Moody's downgrades various government-related issuers in Dubai

Edited by George Haddad
Moody's Investors Service has downgraded various government-related issuers (GRIs) in Dubai, concluding a review initiated on 4 August 2009. The ratings remain investment-grade and are substantially above those that would be based on the entities' stand-alone credit quality. This rating uplift reflects the strategic importance of the GRIs to the government, which makes it likely that the government would extend them support, should such support be needed.

However, the downgrades reflect recent disclosures that reveal the increasing conditionality under which support may be provided.

Ratings affected by today's action are the following:
- DP World issuer and debt ratings were downgraded to A3 from A1;
- Dubai Electricity & Water Authority (DEWA) issuer and debt ratings were downgraded to A3 from A1;
- DIFC Investments (DIFCI) issuer and debt ratings were downgraded to A3 from A1;
- Jebel Ali Free Zone (JAFZ) issuer and debt ratings were downgraded to Baa1 from A3;
- Dubai Holding Commercial Operations Group (DHCOG) issuer and debt ratings were downgraded to Baa1 from A3;
- Emaar Properties issuer ratings were maintained at Baa1.

The ratings outlook for DP World, DEWA, DIFCI and JAFZ is negative, reflecting ongoing economic pressures. The ratings of both DHCOG and Emaar have been maintained on review for downgrade, pending the completion of Moody's ongoing assessment of the impact of the proposed merger of Emaar with DHCOG's real estate operations.

The downgrades follow recent disclosures of increased conditionality around when support could be provided to these GRIs. This includes the specific criteria that will be considered by the recently established Dubai Financial Support Fund when assessing whether financial assistance should be provided. Among these criteria are whether the GRIs are able to demonstrate sustainable business plans, the on-going support of their existing financial creditors, and realistic prospects of fulfilling their repayment obligations.

The government also reiterated that GRI debt obligations not benefiting from a guarantee are not regarded as obligations of the government and that the government is under no obligation to extend support to any such GRI either directly or through the Support Fund.

Moody's is therefore making a greater distinction between its view of the creditworthiness of Dubai's GRIs and that of the Dubai central government, which is itself viewed by Moody's as benefiting from support from the UAE federal government (rated Aa2, stable). The UAE federal government continues to be seen as an important source of support for Dubai and for funding future increases, if required, to the Dubai Financial Support Fund.

Moody's views the liquidity profiles of four of the six rated GRI's (DP World, DEWA, JAFZ and Emaar) as fairly robust, with only moderate maturities until 2012. Moody's notes that DIFCI and DHCOG are understood to have already received liquidity support and will likely require additional liquidity support in the future.

Moody's assumes that the second USD 10 billion tranche will be funded imminently to further prop up the gradually depleting Support Fund.

Dubai's recent successful government bond issuance is also likely to be supportive to Dubai's liquidity profile and alleviate some of the pressures that would arise from further bail-outs, although the use of proceeds has not been specified.

In terms of stabilizing the outlooks, an overall upturn in economic activity and sound liquidity management are key factors for the majority of the rated GRIs, particularly those with sound underlying business models. Those companies in more vulnerable sectors (real estate) may potentially remain under pressure over a more prolonged period.

For a more in-depth assessment of today's rating action, please also refer to our Special Comment "Dubai Inc Credit Environment Update and Outlook", as well as individual Credit Opinions on the six rated GRI's, which will be published shortly on moodys.com.

The last rating action on Dubai's corporate GRI's was on August 3, 2009, when Moody's placed all ratings on review for downgrade. Today's rating action concludes that review.

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Kuwait Financial Forum due on November 1-2

Posted by John Short
Kuwait Financial Forum, planned in coordination with Kuwait Central Bank and the business and economics group (Al-Iktissad Wal-Aamal Group), would be held here at start of November.

The event will be under the patronization of His Highness the Prime Minister Sheikh Nasser Al-Mohammad Al-Ahmad Al-Jaber Al-Sabah.

A total of 600 leading financial personnel will participate in the forum which will be held at the Sheraton Hotel on November 1-2, "Al-Masaref" magazine, issued by the Union of Kuwaiti Banks, said in its latest edition.

The magazine described the forum as the first comprehensive Arab, public and banking forum to analyze the global financial impacts on the economy, banks and stock markets in the Arab world.

The forum was greatly welcomed in the region and finance ministers, and governors of central banks and Islamic banking institutions would take part in the major event.

