Four Dubai banks placed on ratings watch

By Habhajan Singh
Four Dubai-based banks have been put under ratings watch due to "growing concerns regarding the impact on the banking sector of the economic downturn in Dubai".
Standard & Poor's Ratings Services have placed on credit watch with negative implications its longterm counterparty credit ratings on Emirates Bank International PJSC (EBI), National Bank of Dubai (NBD), Mashreqbank and Dubai Islamic Bank (DIB).
The rating agency said the "A-1" short-term ratings on EBI, NBD, and Mashreqbank were also put on credit watch with negative implications, while the "A-2" short-term rating on DIB was affirmed.
"This action reflects our growing concerns regarding the impact on the banking sector of the economic downturn in Dubai," it said in a statement. These banks have a hand in Islamic banking.
MashreqBank, the largest private bank in the United Arab Emirates (UAE), is involved in Islamic finance via its subsidiary Badr Al-Islami. DIB badges itself as the world’s first full Islamic bank.
S&P said the outlook for Dubai's economy has worsened relative to last year and the global economic downturn has been hurting some of Dubai's key economic sectors including trade, tourism, and commerce.
"Demand in the all-important real estate sector also continues to show clear signs of stress, with indications that a sharp correction is underway.
"As a result, we expect Dubai's economy to contract between 2% and 4% in real terms in 2009, putting pressure on banks' asset quality and profitability.
"Dubai is a small open economy that can do little to shield its key sectors from the impact of a fall in external demand in the coming months," it said.
S&P said the rating actions on EBI, NBD, and DIB also reflect its concerns that the government may use these banks to support the refinancing that is soon coming due of the debt of other government-related entities (GREs).
"We have already noticed that these banks are important participants to the refinancing of Borse Dubai's debt that matured in February 2009.
"We understand that these banks received deposits to neutralise the impact on their liquidity profile," the ratings firm said. Taking into account the important amount of Dubai GRE debt that is soon coming due, S&P believes that additional directed lending to these entities would increase credit and concentration risk.
On a positive note, it said Dubai's establishment of a US$20 billion (RM72.91 billion) bond programme at the government level and issuance of US$10 billion that was fully subscribed by the UAE central bank somewhat alleviate liquidity pressure.
"We are concerned about Dubaibased banks' exposure to the real estate sector — about 20% of total loans at year-end 2008 — in light of the marked deterioration of this sector," it said.

(This story appeared in The Malaysian Reserve on Mar 23, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)