Moody's downgrades Dubai banks

Three leading banks are downgraded due to deteriorating economic conditions and uncertainty over Dubai World's $26bn debt restructuring.

Three of Dubai's major banks were downgraded by Moody's Investor Services as the fallout from the emirate's debt troubles continues to destabilise the economy. Emirates NBD, Mashreqbank and Dubai Islamic Bank had their ratings cut in response to deteriorating economic conditions exacerbated by the uncertainty surrounding the US$26 billion (Dh95bn) debt restructuring of Dubai World, Moody's said. "The rating downgrades reflect the weakening in Dubai's economy and the repercussions on the banks' asset quality and earning power," it said in a statement. "Exposure concentrations to the construction and property sector, as well as Dubai government-related entities, are significant and could entail material losses." The downgrades of three of Dubai's banking giants is an indication of how far the reverberations from the crisis have spread. Two of the banks, Mashreqbank and Dubai Islamic Bank, had already had their ratings lowered by Standard & Poor's Ratings Services as part of its downgrade of four Dubai banks last week. A number of local and foreign banks are known to have extended loans to the state-controlled conglomerate Dubai World, which is in talks with banks and creditors to restructure its debt including a $4bn sukuk repayment by its property arm Nakheel that is due on Monday. But the extent of many banks' exposure to Dubai World and other Dubai Government-related entities is uncertain. On Thursday, Moody's downgraded Emirates NBD's deposit ratings to A2/P-1 from A1/P-1; reduced Mashreqbank's deposit ratings to Baa1/P-2 from A2/P-1; and downgraded Dubai Islamic Bank's issuer ratings to Baa1/P-2 from A1/P-1. The direct exposure of the banks to Dubai World was manageable given the banks' high capitalisation levels, it said. However, Moody's gave warning that the negative investment sentiment created by the restructuring could have longer-lasting effects on Dubai's economy, constraining the banks' ability to tap debt capital markets. Bond sales, used by companies as a key tool to fund their growth, are expected to dry up in the emirate as investor appetite for further Dubai debt remains low. Emirates NBD, the biggest UAE bank by assets, has delayed a planned bond sale until the first quarter of next year. It said last month, before the Dubai World restructuring announcement, it would wait for pricing to improve once investors returned to regional debt markets. It already has Dh2.3bn to repay this year and Dh7bn next year, although the bank said last month it was "fully within plan" to repay investors without the need for fresh funds. With the three banks' business concentrated in Dubai, managing liquidity rather than loan growth would be a key focus for banks going forward, Moody's said. "This strategy, while necessary in the short term, could be detrimental to the banks' medium-term franchise value and growth prospects, relative to UAE banks that operate primarily in Abu Dhabi," it warned. Since the Dubai Government announced on November 25 that it was seeking a six-month standstill of the debt of Dubai World, a string of leading government-related entities in Dubai have been downgraded amid uncertainty about the level of state support. Moody's on Wednesday placed seven of the most prominent Abu Dhabi companies on review for possible downgrade. The risk of contagion from the Dubai World standstill could erode private sector asset quality, already burdened by the collapse in the property market in Dubai, Moody's said in its statement on Thursday. Banks in Dubai were already working to realign their balance sheets from exposure to falling property prices during the global financial crisis. Dubai Islamic Bank is in the midst of an expansion drive in the Emirates and abroad including expanding its customer base in the country by 15 per cent to 900,000, opening 30 branches in Pakistan next year through its subsidiary and starting operations in Jordan. Mashreqbank is one of several local banks to disclose its exposure to struggling Saudi conglomerates Saad Group and Ahmad Hamad Al Gosaibi and Brothers. Mashreqbank is owed about $400m by Al Gosaibi, and is exposed to the Saad Group for $160m. Emirates NBD has called its own exposure to the pair negligible. Despite the financial crisis, Dubai's economy was expected to grow 2 to 3 per cent next year after contracting about 2 per cent this year due to slowing property and construction sectors, Sami al Qamzi, the director general of Dubai's economic development department, said in an interview with Dubai TV on Thursday. The restructuring of the debt of Dubai World would have a positive impact on Dubai's economy, he said. [e-mail]