Balance sheet blues

Emirati banks face a fierce storm in the wake of a foundering Dubai World

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Running the gauntlet that is Gulf finances these days, Emirati bank balance sheets are being battered; double-teamed by deteriorating asset quality and non-performing loans. Fortunately for them, however, the fight is effectively rigged, as both the government and the Central Bank of the United Arab Emirates have readied their checkbooks to pay up whatever it takes to keep the banks from going down.  

Asset quality deterioration

A major blight on statements has been Dubai World exposure; UAE banks hold 45 percent of the up-to $26 billion of outstanding debt, of which Emirates National Bank of Dubai (ENBD) and Abu Dhabi Commercial Bank (ADCB) have the highest shares (see estimated exposure table).

As Executive reported in March, even if Dubai World offered full debt repayments, the net present value would only amount to 62.1 cents on the dollar (with a five-year extension at a 10 percent discount).

However, a pledge by the Dubai government on March 25 to “support proposals with significant financial resources” and inject fresh funds of $9.5 billion through the Dubai Financial Support Fund, has eased the Dubai World situation and will lower the discount rate for the debt proposal.  This now entails a higher net present value for the “100 percent principal repayment through the issuance of two tranches of new debt with a five and eight year maturities,” said the Dubai government.

This could avoid additional provision charges but will not help healthy balance sheets show up at UAE banks.

“Problems at Dubai-based banks will not end after the restructuring of Dubai World, with the economy of the Emirate almost in a standstill,” says Marcel Kfoury, senior trader for the Middle East and North Africa region at Nomura Holdings in London. “The default rate on the consumer side will just rise further, adding to an already deteriorating loan-book, as more contractors fail on their obligations.”

UAE banks were already suffering from retail loan portfolios and real estate exposure via lending books, subsidiaries or direct investments in properties. First Gulf Bank (FGB) is the most exposed bank in this matter, as it had in December 2009 a real estate portfolio of $1.6 billion, the market value of which has undoubtedly decreased. With the current oversupply situation, particularly in Dubai, the banks are now left with vacant and non-cash flowing real estate projects that have lost 50 percent of their value; approximately one third of aggregate projects have been postponed or even cancelled.

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