Dubai-based banks still see persistent asset quality pressures (By IFN)

Dubai-based banks still see persistent asset quality pressures

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UAE: Moody’s recent downgrade on four Dubai-based banks, including Emirates NBD, Mashreqbank, Commercial Bank of Dubai and Dubai Islamic Bank highlights the protracted recovery of the Dubai banking sector since the start of the crisis in 2008. Despite improvements in the emirate’s operating environment, the ratings agency has downgraded the three banks, with a possible downgrade on Dubai Islamic Bank based on elevated problem loan levels of up to 17%; which is well above the average of GCC banks at 6.1%, and low loan-loss coverage levels which remain persistently weaker than its regional and global peers with similar standalone credit assessments. Khalid Howladar, vice president and senior credit officer at Moody’s said: “Despite an improvement in the overall operating environment in Dubai, especially in the core sectors of trade, retail, tourism and transport, Dubai-based banks continue to face persistent asset quality pressures, which emerged at the start of the crisis four years ago. We expect problem loan levels to remain elevated over the coming quarters, driven by exposures to large, stressed, government-related issuers (GRIs), particularly non-commercial restructurings, and legacy corporate impairments, which are primarily real-estate-related, which are still emerging after what Moody`s expects have been failed attempts to restructure speculative real-estate financings underwritten earlier in the crisis.” According to the ratings agency, much of the emirate’s real-estate lending was financed on the basis of very optimistic projections of cash flows and capital gains that are “unlikely to return in the near-term, particularly in the commercial property sector.” This continues to pressure the asset quality of the affected banks, while reduced valuations and a delayed enforcement process has stymied any hopes of a quick recovery.