Concern mounts as Dubai Bank rating cut
Dubai, May 26, 2010
Ratings agency Fitch downgraded Dubai Bank on Tuesday as concerns mount that other Dubai companies to which it is connected, including its owner, state conglomerate Dubai Holding, face financial difficulties.
Fitch cut its individual rating on Dubai Bank to 'D', which means there are concerns regarding its profitability and balance sheet integrity, management, operating environment or prospects, according to the agency's website.
The downgrade, which cited rising loan losses and a weak profit outlook, comes as worries intensify about the health of Dubai Holding, one of three flagship conglomerates owned by the Gulf emirate's ruler.
Analysts say Dubai Holding could be the next entity after Dubai World to endure a large-scale restructuring of its debt as shock waves from the financial crisis ripple through the emirate's economy.
"There is a clear cash flow risk in Dubai and I wouldn't be surprised if the same holds true for Dubai Holding," said Saud Masud, head of research for the Middle East and North Africa at bank UBS, said earlier on Tuesday.
"We believe Dubai Holding has roughly $15 billion in loans and bonds but this does not include any off balance sheet liabilities arising from investor or end-user default on properties that have dramatically declined in 18 months," Masud said.
Dubai Bank's finance chief Ahmed El Shall said the bank was reviewing its strategy in face of the financial crisis and would be able to improve its ratings again by setting aside enough cash to cover bad loans.
"We feel that going forward with prudent provisioning we should be able to improve our ratings," El Shall told Reuters.
"All in all we are not significantly different from others who are undergoing the same stress."
Fitch said it was especially concerned about Dubai Bank's concentrated exposure "mainly to entities related to Dubai Holding, and the prospect that other Dubai government related entities may be facing their own financing pressures."
"It's a terrible rating, it has essentially priced them out of the market," said Khuram Maqsood, managing director of Emirates Capital. "The risk of captive banks is that most of their known portfolio is exposed to the parent company ... and we all know that Dubai Holding's portfolio has been struggling since the financial crisis," he said.
Dubai Bank was among the lead arrangers on $6 billion loan to Investment Corporation of Dubai, the sovereign wealth arm of the emirate, in November 2008.
The lender was involved on the Islamic component of the loan -- a $750 million five-year facility and $1.5 billion three-year facility -- while the rest was conventional financing.
Other arrangers on that loan were Dubai Islamic Bank, Noor Islamic Bank and Standard Chartered. Dubai Bank is an Islamic bank owned by Dubai Banking Group, an entity in which Dubai Holding ultimately holds 70 percent and real estate company Emaar Properties the remaining 30 percent.
The lender, which was turned into an Islamic bank in 2007, in April appointed a former ABN Amro banker as its new chief executive.
"There's no vigilant risk culture in the UAE and that's because this part of the world hasn't seen this before," said a financial services analyst who asked not to be identified.
"We need some more guidance from the regulator, that is the central bank, because what is the appropriate provisioning towards these GREs is unclear."
Speculation that Dubai Holding had also been badly hit by the financial crisis that badly damaged Dubai's property market intensified in April, when one of its units, DHCOG, delayed its 2009 results.
Trading in its Islamic bond, listed on Nasdaq Dubai, was then halted on May 2. The delay was extended on May 16, with DHCOG citing complexities in consolidating results of its units.
The Financial Times said in May that three companies within Dubai Holding, including DHCOG, had engaged advisers ahead of a potential plan to restructure billions in debt.
Fitch said it kept Dubai Bank's long-term issuer default and support ratings unchanged, reflecting the high probability that Dubai authorities would provide some form of support. - Reuters