Banks look for direction

Write-downs for Dubai World debt are likely to come after it strikes deal with its creditors

The bulk of bank write-downs linked to Dubai World may not happen before September, once lenders have received new guidelines from the Central Bank, analysts say. Officials of the regulator are expected to issue guidance to banks about how to provision for the conglomerate's restructuring process after a final agreement is reached between Dubai World and its 97 creditors.

Provisioning for exposure to Dubai World is not expected to show up significantly in the earnings of banks for the second quarter. The provisioning "looks most likely in the third quarter, but it is uncertain whether it will be before Ramadan", said Janany Vamadeva, a banking analyst at Al Futtaim HC Securities. "Banks have not signed a final agreement with Dubai World yet and banks are still awaiting guidelines from the Central Bank."

The government-owned group, which is restructuring US$23.5 billion (Dh86.31bn) of debt, reached a preliminary agreement with its core creditor banks in May after last year requesting a rescheduling of its loans linked to the property and financial sectors. But a final deal has yet to be struck with all its lenders. Until that agreement is reached, the Central Bank is not expected to become involved. Officials of the regulator's banking supervision and examination department yesterday could not be reached for comment.

Last year, the Central Bank told the banks to write off 50 per cent of their loans to the Saudi conglomerates Ahmad Hamad Al Gosaibi and Brothers and Saad Group, with the remainder held over for this year. The Central Bank could do much the same with Dubai World debt and allow the banks to cushion the blow from the conglomerate by spreading their provisions over several quarters. Attention is also focusing on how much of a loss the banks will have to take on their original investment.

Raj Madha, a senior banking analyst at Rasmala Investment Bank, believes that although a so-called haircut of between 5 and 7 per cent to cover the losses would be appropriate, lenders were expected to assume a write-down of 15 per cent. "It is possible this amount will be reported in second-quarter 2010 results, but we think that the likelihood is the write-down will take place in the third quarter when the details have been more adequately worked out," Mr Madha wrote in a research report published yesterday by Rasmala and Royal Bank of Scotland (RBS). Although international banks have the lion's share of the exposure to Dubai World, estimated at about 60 per cent, local banks will also feel the pain of the restructuring.

Emirates NBD's estimated impairment of Dh1.2bn represented 4 per cent of its book value, according to the Rasmala and RBS research. Abu Dhabi Commercial Bank's expected write-down was Dh450 million, representing 3 per cent of its book value, and the impairments of First Gulf Bank were estimated at Dh75m or 0.3 per cent of its book value, the report said. While most banks are not expected to write down their complete exposure to Dubai World in the latest quarter, some lenders' earnings may be hit if they opt to increase general provisions in anticipation of the restructuring.

Under the creditor agreement reached in May, Dubai World's debts will be extended into new five and eight-year loans. [e-mail]