Uae Banks Case

All of the nine largest United Arab Emirates (UAE) banks saw a significant jump in impairment charges in 2009, with Mashreqbank (MB) and HSBC Bank Middle East Limited (HBME) reporting the highest percentage increases. The sector average non‐performing loan (NPL) coverage ratio declined from 148% in 2008 to 97% in 2009. Liquidity improved due to government support. However, banks were short of customer deposits and access to international wholesale funding decreased, reflecting capital markets constraints. Customer deposits rose by a low 1.1% from March 2009 to March 2010. Capital ratios strengthened as the banks reduced cash dividends, slowed loan growth, converted federal deposits into Tier 2 capital and, in most of the nine cases, received direct Tier 1 capital injections from their respective emirates' governments.

Challenges remain for all UAE banks in 2010. NPLs to increase and provisions to remain high, putting pressure on profitability and capital ratios. While the restructure of Dubai World (DW) appears to be proceeding, issues remain within other Dubai government related entities and banks will likely still have to provide for the remaining exposures to the Saad and Al Gosaibi groups. Real estate‐ related lending remains high, and there could still be further fallout for the remainder of 2010 and into 2011 as prices have yet to fully stabilise.

On a positive note, capital sensitivity test indicates that the banks are in a good position to weather the difficulties ahead. Moreover, the UAE economy is expected to grow moderately in 2010 (by 2.6% yoy), which should improve corporate financial standing and positively affect the banking sector.

The banks' Long‐Term ratings remain driven by the probability of support from the UAE authorities and individual emirates, or from the parent company in the case of HBME. In December 2009, Individual Ratings of five Dubai‐based banks (Emirates NBD PJSC (ENBD), HBME, MB, Dubai Bank