DUBAI: The ratio of problem loans for banks in the United Arab Emirates may rise by an additional 4 percent as they book further losses for exposure to troubled conglomerate Dubai World, a Moody’s analyst said on Wednesday.
"The problem loan ratio for our rated banks is about 4.9 percent. I expect another 4 percent to be added for Dubai World exposure," said John Tofarides, banking analyst at Moody’s.
The credit ratings agency rates 13 of the largest banks in the region, including Emirates NBD, Abu Dhabi Commercial Bank and National Bank of Abu Dhabi.
The analyst said UAE lenders face losses of 10 to 20 percent on their exposure to the conglomerate, based on restructuring terms which assume a 100 percent repayment of principal at the end of five years.
"This is on an average. It may vary for different banks. For banks which have an option of dirham-denominated repayment, it could go to the lower end of the average (rather) than the higher," he said.
Concerns mounted about the overall debt burden of Dubai’s state-linked companies after Dubai announced a standstill on repaying $26 billion in debt as it restructured Dubai World.
It unveiled a $9.5 billion rescue plan for the group in March and is in talks with other lenders on approving the plan.
Tofarides added that even though a larger "haircut" may have to be incurred in the event of principal repayment not being achieved, the chances of that scenario remained slim.
"Although there is a refinancing risk in the horizon, I think it is a bit premature to discount that from now and assume that Dubai World will not be able either to refinance or to repay its obligations," he said.
"Much of the risk relates to the assumptions surrounding asset sales and recovery of the property market, but there is also the external support element which cannot be ignored although much more difficult to quantify from now," he added.
The analyst said banks may wait for the final restructuring agreement to be signed before they begin to book provisions for their exposure to Dubai World.
The UAE central bank has directed banks not to book any specific provisions related to the entity for the time being.
"Upon agreement of the new terms, they should be able to take the provisions. I don’t expect them to take any specific provisions in the near term until an agreement is reached or new guidelines are given," he said.
UAE banks 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 told Reuters earlier in the week.
Earlier this month a Credit Suisse analyst said UAE banks would likely record 10 percent of their exposure to Dubai World as non-performing loans and forecast growth in the sector was only expected to resume in 2011.