The magazine included a report with statements by a number of economic experts who said local banks' performance was "better than what they expected." The report included an exclusive interview with the Chief Economist at Dexia Asset management Anton Brender, plus other reports and news updates about banks and financial institutions.(KUNA)

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Qatar: CI affirms commercial bank international's foreign currency ratings

Edited by Sami Kasam

Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed Commercial Bank International’s (CBI) foreign currency ratings at BB+ long-term and B short-term with a ‘Stable’ outlook. The ratings are underpinned by the likelihood of support from the federal government and from major shareholder Qatar National Bank (QNB) in case of need. The support rating has been raised to 3 from 4, reflecting the shareholding by QNB.

The financial strength rating has been reduced to BB from BB+ in view of the deterioration in asset quality in H1 2009. The slowing local economy has increased credit risks, and higher provisioning requirements are likely to impact future earnings. However, there are plans to increase capital, which could provide some cushion against external shocks. The outlook for the financial strength rating is Stable.

Commercial Bank International has had frequent changes in management over the last ten years. Although strategies were laid down some years ago outlining its transformation into a modern-day commercial bank, CBI has yet to realise its full potential. A new CEO and new heads for major business groups were appointed over the last year. Credit underwriting standards have improved. New branding and corporate identity campaigns have been launched, the product range has been widened and the IT area is being substantially strengthened. Unfortunately, CBI’s transformation has coincided with the downturn in the local economy, presenting the new management with serious challenges.

One of the main problems facing the bank is the deterioration in asset quality this year. Non-performing loans (NPLs) have increased. While the capital adequacy ratio strengthened at end June 2009, capital remains impaired by a high level of unprovided NPLs. CBI’s profitability ratios declined in H1 2009 due to high loan-loss provision charges. Net profit could come under further strain in the second half of the year, particularly if NPLs rise.

Liquidity had deteriorated towards end 2008 with the contraction of customer deposits, reflecting the tight conditions in the financial markets at that time. However, the bank was able to raise a considerable amount of interbank funds. CBI also received deposits from the federal government under its liquidity support programme for the banking sector.

CBI is one of the UAE’s smaller local banks, with total assets of USD10.9 billion at end 2008. QNB acquired a 16.5% stake in CBI last year and has two seats on the board as well as representation on the executive committee, audit committee and advances committee. QNB provides support in the treasury area. CBI has not entered into a management agreement with QNB. CBI is primarily a corporate bank with a growing retail banking business. Trade finance continues to be its mainstay and customers are still mainly small and medium-sized companies. The bank is expanding its corporate banking business to include larger companies and public-sector entities. Treasury activities are being substantially upgraded. The bank operates a brokerage subsidiary.

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Fitch: UAE Banks Face Increased Impairments in Tough Environment

By George Haddad

Fitch Ratings says today in a special report that the eight largest UAE national banks continue to face rising impairments and other challenges, but can absorb higher impairments as capitalisation has improved and they have a high level of sustainable revenues.

"The first half of 2009 has been challenging, with a rapidly slowing economy, liquidity pressures and rising impairments restricting new lending and profitability," says Robert Thursfield, Director in Fitch's Financial Institutions team. "While the situation has eased somewhat and with the help of some capital injections bank capitalisation has improved, the outlook remains challenging for the UAE's banks."

Results for the first six months of 2009 (H109) show the eight largest national banks reporting still adequate levels of profits (combined net income of AED8.8bn), although it will be difficult for them to repeat this level in H209, in Fitch's view. Cost growth is also likely to slow as banks become more cautious in their expansion plans, although with the average cost/income ratio of the eight banks a fairly low 33.2%, the capacity to absorb slightly higher costs remains.

Asset quality ratios are under pressure but most of the banks' non-performing loans remain around 2% of total lending at end-H109. "However, this is a lag indicator and remains artificially low given the rapid levels of loan growth over the last few years and is likely to rise as growth has slowed significantly and as the existing portfolio loan book seasons." Thursfield added. Real estate related impairments are likely to rise given that the fallout from the significant real estate crash across the UAE has not yet been reflected in banks' financial statements.

Fitch has conducted a sensitivity test on asset quality and capital ratios and believes that all of the eight banks could absorb 100% and 220% increases in impaired loans over the next two years and still maintain minimum Tier 1 ratios of 12% and 8% respectively. Increases in impaired loans of this magnitude are feasible given the challenges faced by the market and as a consequence, despite recent improvements Fitch expects ongoing pressure on capital ratios. Most of the eight banks received direct injections of tier 1 capital from their respective emirates' governments.

