Fitch lowers credit ratings of several GCC banks

A major ratings agency has downgraded the credit ratings of several large GCC banks and two prominent Dubai companies because of concerns that the financial crisis may make it more difficult for them to repay their debts. Another ratings agency said several other Dubai-related companies may face lower credit ratings. Fitch Ratings lowered its credit rating on the Dubai Holding Commercial Operations Group (DHCOG) and the Dubai Electricity and Water Authority (DEWA) - both of which are generally assumed to benefit from implicit Dubai government support - because of concerns that the Dubai economy may be weakening to the extent that it may affect the emirate's ability to support some of the institutions it controls. The agency also downgraded the ratings of several banks throughout the GCC, including individual ratings on four UAE banks.

"Dubai's creditworthiness has deteriorated, despite strong support from the UAE federation, due to the worsened economic outlook and the pressure this will put on Dubai's public finances," said Fitch in a statement. Fitch downgraded both DEWA's and DHCOG's long-term issuer default rating (IDR) from "AA minus" to "A plus". Despite the downgrade, both DEWA and DHCOG still benefited from potential support from the local and federal governments, Fitch said.

"The ratings continue to benefit from potential support from the Government and Dubai's strong position and role within the UAE federation," Fitch said. If separated from the Government, both companies were likely to warrant ratings lower than the ones they were currently assigned, the company said. DHCOG announced three weeks ago that it had repaid Dh1 billion (US$272 million) in publicly traded eurobonds using internal capital, along with Dh1.4bn in bank loans. Analysts said the announcements were meant to reassure investors that the emirate had funds available to repay debt.

Earlier this week, Nasser bin Hassan al Shaikh, the director general of the Dubai Department of Finance, said the emirate would apply for a sovereign rating by next year. Analysts said such a move would increase transparency and help investors better assess the creditworthiness of the emirate, and by extension the entities it supports. Fitch said that a lack of transparency on Dubai's public finances "is detrimental to the ratings in the current environment".

Standard and Poor's, another ratings agency, revised its outlook from "stable" to "negative" on DHCOG, along with DIFC Investments, DP World, Dubai Multi Commodities Centre Authority, Jebel Ali Free Zone and JAFZ Sukuk. Standard and Poor's said that it had not downgraded the actual ratings on these companies. "The outlook revision reflects the impact of the difficult global macroeconomic and financing environment on the emirate of Dubai, to which the ratings on these six entities are directly linked," wrote Farouk Soussa, a credit analyst at Standard and Poor's.

The company said that Dubai's long-term economic prospects remained solid, since it had positioned itself well to benefit from the eventual resurgence of global and regional commerce, finance and tourism. "Its position within the United Arab Emirates is also supportive, given the strength of the federation's external balances and currency," Standard and Poor's said. "The ratings will be lowered should the economic slowdown be deeper and longer than currently expected, or if liquidity concerns raise financing risks to the Government and its [government related entities]," said Mr Soussa.

Fitch also lowered its ratings for several GCC banks, including the long-term IDR for Dubai Bank from "A" to "A minus", and the individual ratings for Abu Dhabi Islamic Bank, Bank of Sharjah, Emirates Bank International and First Gulf Bank. "Fitch's outlook for GCC banks has become less favourable as it has become evident that the region's banks and financial institutions will not be able to fully insulate themselves from the global credit crisis," said Robert Thursfield, the director of Fitch's Financial Institutions group.

"GCC banks are now feeling the effects of the crisis, which is likely to cause deterioration in banking sector profitability and capitalisation going forward." According to Fitch, Saudi Arabia has the region's strongest banking sector, followed by Bahrain and Qatar. Then come the UAE and Kuwait. @Email:[e-mail]