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Tue 7 Jul 2009 11:57 PM

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S&P downgrades 4 Dubai banks

Agency says actions taken due to difficult financing environment and expected asset quality deterioration.

Standard & Poor's said on Tuesday it is lowering its ratings on Emirates Bank International, National Bank of Dubai, and Mashreqbank to 'A-/A-2' from 'A/A-1'.The agency’s long-term rating on Dubai Islamic Bank meanwhile has been cut to 'BBB+' from 'A-' but with the A2-short-term rating affirmed.

The agency said the negative outlooks on all of these banks reflect the deteriorating operating environment in Dubai and the impact it expects this to have on the banks' financial profiles.

At the same time the agency confirmed it has removed all the ratings from CreditWatch with negative implications, where they were placed on March 17.

In its latest note S&P said: ''The risks to Dubai's economy have, in our view, increased as the real estate sector has entered a sharp correction period.

''We expect the impact on Dubai's overall economy to be significant, as construction and real estate account for almost 50% of Dubai's GDP. The economic slowdown, stock market decline, and dropping real estate prices are raising significant hurdles for these Dubai-based banks.

''Looking forward, we expect these factors to significantly slow business growth and lead to a deterioration in asset quality and profitability.''

The agency acknowledged however that banks in the UAE have been receiving significant support, in the form of liquidity and capital, from the federal authorities under various programmes, including the recently announced plan to offer guarantees for bonds to be issued by these banks.

''While these various measures represent important mitigating factors, we nevertheless expect the deterioration in banks' asset quality to be material.

''We classify the UAE as "interventionist" toward its banking sector, meaning that we expect strong extraordinary support to systemically important banks in case of need.

''Therefore, the long-term rating on Mashreqbank is one notch above its stand-alone credit profile owing to its systemic importance. The long-term ratings on EBI, NBD, and DIB are two notches above their respective stand-alone credit profiles owing to their systemic importance and ownership structure dominated by the government of Dubai,'' the agency added.

Under its 'base case' scenario it expects the financial profiles of these banks to remain adequate for the current ratings.

However, if the operating environment continues to worsen and the financial profiles of these banks, especially asset quality, financial performance, or capital ratios, are more affected than it expects, the ratings could come under further pressure.

On the other hand, the outlooks could be revised to stable if operating environment pressure eases, the banks demonstrate a superior resilience to current market conditions, or improve their financial profiles substantially.

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