Standard & Poor's has lowered on Monday 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. Meanwhile, banks in the United Arab Emirates face the prospect of increasing loan defaults as the country's property boom loses steam amid the global credit crisis. Small and medium-sized real-estate developers are being hurt as home sales fall, making it harder for them to repay loans. Banks are also cutting lending, which is weighing on property values, bringing the fourfold increase in residential real-estate prices over the last five years to an end. “Given the scale of banking sector exposure to property developers and contractors, a problem for the property sector is substantially a problem for the banks,” Raj Madha, a director responsible for equity research at EFG-Hermes Holding, said in a report. Moody's Investors Service on Dec. 16 cut the outlook on four UAE banks, Dubai Islamic Bank, Dubai Bank, Abu Dhabi Commercial Bank and First Gulf Bank, citing “mounting liquidity pressures and growing downward pressures on asset prices.” Standard & Poor's cut its outlook on Dubai's two biggest banks, Emirates NBD and Dubai Islamic, on Dec. 223, because of the impact of the credit crunch. “The risk here comes from the medium-sized opportunistic developers who will have a funding problem at some point,” John Tofarides, an analyst at Moody's said in a phone interview from Dubai. UAE banks' “exposure to mortgages is not significant and not comparable to the US,” he added. 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 percent 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 percent over the past four years, the second after Qatar. 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 percent 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. 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 percent on Sept. 30. 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 percent on Sept. 30. 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 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. 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.
