UAE to punish banks which over-lent for IPOs

The United Arab Emirates Central Bank will penalise banks which have over-lent to investors taking part in hugely popular initial public share offers, bank governor Sultan bin Nasser al-Suweidi said on May 18. UAE bankers say massive lending helped inflate demand for the last big IPO in the Gulf state, a $135 million offering of Aabar Petroleum Investments, which was 800 times oversubscribed. Suweidi said some banks, which he declined to name, had lent above the maximum level set by the central bank and could be made to forfeit interest on those excess funds.
"What we watch for is the total amount a bank would lend (for an IPO)," he told Reuters on the sidelines of a banking conference in Saudi Arabia.
Limits on bank lending were calculated based on their capital, reserves and customer deposits, Suweidi said.
"We are watching that carefully, and there are violations. We are going to penalise banks that have violated."
"We can deprive them of the interest generated on the excess funds," he said, adding that the central bank may act "very soon".
Last month's Aabar IPO set a new record for the United Arab Emirates, netting over $100 billion in an offering which was 808 times oversubscribed. The previous record was 448 times, set by Aldar Properties in November 2004.
The UAE Central Bank issued new rules in April that extended lending for IPOs to "five-fold the amount contributed by the subscriber for the purchase of the IPO shares". But bankers said investors were going to banks and requesting leverage of up to 20 times their cash contribution.
Suweidi said the Central Bank was less concerned with the size of individual loans made by the banks than by the total amount they lent. "Five times is really a limit for those who don't have other sources to provide security for their borrowings," he said.
"If (banks lend to) a commercial entity or a merchant who has other resources, they can lend to him as they wish."
Like neighbouring oil-rich Gulf states, the United Arab Emirates is riding the wave of high oil prices which has sent government revenues and corporate profits soaring. Demand for investment opportunities has risen along with the economic boom.
Suweidi said the high levels of liquidity were stoking "financial inflation" in the United Arab Emirates, which the central bank may have to address.
"We have to absorb the excess liquidity through issuing more central bank CDs (certificates of deposits), and maybe changing the reserve requirements," he said, without giving details.