UAE Banks Could Face $1B In Impairments From Dubai World Debt

Banks in the United Arab Emirates may need to take as much as $1 billion in total impairment provisions for their Dubai World exposure to account for the difference between market lending rates and the sub commercial rate offered in the conglomerate's restructuring deal, bankers said Monday.

"The difference between the rates that banks lent to Dubai World and the rate they are offered (in the restructuring proposal) is around 3%," one local banker who declined to be named told Zawya Dow Jones on the sidelines of a conference in Dubai.

"If you multiply this by the number of years of restructuring, 5 or 8 years, banks will have to take losses between 15% and 24% of their loan book. This amounts to more than $1 billion," he added.

After months of talks, Dubai World late last week said it has agreed in principle with its main creditors to restructure $23.5 billion of debt.

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Under one of the options put forward in the debt proposal, U.A.E banks could opt for a cash interest payment of 1% plus the difference between the emirates interbank offered rate, or EIBOR, and the London interbank offered rate, or LIBOR, up to a cap of 1%. This also includes payment in kind of up to 1.5%.

"Banks (U.A.E.) will have to take provisions for the difference between the two rates," Edward Quinian, U.A.E. country partner at Ernst & Young told Zawya Dow Jones at the same conference in Dubai.

IFRS STANDARDS

"Banks will have to abide by the International Financial Reporting Standards (IFRS) rules. It's a full conformity with the IFRS," Quinian said, adding that a U.A.E. central bank meeting with lenders is expected very soon.

The banker who declined to be named said "the worst part is that according to IFRS, banks have to take these provisions before the end of this year."

Ernst & Young, which audits the finances of some of the U.A.E.'s leading banks, expects lenders to make large provisions for their Dubai World exposure over the coming 12 months.

Mohammad Ali Yasin, managing director of U.A.E.-based Shuaa Securities, said the country's central bank should act in the interests of the financial sector and instruct local banks to not take impairment provisions for Dubai World's restructured loans.

"In such critical times regulators can and do take extraordinary steps similar to what the European central bank did in buying bonds to protect banks in the euro-zone and as the U.S. Fed did when they bailed out certain financial institutions and took toxic assets in their books," he added.