Moody’s: UAE banks with largest exposures to Dubai World remain on review

Based on an initial assessment of the exposures of rated banks in the United Arab Emirates to Dubai World and its subsidiary Nakheel, Moody's Investors Service said that it will not implement any rating changes for now given that the banks that have sizeable exposures to Dubai World are either already on review for possible downgrade or carry a negative outlook on their deposit ratings.
Moody's announcement is in response to the decision by the government of Dubai to seek a six-month "standstill" period for repaying the debts that are due by Dubai World, one of the largest Dubai government entities, and its subsidiary Nakheel, the property development company.
Moody's has reviewed the potential repercussions of the government's action for the standalone as well as supported ratings of UAE banks. The rating agency concludes that, if the repercussions remain confined to exposures to Dubai World and Nakheel, and based on current assumptions and expectations, UAE banks are likely to be able to absorb potential stress at their current rating levels.
Moody's notes that Dubai-based banks are generally more heavily exposed to Dubai World and Nakheel than their counterparts in Abu Dhabi, with the exception of Abu Dhabi Commercial Bank and First Gulf Bank, whose ratings carry negative outlooks.
Indeed, the UAE banks that are on review for downgrade are Dubai-based banks: Emirates NBD, Mashreqbank, and Dubai Islamic Bank.
Although the recent developments have increased the likelihood of downgrades of bank financial strength ratings (BFSRs) for the banks that are already on review, Moody's noted that their debt and deposit ratings will continue to benefit from systemic support from the federal government of the UAE.
Given the unclear and evolving situation, Moody's said that it will monitor developments and review all bank ratings in the event of a further escalation or spread of the credit event surrounding Dubai World and Nakheel to other areas.
Moody's acknowledged the possibility that the proposed restructuring of Dubai World and Nakheel could be a sign that the Dubai government may allow other government-related issuers to restructure or even default on their obligations. If this is proven to be the case, such an eventuality could have major repercussions on the banks' financial strength ratings in the country and possibly the region, as other non-UAE based banks as well as foreign banks are heavily exposed to Dubai's government-related issuers, known collectively as "Dubai Inc." However, Moody's also acknowledges that the stand-still period for negotiating debt and restructuring of Dubai World and Nakheel could potentially leave the Dubai government in a better position to support its other
government-related companies.
Moody's said it has no reason to believe that the UAE's federal government would abstain from supporting banks in Dubai or in other emirates. However, Moody's assessments impute higher probabilities of support for banks owned by the government of Abu Dhabi due to stronger local government support, in addition to the federal support.
The rating agency observed that the Abu Dhabi government, which holds the bulk of the federation's oil reserves and is the main contributor to UAE's gross domestic product, has demonstrated a strong willingness and ability to provide support to its local banks. Moody's noted, however, that a change in the likely support assumptions could negatively impact on the debt and deposit ratings of the banks.