UAE banks may take Dubai World provisions from Q3

Cbank directed banks to only book general provisions in Q2 until its recommendations.
UAE banks may take Dubai World provisions from Q3
SPECIFIC PROVISIONS: UAE banks are likely to book specific provisions against loans to Dubai World in Q3 as they await guidelines from the central bank. (Getty Images)
By Stanley Carvalho
Sun 27 Jun 2010 10:30 PM

Banks in the UAE are likely to book specific provisions against loans to Dubai World in the third quarter as they await guidelines from the central bank, bankers and analysts said on Sunday.

The central bank has directed banks to book only general provisions in the second quarter until its recommendations are ready, a senior Abu Dhabi banker said.

The banker, who asked not to be named, said: "We were told the committees in the central bank are still working on the subject of provisions."

Last week the central bank held a meeting with the chief executives of local banks and discussed matters relating to liquidity and real estate but did not discuss anything relating to Dubai World provisions.

The central bank did not return calls seeking comment.

A senior executive at a Dubai based bank said: "The stock market has already priced in the provisioning needs of the local banks, so the timing of when banks book provisions is not the main issue. The third quarter is likely, sounds plausible."

He added: "This could be an individual institutional call. It's a material event for 2010, something that needs to be addressed before the end of the year."

In May Dubai World reached a deal in principle to restructure $23.5 billion in debt with core lenders holding 60 percent of the exposure, in a deal to repay creditors over five and eight year maturities.

The final terms of the debt deal are expected to be presented to remaining creditor banks towards the end of June or in July.

Another banker said: "Until there's further clarity from the Central Bank, we will take general provisions in Q2 as we did in Q1 for our exposures," another banker said.

Banks in the UAE have an estimated exposure of $15 billion to Dubai World. Dubai lender Emirates NBD and Abu Dhabi Commercial Bank are thought to carry a large proportion of the exposure.

Provisions of UAE banks for non performing loans (NPLs) declined to 35.2 billion dirhams in May from 36 billion dirhams while general provisions edged up to 13.6 billion dirhams in May from 13.4 billion dirhams the previous month, according to Central Bank data.

Deepak Tolani, analyst, Al Mal Capital, said: "Banks are looking for guidance from Central Bank and they may now take provisions in third quarter."

UAE banks will also need to comply with International Financial Reporting Standards (IFRS) which could lead to quite specific requirement from the central bank on Dubai World provisioning.

Ratings agency Moody's in a recent note said the outlook for UAE banks remained negative on continued asset quality concerns.

The note said: "Dubai World's recent restructuring is central to defining problem loans that pose significant asset quality challenges to the UAE banking system."

In the note, John Tofarides, analyst, Moody's, said: "Problem loans could more than double by year end 2010 to around 9.5 percent to 12.5 percent of gross loans, taking into account the Dubai World restructuring." (Getty Images)

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