Funding and liquidity pressures were significant for all banks during Q408 and although these have eased in H109 with the UAE Ministry of Finance (MoF) placing AED50bn of deposits into the banking system, the imbalance between loans and deposits persists. Competition for customer deposits remains high and with debt capital markets remaining unattractive to date in 2009, funding costs rose. The UAE Federal Authorities have sought to address this by issuing a guarantee on all bank deposits and planning to do the same for bank debt issuance, although no detail on either guarantee has yet been forthcoming.

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BAB launches the first banking magazine in Bahrain

Edited by George Haddad
The Bahrain Association of Banks (BAB) announces the launch of the first banking magazine in the Kingdom of Bahrain - The Bahrain Banker.
The magazine will include articles, interviews and features demonstrating thought leadership for business today. Key contributors will include Bahrain's senior banking professionals, economists, legal and compliance professionals, senior management from the Central Bank of Bahrain (CBB), as well as specialists on important financial topics such as Islamic banking.

The inaugural edition of The Bahrain Banker will be published at the end of November and distributed at the World Islamic Banking Conference in December. Thereafter, it will be published quarterly, with editions in the spring, summer, autumn and winter.

"We are very proud to launch such a high quality, focused magazine in Bahrain and believe it has a winning formula to engage the banking sectors, members of The Association and all service providers to the sector. It is the right time to launch The Bahrain Banker as we all plan 2010 strategies and rebuild the industry to make it stronger, leaner and more efficient. No other publication like it exists in Bahrain today," said Mayank Malik, Chairman of the BAB and CEO Citibank Bahrain.

"This will not be a trade magazine. It will be thought-provoking, with articles and features contributed by professionals in Bahrain's banking sector. We will, therefore, offer a better quality read than is currently available. We plan to demonstrate the sector's professionalism and maturity, given that the Kingdom of Bahrain has the longest and most advanced history in banking in the region" said Robert Ainey, CEO of the BAB.

The main aim of the magazine is to promote Bahrain's banking sector worldwide in a cost-effective way through alliances with the Economic Development Board as well as other international banking associations. The publication will focus on leaders in the industry to generate a greater awareness, among other things, of Islamic banking - its principles and practices - world-wide. The Bahrain Banker will also discuss key Government initiatives such as Vision 2030, Tamkeen, the reform of the labour market and the role of Mumtalakat.

The BAB has employed an expert team to create this unique publication. The team's editorial coverage will be managed by Abdullah Jonathan Wallace, the former publisher of MEED magazine (Middle East Economic Digest), and Nigel Gibson who previously worked for The Economist newspaper and is author of Al Hilal's The Guide to Islamic Banking & Finance. The design and advertising sales team comes from Metaphor, a boutique agency, which currently handles communications for the BAB.

'The global economy has been through a shattering downturn and one of the challenges facing the banking sector is trust. The Bahrain Banker will strive to build that trust between the Kingdom's banking sector and key local, regional and international partners. Bahrain has many good news stories to tell and we will provide the ideal medium to deliver them,' said Wallace.

The Bahrain Banker is to be distributed through every Bahraini embassy, key Ministries, the Central Bank of Bahrain, the Economic Development Board, the Bahrain Institute of Banking and Finance, as well as overseas banking associations, conferences, airlines and airport lounges and selected retail outlets. We will also offer subscription opportunities for commercial organizations which service the banking sector and professionals who are serious about doing business with the banking industry. Over 5,000 copies will be distributed each quarter.

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Irregular future for CMBS issuance in the Middle East

Edited by Hannan Taha
New issuances of commercial mortgage-backed securities (CMBS) in Europe, the Middle East and Africa (EMEA) are expected to remain sporadic, says Moody's Investors Service in its H1 2009 Review and H2 Outlook report for the sector. The full year issuance volume has been revised upwards by Moody's to €20 billion, levels still substantially below the volumes seen in 2005 to 2007. Moody's notes that there is some investor demand for credit-tenant-lease CMBS.
"In the first half year of 2009, issuance volumes were well above the full year of 2008 volumes. That was mainly driven by three retained transactions amounting to €11.4 billion compared to the total issuance volume of €14.7 billion for the first half year of 2009 and total issuance volume of €6.3 billion for the full year of 2008," says Alexander Zeidler, a Moody's Assistant Vice President -- Analyst and co-author of the report. Irrespective of the volume increase compared to last year's levels, Moody's notes that most of the CMBS transactions were retained and not placed with investors.

