Four Dubai-Based Banks Long-Term Ratings Placed On CreditWatch Negative On Deteriorating Operating Environment

Standard & Poor's Ratings Services said today that it has placed its long-term counterparty credit ratings on four Dubai-based banks, namely Emirates Bank International PJSC (EBI), National Bank of Dubai (NBD), Mashreqbank, and Dubai Islamic Bank (DIB) on CreditWatch with negative implications (see ratings list below). The 'A-1' short-term ratings on EBI, NBD, and Mashreqbank were also put on CreditWatch with negative implications, while the 'A-2' short-term rating on DIB was affirmed. This action reflects our growing concerns regarding the impact on the banking sector of the economic downturn in Dubai.

The outlook for Dubai's economy, in our view, has worsened relative to last year; the global economic downturn has been hurting some of Dubai's key economic sectors including trade, tourism, and commerce. Demand in the all-important real estate sector also continues to show clear signs of stress, with indications that a sharp correction is underway. As a result, we expect Dubai's economy to contract between 2% and 4% in real terms in 2009, putting pressure on banks' asset quality and profitability. Dubai is a small open economy that can do little to shield its key sectors from the impact of a fall in external demand in the coming months.

The rating actions on EBI, NBD, and DIB also reflect our concerns that the government may use these banks to support the refinancing that is soon coming due of the debt of other government-related entities (GREs). We already noticed that these banks have been important participants to the refinancing of Borse Dubai's debt that matured in February 2009. We understand that these banks received deposits to neutralize the impact on their liquidity profile. Taking into account the important amount of Dubai GRE debt that is soon coming due, Standard & Poor's believes that additional directed lending to these entities would increase credit and concentration risk. On a positive note, Dubai's establishment of a $20 billion bond program at the government level and issuance of $10 billion that was fully subscribed by the Central Bank of the United Arab Emirates (UAE) somewhat alleviate liquidity pressure.