Fitch Ratings has published a new report today assessing the ability of United Arab Emirates' (UAE) banks to absorb higher impairments following Dubai World's (DW) recent announcement about restructuring its debts.
Given the impact of DW's announcement, impairments at most UAE banks, in terms of lending and investments, will rise further than had been previously anticipated as a result of direct exposures to DW and Nakheel and because of the secondary effect of a loss of confidence in the Dubai economy.
Dubai-based banks' capital positions are more sensitive to rapidly rising NPL trends than other UAE banks. Dubai Bank, in particular, is the most sensitive as its NPLs would only have to rise by a moderate double digit percentage before its capital ratio of 12% would see a decline, according to the findings of Fitch's capital sensitivity test which the agency has updated. (A capital ratio of 12% is the minimum required by the UAE Ministry of Finance, as of end-June 2010, for access to its AED70bn liquidity support programme.)
Most Abu Dhabi-based banks, which benefited from capital injected earlier in 2009, are less sensitive to NPLs, with the exception of Abu Dhabi Commercial Bank (ADCB) whose 12% capital ratio would be reduced if its NPLs rise by 80%. The smaller banks in the UAE's other emirates also appear to be less sensitive to NPLs than Dubai's banks and ADCB.
Although in general, UAE bank capital ratios have strengthened during 2009 as the institutions reduced cash dividends, slowed loan growth, converted federal deposits into Tier 2 capital and in some cases received direct injections of Tier 1 capital from their respective governments, Fitch expects ongoing pressure on capital ratios. If rising impairments over the next six months are largely limited to DW and its related entities, the impact should be manageable for the UAE banking sector, although such an outcome remains uncertain. Global Arab Network