DUBAI — The UAE Central Bank's decision to go ahead with punitive action against four National Banks which had violated the prescribed leverage limits for IPO financing has hit hard the share prices of most banks yesterday.Why don't banks that were not punished by the Central Bank issue denials?
With the Central Bank refusing to name the banks against which it had initiated action, the local market was rife with rumours which resulted in investors speculating different names.
On Abu Dhabi Securities Market, there was across the board fall in the share prices of banks. All leading banking scrips closed lower with Abu Dhabi Islamic Bank and the First Gulf Bank shares slipping 4.4 per cent and 4.98 per cent, respectively.
The Central Bank yesterday came down heavily on banks, which were offering leverage far in excess of the permitted level of 1:4. The market expects that the strict action by the Central Bank will have a major impact on the bottomlines of all banks, which earned quick profits from leveraging. The lone exception to the market trend yesterday was Dubai Islamic Bank, which closed marginally up by 10 fils at Dh239.45....
Although the market has been falling for past few days, the sharp fall of banking scrips during yesterday's session is seen more as a response to the Central Bank action. “The whole sector has been affected with most shares closing lower. This indicates that the names of these banks are not yet known to the investors and the market is merely following different romours. However, one thing is certain that the banks' margins will come under strain in the third and fourth quarters,” said an investment analyst. Most local banks had reported more than 30 per cent increase in their net profits for the first quarter of 2005.
While a significant number of banks posted more than 60 per cent increase in their Q1 profits, there were a few even reported more than 100 per cent increase in their net profits in the first quarter. The Central Bank's circular No 25/2005 had directed banks not to provide loans to investors greater than five times (1:4) the investment made by the investor. The central bank action to penalise a few banks, which violated the guidelines, confirm that there have been rampant excessive leveraging in some of the recent IPOs.
It has been a common practice among banks that well-heeled investors were offered credit lines on leverage of more than 1:10 percent purely on their credit standing, reputation or in some cases personal relations with leading bank executives.
As long as prices increase, lending to investors buying on margin looks smart.
Also, Abu Dhabi and Dubai shares trade in opposite ways: "The market is now down 9.3 per cent from its May 2 peak of 6,266.53 points after losses of 0.67 per cent in the past week. The Abu Dhabi banking index shed 2.09 per cent after the central bank last week imposed a penalty on four state banks for their excessive lending to fund bids for IPOs."