain a capital conservation buffer (CCB) of 2.5%. The CCB is likely to be phased in over the next three years. In addition, certain UAE banks may be subject to additional capital requirements. This additional buffer is likely to be applied to large systematically important institutions such as FGB/NBAD and ENBD. Finally CBUAE will also encourage banks to hold a counter cyclical buffer of 0-2.5% depending on sector’s position on the credit cycle (during booms it would peak at 2.5% and in recessions it would fall to 0%). The counter cyclical buffer is also likely to be phased in over the next three years.

Shabbir Malik
Rajae Aadel