Standard and Poor's cuts ratings

Dubai: Standard & Poor's Ratings Services yesterday said it had lowered its long- and short-term counter party 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.

It also revised its outlook on Emirates Bank International and National Bank of Dubai to negative from stable and affirmed its A/A-1 counter party credit ratings on the two banks.

Standard and Poor then revised its outlook on Sharjah Islamic Bank to stable from positive and affirmed its BBB/A-2 counter party credit ratings on the bank; and affirmed its A/A-1 counter party credit ratings on Mashreqbank.

Financial environment

"The rating actions mainly reflect the impact of the difficult global macroeconomic and financing environment on the Emirate of Dubai. The medium-term risks to Dubai's economy have increased in our opinion 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 per cent of Dubai's GDP," it said in a statement.

"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."

Loans granted by banks in the UAE have been growing annually by an average 35 per cent over the past four years. After Qatar, this is the fastest rate of loan growth in the Gulf.

The pace of growth 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 per cent for the whole banking sector, forcing banks to rely on wholesale funding that is more expensive and could prove volatile.

Exposure

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 and 2.3 times adjusted total equity on September 30, 2008. 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 per cent on September 30, 2008. 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 capitalisation, which triggered an outlook revision. The banks' commercial position will strengthen following the effective completion of their planned merger scheduled for the first half of 2009.

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.