The biggest reason for still low open market issuance volumes in H1 2009 was the ongoing concern about the economies and the real estate markets in EMEA. "In H1 2009, the commercial property investment market showed limited activity, the occupational market was weak with reduced tenant demand and banks continued to hold real estate lending activities at very low levels," says Jeroen Heijdeman, a Moody's Analyst and co-author of the report.

The commercial property markets across all European countries and property types experienced continued value declines in the first half year of 2009. The value decline was most pronounced in the UK in the first quarter of 2009, but other main CMBS markets like France and Germany also experienced value deterioration.

The value declines were not only driven by yield widening, but also rental value declines. The trend of widening yields slowed towards the end of the second half year for selected prime commercial properties in the UK that feature strong lease profiles. Moody's expects the trend of declining rental values to continue in H2 2009 and that most EMEA commercial real estate markets will show some improvement in 2010. Moody's expects moderate property value increases from 2011 onwards. A material recovery of commercial property values over the next five years is unlikely, in Moody's view.

The rating agency believes that the focus in H2 2009 will remain on the performance of existing transactions and predicts that the adverse loan performance trend will accelerate, depending on the state of the economy and the availability of capital to refinance commercial real estate loans.

Moody's expects new retained CMBS issuances in H2 2009 and expects continued interests from investors for credit-tenant-lease securitisations as seen towards the end of H1 2009. Looking beyond 2009, Moody's expects that the capital markets will still play an important role in financing commercial real estate. This is needed in order to close the financing gap arising from significant loan refinancing volumes due over the next years while banks are reducing exposure.

The future shape of CMBS transactions will not be decided soon, but investor demand will likely focus on single-loan CMBS and granular CMBS transactions that are less complex.

Global Arab Network

Stable Outlook- Fitch Affirms National Bank of Egypt at 'BB+'

Edited by Jihad Taki

Fitch Ratings has today affirmed the National Bank of Egypt's (NBE) Long-term Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook. NBE's Short-term IDR is affirmed at 'B', the National Long-term rating at 'AA(egy)', and the National Short-term rating at 'F1+(egy)'. The Outlook on the National Long-term rating is Stable. Fitch has simultaneously affirmed the bank's Individual Rating at 'D/E', Support Rating at '3' and Support Rating Floor at 'BB+'.

NBE's Long- and Short-term IDRs and National ratings reflect Fitch's view of the support that would be provided by the Egyptian authorities in case of need, based on the bank's systemic importance, its 100% government ownership, and significant retail deposit franchise. NBE's Individual Rating reflects the strength of the bank's domestic franchise, its stable funding and strong liquidity. It also takes into account NBE's weak performance and still substantial level of non-performing loans, although these are largely legacy NPLs and do not reflect current performance. NBE's capitalisation remains on the low side, although management has stated that the bank recently received a USD400m subordinated government loan that boosted its Tier II capital.

Following the appointment of a new chairman and deputy chairman in 2008, there has been a marked shift in the pace of the bank's restructuring with a number of new appointments made at all levels. There have been improvements in all major divisions, including risk management, and a strengthening of reporting and monitoring systems and controls. The composition of the board was also substantially changed during 2008, during which six of its present eight members were appointed, to broaden the board's business background and to ensure support for NBE's restructuring. The bank is increasingly run on commercial lines with pricing of both assets and liabilities adjusted to market rates which is expected to improve the bank's performance going forward.

NBE continued to report weak profitability in the year to June 2008 and the six months to December 2008. The slight strengthening of net interest and fee income was offset by some losses on the bank's securities portfolio and ongoing loan provisioning charges. In the year to June 2008, NBE booked an exceptionally large provision charge in a bid to boost reserve coverage. The expense was largely funded by the sale of AFS securities, mostly to the bank's wholly-owned subsidiary, Ahly Capital. NBE still has a large proportion of non-performing loans and these increased in the year to June 2008. However, management has stated that virtually all of the increase was due to a reclassification of legacy NPLs that had not previously been recognised. The reclassification occurred as part of a review of NBE's loan book following the improvement in the bank's reporting systems and controls.

NBE is wholly-owned by the Egyptian government. It offers a wide range of retail, wholesale and investment banking services through its extensive domestic branch network. NBE is still Egypt's largest bank by assets by far, accounting for about a quarter of the system's total. Funding is one of NBE's main strengths and reflects the bank's extensive domestic franchise. It is funded by its large deposit base, almost three quarters of which are retail deposits.

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