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Finance & Banking | Global Arab Network
Negative Rating Actions Taken On Four Dubai-Based Banks On Expected Asset Quality Deterioration
Global Arab Network -
National_Bank_of_Dubai_NBD
Standard & Poor's Ratings Services said today that it has lowered its long- and short-term counterparty credit ratings on Dubai-based Emirates Bank International PJSC (EBI), National Bank of Dubai (NBD), and Mashreqbank to 'A-/A-2' from 'A/A-1'. We also lowered our long-term counterparty rating on Dubai Islamic Bank (DIB) to 'BBB+' from 'A-' and affirmed our 'A-2' short-term rating on the bank. The outlooks on all these ratings are negative. At the same time, we removed all the ratings from CreditWatch with negative implications, where they were placed on March 17, 2009.

The rating actions mainly reflect the impact on these banks of the difficult macroeconomic and financing environment in the Emirate of Dubai (not rated). The risks to Dubai's economy have, in our view, increased as the real estate sector has entered a sharp correction period. We expect the impact on Dubai's overall economy to be significant, as construction and real estate account for almost 50% of Dubai's GDP. The economic slowdown, stock market decline, and dropping real estate prices are raising significant hurdles for these Dubai-based banks. Looking forward, we expect these factors to significantly slow business growth and lead to a deterioration in asset quality and profitability.

Standard & Poor's acknowledges that banks in the United Arab Emirates (not rated) have been receiving significant support, in the form of liquidity and capital, from the federal authorities under various programs. For instance, the authorities have recently announced their plan to offer guarantees for bonds to be issued by these banks. While these various measures represent important mitigating factors, we nevertheless expect the deterioration in banks' asset quality to be material.

We classify the UAE as "interventionist" toward its banking sector, meaning that we expect 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 profile owing to its systemic importance. The long-term ratings on EBI, NBD, and DIB are two notches above their respective stand-alone credit profiles owing to their systemic importance and ownership structure dominated by the government of Dubai.

The negative outlooks reflect the deteriorating operating environment and the impact we expect it to have on the banks' financial profiles. Under our base case scenario, we expect the financial profiles of these banks to remain adequate for the current ratings. However, if the operating environment continues to worsen and the financial profiles of these banks, especially asset quality, financial performance, or capital ratios, are more affected than we expect, the ratings could come under further pressure. On the other hand, we could revise the outlooks to stable if operating environment pressure eases, the banks demonstrate a superior resilience to current market conditions, or improve their financial profiles substantially.

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