Moody's downgrades outlooks for UAE banks

BANKS DOWNGRADED: Four major UAE banks including First Gulf have had their outlooks revised by Moody's amid mounting liquidity pressures. (ITP Images)

Moody’s Investors Services has revised down the outlooks on the ratings of four major UAE banks.

The agency’s Dubai International Financial Centre office of has downgraded the rating outlooks for Abu Dhabi Commercial Bank, First Gulf Bank, and Dubai Islamic Bank have been changed to ‘negative’ from ‘stable’, while the rating outlook on Dubai Bank has been changed to ‘stable’ from ‘positive’.

“Today’s rating action reflects first, the mounting liquidity pressures in the short to medium term; secondly, the growing downward pressures on asset prices (mainly stocks and properties); and thirdly, the anticipated profitability pressures from rising funding costs derived from increasingly scarce liquidity and loss of confidence,” explains John Tofarides, analyst in Moody’s DIFC Financial Institutions Group.

Concurrently, the outlooks on the ratings for all senior unsecured debt issued by the above-named banks have also been revised accordingly.

Moody’s states that liquidity conditions in the UAE weakened significantly during the third quarter of 2008.

The flight of speculative deposits from the country created substantial short-term liquidity pressures, which prompted the UAE Central Bank to offer emergency liquidity support facilities, and the Ministry of Finance to announce a three- to five-year deposit scheme to fill the gaps created by the disappearance of the long-term funding market.

Moody’s notes that soaring loan growth levels and future loan commitments, in tandem with maturing medium term note (MTN) programmes, are exacerbating the pressures on UAE banks’ liquidity.

“Moody’s recognises that the currently excellent asset quality and profitability levels reported by all UAE banks – as a result of the benign credit environment up until autumn 2008 – may be negatively affected going forward,” cautions Mr. Tofarides.

Looking ahead, the operating environment in the UAE is faced with increasing challenges emanating from the volatility in both the equity and real estate markets.

The Moody’s note continued: there is increasing evidence that the demand for properties in the UAE has dwindled significantly due to negative sentiment, lack of affordability and poor systemic liquidity. Moody’s expects these trends to continue.

Moreover, the observed slowdown in quarter-by-quarter real estate investment returns (although these were still positive until the third quarter of 2008, according to Colliers International House Price Index) points to a continued decelerating trend.

Although Moody’s cannot predict the extent and severity of the highly likely property market squeeze, the rating agency nevertheless remains cautious, particularly with regard to banks whose loan composition appears to be largely tilted towards real estate and construction loans.

Moody’s states that it will continue to monitor the ratings of all UAE banks and may take rating actions if evidence of a liquidity squeeze, emerging asset quality problems or profitability pressures materialise.

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READERS' COMMENTS

moodys
Posted by ahmed on Tuesday 16 December 2008 at 13:02 UAE time

High time to start rating Moody's themselves,...

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