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Fitch: UAE banks’ asset quality and liquidity pressures manageable

United Arab Emirates: Tuesday, June 22 - 2010 @ 16:57

“The first half of 2010 has been difficult for the UAE’s banks, with rising retail and corporate impairments, debt restructuring at Dubai government-related entities (GREs), reduced lending appetite and stubbornly high loan/deposit ratios resulting in some stagnation in the sector. The sector’s capitalisation remains sound and should be sufficient to absorb the likely impact of the well-publicized problems of certain Dubai GREs and the Saudi corporates Saad and Al Gosaibi,”

says Robert Thursfield, a Dubai-based Director in Fitch’s Financial Institutions team.

The UAE banking sector’s profitability suffered in 2009 as the global economic crisis impacted the region more significantly and year-on-year comparatives in Q1 2010 were generally disappointing, although core interest and fee revenues are holding up relatively well. Impairment charges are still rising on both retail and corporate portfolios and with Dubai World (DW), other GREs and the remainder of the troubled Saudi corporates’ exposures to provide for, sector profitability in 2010 is unlikely to exceed the 2009 level.

Asset quality ratios deteriorated significantly in 2009 with the average NPL to gross loans ratio for the nine largest banks increasing to 4.3% from 1.7% at end-2008 (HSBC Bank Middle East (HBME), Mashreqbank and Dubai Islamic Bank have the highest ratios). However, these ratios understate true positions given the high levels of restructured and rescheduled loans and those past due, but not deemed impaired, reported by some banks. The ratio reported by HBME of 7.3% is a better indication given the stringent provisioning requirements of the HSBC Group. As loan books stagnate in 2010 and possibly into 2011, the ratio will increase for all banks as problems assets work their way through the banking system. Loan loss reserve coverage also declined for the nine banks to 97% from 148% at end-2008.

Funding and liquidity pressures remain for the banking system with the average loan/deposit ratio for the nine banks remaining above 100% and in some cases above 120% (Emirates NBD and Abu Dhabi Commercial Bank), limited foreign bank funding, the rising cost of domestic deposits in a competitive market and reduced international debt capital market access.

“While recent federal liquidity support measures greatly helped to stabilise the banking system in 2009, we believe that banks’ lack of long-term wholesale funding will constrain future growth and earnings,” says Mahin Dissanayake, a Dubai-based Associate Director in Fitch’s Financial Institutions team.

Some Abu Dhabi banks issued under their EMTN programmes just before the DW restructuring announcement in November 2009, but the National Bank of Abu Dhabi has been the only bank to issue since then ($750m raised in Q110), benefiting from its close links to the emirate of Abu Dhabi (rated ‘AA’/'F1+’).

Capital adequacy ratios for the nine banks strengthened in 2009 following government actions and greater retentions of net income by the banks and, in some cases, lower risk-weighted assets. The average regulatory Tier 1 and total capital ratios for the nine banks were 14% and 19% respectively at end-2009. Fitch calculated eligible capital ratios were boosted at six banks by the issuance of Tier 1 qualifying securities. The agency has updated its capital sensitivity tests to assess the ability of the banks to absorb higher bad debts over the next 12 months based on end-2009 financials and believes that the nine banks are in a good position to weather a significantly higher level of impaired loans.

The full special report, entitled ‘UAE Banks’ Review and Outlook: Asset Quality and Liquidity Stresses Continue, But Should be Manageable’, is available on the agency’s website. The review covers Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Dubai Islamic Bank, Emirates NBD, First Gulf Bank, HSBC Bank Middle East, Mashreqbank, National Bank of Abu Dhabi and Union National Bank.

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Tuesday, June 22- 2010 @ 16:57 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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