Friday, 30 July 2010
State aid for UAE banks seen after Dubai World deal
Wednesday, 10 March 2010 at 16:13, Reuters, Dubai
Banks in the United Arab Emirates may require more government support if the debt restructuring of state-owned Dubai World forces lenders to take significant "haircuts" or debt writedowns, analysts say.
The domestic banking sector is heavily exposed to Dubai World, with estimates of potential exposure ranging up to $15bn, according to ratings agency Moody's.
Dubai World, whose debt troubles have shaken global markets, is still negotiating the terms of a restructuring plan with nearly 100 creditors. Emirates NBD and Abu Dhabi Commercial Bank are part of a seven-member committee believed to have most exposure to the troubled conglomerate.
Creditors expect to see the option of a full repayment over a longer period of time, while some others are willing to take a haircut to receive their money back faster. In the case of a significant haircut, banks in the UAE will be forced to take new writedowns, further eroding their capital base, analysts said.
"We believe investors are already expecting a significant haircut to the DW debt entailing $22bn in obligations, i.e. roughly 40 cents with a payout over several years," said UBS analyst Saud Masud.
"Such a haircut would likely challenge the bankability of UAE financials as books may need to be adjusted further," he said.
Arab banks on average have better capital ratios than their Western counterparts. Their ratio of tier one capital against assets is twice as high, according to figures from the Union of Arab Bank.
"(Regional) banks have good capital ... good provisions, they will be able to cope with it," Adnan Yousif, chairman of the Union of Arab Banks said.
The UAE's deputy finance minister said on Wednesday the domestic banking sector is strong enough to absorb any shock, including the impact of Dubai World's restructuring.
But bankers and analysts say local banks' balance sheets will come under additional pressure if the Dubai World restructuring involves a significant haircut.
The IMF recently said in a report that banks across the region may have to raise nearly $10bn in fresh capital, based on a scenario that they will have to settle for a 50 per cent haircut on their loans to Dubai World.
"The broader concern remains how deep the knock-on effect will be on the banks," said the head of a Dubai-based large international investment bank. "And where will they raise the capital from?".
An official at ratings agency Standard & Poor's said Abu Dhabi is likely to support the UAE central bank should it need it need to pump capital in the domestic banking sector.
Banks operating in the UAE saw years of rapid growth, on the back of high oil prices and a booming real estate sector, come to an end in 2009 as a result of the global financial crisis.
Rising corporate defaults and a sluggish economy forced them to take hefty provisions, depressing 2009 profits, with little or no improvement expected in the first half of 2010.
"Knock-on effects into 2010 are possible, even likely, and confidence in our view has been weakened by the unexpected nature of the incidents and the material nature of the aggregate commitments at risk," according to an HSBC research note.
The UAE government has since the onset of the crisis introduced several measures to shore up local banks' balance sheets, such as setting up an emergency liquidity facility, but which no bank is believed to have tapped because it is expensive.
The UAE still has 20bn United Arab Emirates dirhams left out of a Dh70bn facility set up in 2008 to inject liquidity into the country's banking system, a top official said.
The domestic banking sector is heavily exposed to Dubai World, with estimates of potential exposure ranging up to $15bn, according to ratings agency Moody's.
Dubai World, whose debt troubles have shaken global markets, is still negotiating the terms of a restructuring plan with nearly 100 creditors. Emirates NBD and Abu Dhabi Commercial Bank are part of a seven-member committee believed to have most exposure to the troubled conglomerate.
Creditors expect to see the option of a full repayment over a longer period of time, while some others are willing to take a haircut to receive their money back faster. In the case of a significant haircut, banks in the UAE will be forced to take new writedowns, further eroding their capital base, analysts said.
"We believe investors are already expecting a significant haircut to the DW debt entailing $22bn in obligations, i.e. roughly 40 cents with a payout over several years," said UBS analyst Saud Masud.
"Such a haircut would likely challenge the bankability of UAE financials as books may need to be adjusted further," he said.
Arab banks on average have better capital ratios than their Western counterparts. Their ratio of tier one capital against assets is twice as high, according to figures from the Union of Arab Bank.
"(Regional) banks have good capital ... good provisions, they will be able to cope with it," Adnan Yousif, chairman of the Union of Arab Banks said.
The UAE's deputy finance minister said on Wednesday the domestic banking sector is strong enough to absorb any shock, including the impact of Dubai World's restructuring.
But bankers and analysts say local banks' balance sheets will come under additional pressure if the Dubai World restructuring involves a significant haircut.
The IMF recently said in a report that banks across the region may have to raise nearly $10bn in fresh capital, based on a scenario that they will have to settle for a 50 per cent haircut on their loans to Dubai World.
"The broader concern remains how deep the knock-on effect will be on the banks," said the head of a Dubai-based large international investment bank. "And where will they raise the capital from?".
An official at ratings agency Standard & Poor's said Abu Dhabi is likely to support the UAE central bank should it need it need to pump capital in the domestic banking sector.
Banks operating in the UAE saw years of rapid growth, on the back of high oil prices and a booming real estate sector, come to an end in 2009 as a result of the global financial crisis.
Rising corporate defaults and a sluggish economy forced them to take hefty provisions, depressing 2009 profits, with little or no improvement expected in the first half of 2010.
"Knock-on effects into 2010 are possible, even likely, and confidence in our view has been weakened by the unexpected nature of the incidents and the material nature of the aggregate commitments at risk," according to an HSBC research note.
The UAE government has since the onset of the crisis introduced several measures to shore up local banks' balance sheets, such as setting up an emergency liquidity facility, but which no bank is believed to have tapped because it is expensive.
The UAE still has 20bn United Arab Emirates dirhams left out of a Dh70bn facility set up in 2008 to inject liquidity into the country's banking system, a top official said.
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