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Standard & Poor’s cuts ratings on UAE banks

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Points of Essence:

  • UAE based Islamic financial institutions have been snubbed rating-wise by S&P by according  them a revised down rating and outlook for the upcoming year. This was largely contributed by the uncertainties in the economic outlook of the UAE due to the gloomy global financial sector. CPI Financial has the report.

Rating agency Standard & Poor’s has revised down its ratings on Dubai Islamic Bank, Emirates Bank International, National Bank of Dubai and Sharjah Islamic Bank.

Standard & Poor’s has lowered its long- and short-term counterparty credit ratings on Dubai Islamic Bank to ‘A-/A-2’ from ‘A/A-1’ and revised its outlook on the bank to negative from stable; revised its outlook on Emirates Bank International and National Bank of Dubai to negative from stable and affirmed its ‘A/A-1’ counterparty credit ratings on the two banks; and revised its outlook on Sharjah Islamic Bank to stable from positive and affirmed its ‘BBB/A-2’ counterparty credit ratings on the bank.

At the same time, the ratings agency has affirmed its ‘A/A-1′ counterparty credit ratings on Mashreqbank. The outlook on the bank remains stable.

The rating actions mainly reflect the impact of the difficult global macroeconomic and financing environment on the Emirate of Dubai (not rated). The medium-term risks to Dubai’s economy have, in the agency’s view, increased as demand in the real estate sector shows clear signs of abating, raising the possibility of a sharp correction in this market. The impact on Dubai’s overall economy would be significant as construction and real estate account for almost 50% of Dubai’s GDP.

“Plunging oil prices, an economic slowdown, the falling stock market, and pressure on real estate prices are raising major hurdles for Dubai-based banks,” said Standard & Poor’s credit analyst Emmanuel Volland. “Looking forward, these factors are expected to lead to a major slowdown in business growth and deterioration in asset quality and profitability.” This comes at a time when liquidity has also deteriorated rapidly.

Loans granted by banks in the United Arab Emirates (UAE) have been growing annually by an average 35% over the past four years. After Qatar, this is the fastest rate of loan growth observed in the Gulf. The pace of growth even accelerated in the first half of 2008, boosted by massive borrowings from the government and government-related entities. While customer deposits also increased rapidly, this could not keep pace with the growth in lending. As a result, the loan-to-deposit ratio exceeds 100% for the whole banking sector, forcing banks to rely on wholesale funding that is more expensive and could prove volatile.

The lowering of the ratings on Dubai Islamic Bank (DIB) reflects the bank’s high exposure to the real estate sector – its historical core competence – representing more than one-quarter of the bank’s assets and 2.3x adjusted total equity on 30 September 2008. Its exposure to the local stock market is another source of risk in light of the dramatic fall in the Dubai Financial Market in 2008. On a positive note, DIB’s funding profile appears adequate, with a ratio of loans to deposits of 78% on 30 September 2008.

While Emirates Bank International (EBI) and National Bank of Dubai (NBD) exhibit lower exposure to the real estate sector and stock market, recent fast growth in assets has put pressure on funding and capitalization, which triggered the outlook revision. The banks’ commercial position will strengthen following the effective completion of their planned merger scheduled for the first half of 2009.

The outlook revision on Sharjah Islamic Bank (SIB) reflects the less supportive environment in which the bank operates, reducing the likelihood of near-term upgrades for the bank. SIB continues to exhibit a superior level of capitalization, with a ratio of adjusted total equity to total assets of 26.4%

on 30 September 2008.

The rating affirmation and stable outlook on Mashreqbank reflect the bank’s relatively limited exposure to the real estate sector and stock market, its strong risk management framework, and good financial profile.

Despite mounting pressure on the UAE banking sector, mitigating factors do exist. “Rated banks continued to post strong financial performance in the first nine months of 2008 and enjoy adequate financial profiles, helping them to weather deteriorated market conditions,” said Mr. Volland. They also benefit from strong government support. The UAE Central Bank put in place an AED 50 billion short-term liquidity facility and the Ministry of Finance recently injected AED50 billion into the banking sector as medium and long-term deposits (another AED20 billion is expected in the next few weeks).

Standard & Poor’s classifies the UAE as “interventionist” toward its banking sector, meaning that it expects strong extraordinary support to systemically important banks in case of need. Therefore, the long-term rating on Mashreqbank is one-notch above its stand-alone credit quality owing to its systemic importance. The long-term ratings on EBI, NBD, and DIB are two notches above their respective stand-alone credit quality owing to their systemic importance and their ownership structure dominated by the government of Dubai.

The ratings on DIB, EBI, and NBD could be lowered if the environment continues to worsen, if tight global liquidity affects the operating environment in Dubai more severely than expected, or if these banks’ asset quality erodes significantly. A positive rating action could occur if operating environment pressure eases, banks demonstrate a superior resilience to current market conditions, or improve their financial profiles substantially.

Source: http://www.cpifinancial.net

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Written by Suapi Shaffaii

December 31, 2008 at 3:13 am

Posted in General Issue

Tagged with , ,

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