Profits at the UAE's biggest banks are expected to come under pressure as they struggle to comply with new Central Bankregulations taking effect next year.
Concerns around the financial sector have grown after banks failed to meet a deadline last month to implement a controversial Central Bank ceiling on lending to government companies.
But a new report from Arqaam Capital says separate liquidity regulations, intended to prepare banks for the strict new banking rules known as Basel III, will also weigh on earnings.
The report added that NBAD would take the biggest hit from fully complying with the liquidity measures of the Basel III rules, with a potential dip in pre-tax profits of as much as 9.4 per cent.
"We anticipate some margin compression on the back of the usage of more expensive sources of funding," the report said.
In July, the Central Bank published liquidity regulations intended to help bring banks into line with the Basel III banking code, itself designed to prevent a repeat of the mistakes that led to the global financial crisis.
With multiple major regulatory drives announced by the Central Bank in the past six months, UAE banks said they were being forced to reshape their institutions.
"When you have many, many changes you have to exert more effort, put in more investment and change your whole culture," said a source at one lender.
Two liquidity ratios implemented by the Central Bank could present difficulty to lenders, Arqaam said.
A requirement to hold 10 per cent of assets in highly liquid instruments takes effect in January and is currently breached by ADCB and Union National Bank, Arqaam said, although it estimates this could be easily remedied.
More problematic was the "uses of funds to stable resources ratio" - which assesses a bank's solvency based on the stability of funding sources.
ADCB, Emirates NBD and NBAD are in breach of this ratio and will have to raise new funds or source new deposits to comply by next June, Arqaam estimates.
The banks named in Arqaam capital's report did not respond to requests for comment.
Financial analysts from JPMorgan said that they expected big UAE banks to be "comfortable" with the new regulations. But the lack of a federal bond market could hamper efforts to comply for some lenders, the report said.
Other banks have said that this ratio requires more detailed knowledge of a bank's loan book than most provide publicly and is therefore impossible to assess.
Banks may be forced to surrender some of their earnings to comply with the new rules, analysts from Deutsche Bank wrote in a report released in July.
"The UAE Central Bank has marked out a clear glide path to Basel III implementation," analysts with the bank wrote. "However, shareholders, should be aware that enhanced liquidity comes at a cost."
An increase in liquid assets of 1 per cent could reduce profits by 2.4 per cent, they added.
The Central Bank said in its announcement of the regulations that it would set up a "liquidity task force to ensure a smooth implementation" of the new regulations. The Central Bank was unavailable for comment yesterday.
European banks have been hamstrung by efforts to raise capital to meet the Basel III requirements at the same time as protecting themselves from the effects of Greece's restructuring this year.