The cloud of Dubai World's US$23.5 billion (Dh86.31bn) debt restructuring will weigh on the country's big banks as they prepare to report first-half financial results this month. The government-owned group, which has extensive interests in the property and financial sectors, reached a restructuring pact with its core creditor banks in May after seeking to reschedule loans last year in the aftermath of the financial crisis.
Despite the agreement, which called for extending Dubai World's debt into new five and eight-year loans, most banks have not written down their exposures to the group ahead of a final deal involving the full complement of 97 creditor banks. "While a final agreement has not been reached, there is a lot more visibility on what the final agreement will be," said Murad Ansari, the vice president of equity research at EFG-Hermes. "I think banks might not book complete provisions on Dubai World's restructuring, but they might book some general provisioning on anticipation of a restructuring."
Most analysts do not expect banks to make provisions for exposures to Dubai World in the second quarter. Instead, they expect them to take the hit in the second half of the year after a final agreement is reached and the Central Bank gives guidance on how much provisioning is required. Provisions for non-performing loans fell month-on-month in May to Dh35.2bn, according to Central Bank figures, the first such decline in more than 18 months. Yet while analysts view lower provisioning as a sign that banks have successfully handled their bad loans, the lack of resolution on Dubai World's huge restructuring may spell more pain ahead.
In a recent report, Fitch Ratings said it expected the volume of impaired loans to rise through the rest of this year and into next. In a separate report, Moody's Investors Service painted the banking system equally gloomily, forecasting that the proportion of problem loans would more than double to between 9.5 per cent and 12.5 per cent of overall loans. "We expect impairments to rise during next year but not necessarily all the way through next year," said Robert Thursfield, the director of Fitch's financial institutions group in Dubai. "It's difficult to say what will happen in the second part of 2011."