Dubai state-linked companies may find it harder to complete the refinancing of $15bn in debt this year as new central bank loan rules force lenders to curtail their exposure to the government.
Banks in the UAE can lend no more than 100% of their capital to local governments and the same to government-related entities known as GREs, the UAE central bank said on April 4. There was no limit under previous rules. The exposure of Emirates NBD, the nation’s biggest bank, to sovereign loans was 130% of regulatory capital at the end of 2011, its financial statements show.
Many UAE banks suffered from an increase in bad loans linked to debt restructuring by state-owned businesses including Dubai World, which shook global markets in 2009 with its request to delay payments on $25bn in loans. Sovereign and GRE issuers have about $32bn of debt maturing in 2012, including $15bn in Dubai, the International Monetary Fund said in a March 14 report.
“For the corporates which are in a difficult refinancing environment, it may force them to find other lenders aside from their usual group, both inside and outside the UAE,” Khalid Howladar, senior credit officer at Moody’s Investors Service in Dubai, said by phone on Sunday. “The measures will definitely help local banks manage their large exposures to government- related entities.”
With pledges this year that the emirate’s main companies can refinance debt without state help, perceptions of Dubai’s credit risk and corporate financing costs are dropping. This may lead a greater number of state-linked borrowers to tap bond markets as banks apply the central bank limits.
Lenders in the second-largest Arab economy, which comprises seven emirates including Dubai and Abu Dhabi, have until September 30 to comply with the new limits, the central bank said last week. Under the rules, lending to an individual government-related company is limited to 15% for funded exposure, down from 25% previously.
“It is too early to draw definitive conclusions at this stage as we are in the process of conducting an impact assessment which will likely include a period of consultation with and clarification from the UAE central bank,” Emirates NBD said in an e-mailed response to questions on Monday.
The Dubai-based bank, which is 55.6% owned by Dubai’s government, would have to cut exposure to sovereign loans by at least 10bn dirhams to reach compliance levels, said Murad Ansari, a Riyadh-based analyst at EFG Hermes Holding. The bank is one of the biggest lenders to units of Dubai Holding, owner of Dubai Group, which is in talks with creditors to restructure $6bn of bank debt.
Emirates NBD’s exposure to sovereign and quasi-sovereign clients is 192% of regulatory capital, while that of National Bank of Abu Dhabi and Abu Dhabi Commercial Bank, the second-and third-biggest UAE lenders, are 199% and 108%, according to Deutsche Bank estimates. “The new limits will likely prompt some balance sheet deleveraging for the most-affected UAE banks, with NBAD and ENBD appearing most at risk,” Deutsche Bank analyst Rahul Shah said in a note on Monday.
Dubai racked up $129bn in debt transforming itself into a financial and tourism centre in the last decade. The onset of the 2008 global credit crisis triggered a real-estate crash that sent home prices plunging more than 65% and led the emirate’s economy to contract 2.4% in 2009.
Non-performing loans surged more than threefold to 10.6% in Dubai and 4.6% in Abu Dhabi since 2008, and are likely to “rise substantially further” this year with debt restructuring at Dubai Holding and other GREs, the IMF said last month. The banking system’s net exposure to GREs rose by 44bn dirhams, or 3.5% of gross domestic product in 2011, according to the Washington-based lender.
Emirates NBD’s ratio of non-performing loans to gross loans will rise to between 14% and 15% this year and as high as 16% in 2013, the bank said in an earnings statement in February.
“The introduction of lending limits in principle enhances the prudential oversight of the UAE banking sector, and should help safeguard the financial system against ongoing concerns over public-sector debt sustainability, especially in Dubai,” Farouk Soussa, chief economist for the Middle East at Citigroup Inc in Dubai, said in a phone interview on Monday.
“That said, we don’t think the regulations will have much effect in practice due to ongoing inconsistencies with respect to loan classifications and the blurriness of lines between what constitutes a GRE and a commercial enterprise.”
“If you’re limiting banks’ ability to lend to the government and its entities, then they’ll have to find alternatives, which means tapping foreign banks or tapping international markets directly through bonds,” said Yaser Abushaban, director of asset management at Emirates Investment Bank in Dubai, said by phone on Monday.
Gulf Cooperation Council borrowers have started to widen their pool of financing as Greece’s debt restructuring prompts European banks to curtail lending in the region. Europe’s regulators are forcing lenders to shrink their balance sheets, reduce risk and raise capital.
With European banks scaling back, the central bank’s new rules could help UAE banks “moderate the increase in large exposures,” Moody’s Howladar said. Emirates NBD boosted loans to the Dubai government 10% last year.
“This might be good timing,” Howladar said. “If European banks are staying back, if local banks have to manage their large exposures more conservatively, that means GREs will have to find other sources of funding.”
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