The UAE central bank wants lenders to raise to 80 percent their provisions against exposure to two Saudi conglomerates, according to newspaper reports on Monday, causing a decline in Dubai-based banking stocks.

Arabic dailies Al Khaleej and Al Bayan quoted a central bank circular as saying banks must take the provisions against Saad Group and Ahmad Hamad Algosaibi & Bros by the end of 2010.   

The two family-owned entities are locked in a complex legal dispute involving up to $22 billion of debt.

"All banks and financing companies must increase their provisions against their credit facilities to Saad and Algosaibi to 80 percent of those facilities," the newspapers said, quoting the circular.

"All these provisions must be allocated by the end of 2010 and the central bank's approval of the banks' annual audited results are conditional on the allocation of those provisions," said the circular issued by central bank Governor Sultan Nasser Al-Suweidi.  

The central bank reiterated that lenders take 100 percent provisions on exposure to The International Banking Corporation (TIBC), and Awal Bank, subsidiaries of Algosaibi and Saad, respectively, which were taken over by the Bahraini central bank last year.

"The announcement will definitely affect banks and this will be seen in their earnings," said Mohamed Khaled, relationship manager at broker Prime Emirates.  

Dubai's largest bank by market value, Emirates NBD ended nearly 5 percent lower on Monday, while Dubai Islamic Bank, the largest Islamic lender in the country, dropped 0.5 percent.

In July, Emirate NBD said it had provided for around two thirds of its exposure to Saad and Algosaibi. The bank holds around $350 million in exposure to the two firms.

In 2009, the UAE central bank had told banks to take provisions worth half their exposure to the two Saudi firms by the end of last year. - Reuters