DUBAI: United Arab Emirates banks are likely to face the brunt of the Dubai World restructuring impact in the second quarter after the central bank told lenders they are not required to book provisions until there is more clarity.
In a circular dated April 22, the central bank told local banks they "are not required to provision their related exposure to Dubai World".
It said it would "provide further guidance to banks concerning the treatment of Dubai World debt in their books".
Banks in the United Arab Emirates have an estimated exposure worth of $15 billion to Dubai World, the state conglomerate that is holding debt talks with its nearly 100 creditors.
The central bank’s circular allows domestic banks to avoid taking a full hit related to Dubai World in the first quarter, analysts said.
"Once the banks accept the (Dubai World) proposal they will have to announce the accounting impact," said Deepak Tolani, a banking analyst at Al Mal Capital.
"It (Q2 headlines) could be negative," he said.
Some banks, have indicated they already started booking provisions against Dubai World debt despite the central bank circular.
"Irrespective of what the central bank said in its circular on Thursday, the bank is taking provisions in first quarter," said an official from an Abu Dhabi-based bank with exposure to Dubai World, who asked not to be identified.
"Under the restructuring, the bank is losing substantially on interest and that is what we are providing for," the official said.
An executive at another UAE bank said: "We are booking some provisions generally but nothing specific to Dubai World in line with the central bank order. We will wait for further directions from the Central Bank."
Dubai World recently offered creditors a 1 percent interest rate on two new tranches of debt as part of its restructuring plan, but it was rejected as too low.
Lenders are pushing for a better rate in order to limit the impact on their books.
Sheikh Ahmed bin Saeed Al Maktoum, the chairman of the Supreme Fiscal Committee of Dubai, said in a television interview on Sunday the proposal has been well received but still needs time to be finalized.
Emirati banks have already kicked off the first-quarter earnings season. Until last week the lenders, their auditors and the central bank have been holding discussions on when to book provisions against their Dubai World exposure, one banker familiar with the situation said.
"The question was whether to account immediately for Dubai World, based on assumptions as the final outcome of the negotiations isn’t clear yet, or wait until the next quarter when precise figures are available," the banker said.
First Gulf Bank, the UAE’s second-largest bank by market value, said on April 21 first-quarter net profit rose 23 percent, ahead of analysts’ forecasts.Abu Dhabi Islamic Bank said on April 19 it may need to book further credit impairments in 2010, after posting a 9.3 percent rise in first-quarter net profit.
Emirates NBD and Abu Dhabi Commercial Bank, two of the local banks believe to be most exposed to Dubai World, are expected to post a 51 percent and 23.7 percent fall in first-quarter net profits respectively in coming weeks.