The Central Bank's request that banks delay their quarterly reports until they have fully reviewed their loan and investment books is prompting analysts to question the financial sector's transparency. For others, however, it is further proof that the authorities want to ensure reporting is up to international standards. "There are 50-odd banks here in the UAE and the likelihood of inconsistencies remains high. With this step the Central Bank wants to assure a certain level of consistency of how the [accounting] rules are applied," said Sanjay Uppal, the chief financial officer at Emirates NBD, the country's largest bank by assets.
Other bankers echoed his sentiments, adding that the financial body was merely trying to ensure that banks did not use accounting loopholes or off-balance-sheet vehicles to hide losses. "Banks are in trouble," said Yazan Abdeen, an asset manager at ING Investment Management. "The Central Bank wants to be sure that banks are not understating their book losses." Last weekend, the Central Bank sent a letter to every bank in the country, instructing them "not to be in a hurry" to publish their annual results. Banks normally have 45 days after the end of the reporting period to report unaudited results.
"We are going through a global financial crisis... World markets remain highly volatile and investors have been prone to overreact. As a result, the market value of securities may be hard to assess," Sultan bin Nasser al Suwaidi, the Central Bank Governor, said in the letter. Banks are asked to fill out three forms to detail loans of more than Dh10 million (US2.7m), investments and borrowing in interbank and/or capital markets.
"This is a good thing, although it comes a bit late," said Sofia el Boury, an analyst at Shuaa Capital, the investment bank. "The Central Bank wants to check banks for any significant exposures. It is its role to double-check." Others in the industry say the measure could be another way to hide potentially huge losses from write-downs on investment losses and loan provisions. "They may just want to cover up losses. They are fearing that bad data will come out and they want to have a grip on the information management," said one analyst.
IFRS (international financial reporting standard) rules demand that banks re-assess their investments every quarter and take write-downs for declined values. Known as mark-to-market, the procedure assumes active markets where buyers and sellers reach a "fair" value of a stock or debt. However, market turmoil has made assets hard to value. Depending on the investment category, write-downs feed directly into the profit-and-loss statement, lowering profits. In other cases they diminish shareholders equity. In addition, banks must take provisions for non-performing loans and their entire loan portfolio.
The country's banks are highly exposed to the property sector, the backbone of the Emirates' non-oil economy, through loans to contractors and developers. Dubai contractors have cancelled or put on hold many projects and property prices are expected to fall by as much as 60 per cent from last year's peak. There are fears that many smaller, private-sector developers could collapse. At the same time, an unprecedented exodus of skilled and unskilled workers and widespread lay-offs, particularly in the property sector, is expected to result in large defaults on credit cards and personal loans. "The Central Bank wants to take a fresh look, get further insights and use that information for consistent guidance," Mr Uppal said. This was necessary because IFRS rules "allow judgement to be exercised, they are not rule based".
Mr Uppal said the announcement was by no means "shocking" and that "regulators around the world are all facing similar issues". Last week, the Financial Services Authority in the UK held talks with top auditors to try to ensure banks were not destabilised by accountants judging a bank's overall health. However, Britain's Barclays Bank, in which investors in both Abu Dhabi and Qatar have recently taken major stakes, is planning to bring forward last year's full financial results to Feb 9 to reassure the markets that it has nothing to hide.
uharnischfeger@thenational.ae Cross ref: Barclays page 9