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Thu 11 Mar 2010 12:14 AM

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UAE sees no need for capital injection into banks

Banking sector heavily exposed to Dubai World, with exposure estimated at $15bn.

UAE sees no need for capital injection into banks
CAPITAL INJECTION: Younis al Khouri, director general at UAEs finance ministry has said that banks in the UAE dont need any capital injection. (Getty Images)

Banks in the UAE are strong enough to absorb any shock, even from Dubai World's restructuring, and no capital injection is needed for now, a senior finance ministry official said.

The banking sector in the world's third largest oil exporter is heavily exposed to Dubai World, with estimates of potential exposure ranging up to $15 billion, according to Moody's.

Speaking on Wednesday, Younis al Khouri, director general at the finance ministry, said: "The ministerial committee is meeting every month and reviewing the end results of local banks, so far they have not seen any need for further injection."

When asked if the ministry could provide more capital to banks if needed, he said: "Yes".

Analysts said the UAE banks may require more state support if the debt restructuring of state owned Dubai World forces lenders to take significant debt writedowns, or "haircut".

Dubai World, whose debt troubles have shaken global markets, is still negotiating the terms of a restructuring plan with nearly 100 creditors.

Emirates NBD and Abu Dhabi Commercial Bank are part of a seven member committee believed to have most exposure to the debt laden conglomerate.

Khouri also said that the Gulf Arab country was unlikely to tap debt markets with its first ever federal bond issue this year as it was still setting up its debt management office.

Speaking to reporters, he said: "We may not be able to go to the market by 2010, the office should be ready by the end of the year."

With Dubai reeling from debt woes, the emirate of Abu Dhabi is now most likely to come to debt markets this year as its government is already preparing roadshows for investors.

Khouri declined to comment on Abu Dhabi plans, but said in the future debt offices of the federal and emirate levels are going to coordinate issuance plans.

Dubai World creditors expect to see the option of a full repayment over a longer period of time, while some others are willing to take a haircut to receive their money back faster.

In the case of a significant haircut, banks in the UAE will be forced to take new writedowns, further eroding their capital base, analysts said.

Saud Masud, UBS analyst, said: "We believe investors are already expecting a significant haircut to the DW debt entailing $22 billion in obligations, ie: roughly 40 cents with a payout over several years."

He added: "Such a haircut would likely challenge the bankability of UAE financials as books may need to be adjusted further."

The IMF has said in a report that banks across the region may have to raise nearly $10 billion in new capital, based on a scenario that they will have to settle for a 50 percent haircut on their loans to Dubai World.

The head of a Dubai based large international investment bank said: "The broader concern remains how deep the knock on effect will be on the banks, and where will they raise the capital from?"

The UAE finance minister, who is also Dubai's deputy ruler, said on Tuesday that Dubai has not approached the federal government for support yet, but the emirate would get support as a part of the federation.

The government has, since the onset of the crisis, introduced several measures to shore up local banks' balance sheets.

The UAE still has $5.45 billion left from a $19 billion facility set up in 2008 to inject liquidity into the banking system, a top official said. (Reuters)

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