Outlook for UAE banks still hazy on Dubai restructurings (By IFN)

UAE: The IMF has released optimistic forecasts for economic growth in the MENA region this year, but in the UAE, the domestic banking sector remains weighed down by corporate restructurings related to Dubai Inc.

Furthermore, it has emerged that the banks’ accounting treatment of their exposure to restructurings differs; creating a hazy picture as to the actual financial performance of the banks.

In a report, Moody’s, which believes that corporate restructurings continue to be credit negative for the emirates’ banking system, noted that there are three different approaches in the banks’ accounting treatment of their exposure to Dubai debt; affecting their reporting of non-performing loans and financing and profitability metrics.

“At US$25 billion, the distressed debt restructuring completed by Dubai World Group in June 2011 was the largest ever seen in the GCC. The impact of the restructuring was particularly pronounced for Dubai-based banks, triggering a sharp deterioration in their asset quality, which led to the downgrade of numerous banks and changes in the outlook for most rated Dubai-based banks to negative.

“Following the Dubai World restructuring, we have a divergence in the accounting treatment of these sizable exposures across banks in the UAE,” said Moody’s.

These approaches comprise: maintaining the restructured financing as impaired at the original balance; and holding provisions equivalent to the net present value (NPV) loss, recording the financing as performing at a reduced balance and recognizing an NPV loss; or recording it as performing at the original balance and releasing associated provisions at their discretion.

“Where non-commercial restructurings have bullet repayment profiles, as is the case with the Dubai World restructuring, we believe that a declassification of these restructurings to the ‘performing’ category leads to loss of information and transparency, at least until there is strong and objective evidence of improvements in borrowers’ repayment capacity,” it said.
It also noted that many banks in the UAE do not include restructured financing in their financial reporting, reducing transparency and diminishing the ability to track the exposure and judge the banks’ asset quality.

“We believe that corporate restructurings will affect the UAE local banking landscape for the foreseeable future. Accordingly, regardless of reporting variations of restructured exposures, our analysis will focus on asset quality substance over reported form, with the additional aim of maintaining accuracy and consistency across the rated universe in the UAE and globally,” it said.

According to the ratings agency, seven of the 12 banks it rates do not report restructured financings. Of these Dubai Islamic Bank is the only fully-fledged Islamic bank; while others which do not report restructured financings include Emirates NBD, Abu Dhabi Commercial Bank and Mashreq Bank.

Meanwhile, according to Moody’s, some restructurings still in progress include Amlak’s, whose debt under restructuring amounts to US$3.8 billion.

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