Moody’s lowers outlook on four UAE banks

Moody's Investors Service has revised downwards the outlook on the ratings of four banks in the United Arab Emirates — Abu Dhabi Commercial Bank (ADCB), First Gulf Bank (FGB), and Dubai Islamic Bank (DIB) have been changed to 'negative' from 'stable', while the rating outlook on Dubai Bank (DB) has been changed to 'stable' from 'positive'.
"Today's rating action reflects the mounting liquidity pressures in the short to medium term; the growing downward pressures on asset prices (mainly stocks and properties); and the anticipated profitability pressures from rising funding costs derived from increasingly scarce liquidity and loss of confidence," explained John Tofarides, analyst in Moody's Financial Institutions Group.
Moody's observed that liquidity conditions in the UAE weakened significantly in Q3 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 MTN programmes, are exacerbating the pressures on UAE banks' liquidity.
"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," cautioned 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.
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 Q3 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.