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Wed 3 Mar 2010 02:23 PM

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Banks dodge write-offs in Dubai World debt saga

'Banks want to avoid writedowns, provisions because that will hit their bottom lines.'

Banks dodge write-offs in Dubai World debt saga
DUBAI BANKS: Several Dubai-based banks are thought to be heavily exposed to Dubai World and related entities. (Getty Images)

Lenders will roll over billions of dollars in risky loans to Dubai World rather than face the pain of write-offs, illustrating the close network of families and firms in Dubai's commercial landscape, experts say.Keeping loans in a perpetual state of extension - where interest is paid but principle not - reflects banks' fear of losses, political pressure and self-interest as many of the banks' controlling interests overlap with Dubai World.

"They want to avoid writedowns and provisions because that will hit their bottom lines," said one Gulf-based banker, who did not wish to be identified. "There is no money on both sides."

Dubai's government and old merchant families play an important role in the emirate's banking sector, with key alliances playing out in the ownership and governance structures of lenders.

The government, through the Investment Corporation of Dubai (ICD), owns a 56 percent stake in Emirates NBD, Dubai's largest bank by market value.

The ICD has a stake in several other lenders as well, and banks will have an interest in not only preserving relationships in a region offering growth potential, but also where preserving pride will often trump sound business strategies.

Dubai sent global markets into shock in November with the surprise announcement it would restructure and delay payment on $26 billion in debt linked to its property units Nakheel, developer of the palm-shaped islands, and Limitless.

Lenders have rolled over a total of more than $2.5 billion since May 2009. A $1.2 billion Limitless loan maturing at the end of March will also get rolled over, people familiar with the matter have said.

"Local banks had been renegotiating a lot of loans (last year), under the economic conditions, rather than writing them off," said a Dubai-based analyst, asking not to be identified.

"Until they figure out what's happening, and there is a proposal on the table, banks don't want to write anything off."

Few banks - struggling to recover from a biting slowdown which saw liquidity squeezed - would have wanted the current tug-of-war between the state-owned holding giant and its creditors to spill over into the glare of the public spotlight.

"The problem is that the cat is out of the bag, and this is now being played out in the public arena," said one credit analyst at a major international bank.

Local banks may have little choice but to renegotiate loans, he said, due to a combination political pressure and commercial self interest.

Several Dubai-based banks are thought to be heavily exposed to Dubai World and related entities, though no local bank has yet disclosed its exposure. Higher provisioning for bad loans however has been a consistent pattern over the last 12 months.

A recent report by Moody's estimated the total exposure of UAE banks to Dubai World to be $15bn.

The International Monetary Fund in its latest UAE country assessment said the share of Dubai World debt held by national banks is 45 percent of the $22 billion outstanding, of which two-thirds is to Dubai-based banks, or six percent of their overall loan book. (Reuters)

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