Fitch downgrades 7 UAE banks on review of support

The institutions affected are Bank of Sharjah, Commercial Bank of Dubai, Dubai Bank, Emirates Bank International, Mashreqbank, National Bank of Ras Al-Khaimah and Tamweel. At the same time, the Support ratings for four of these institutions have been downgraded to '2' from '1'. A full breakdown of the rating actions is included at the end of this commentary.

Fitch has reviewed the sources of support provided to the UAE banking sector over the past year by both the UAE Federal Authorities and individual emirates. The review also considered the ability and willingness of these support providers to continue to provide support if necessary.

Fitch concluded that the willingness to provide support for most institutions is unchanged. However, the ability (as reflected by the creditworthiness) of the UAE Federal Authorities and the Emirate of Dubai to provide support has weakened, prompting today's negative rating actions on the banks. Fitch has affirmed the IDRs of Abu Dhabi Islamic Bank (ADIB), First Gulf Bank (FGB), National Bank of Abu Dhabi (NBAD) and Union National Bank (UNB) following direct support provided by the Emirate of Abu Dhabi ('AA'/Stable) in 2009.

Fitch's revised view of the UAE sovereign reflects the increasing demands on its relatively small fiscal resources during the current period of economic stress. In Fitch's opinion, the increased risk that contingent liabilities arise from the exercise of the UAE sovereign's responsibility to ensure financial stability across the UAE, combined with the federal government's limited fiscal and financial flexibility, has weakened the UAE sovereign credit profile. It remains exceptionally strong, reflecting the fundamental strengths of the UAE economy and Abu Dhabi (rated 'AA') in particular. However, the lack of clarity on the process for non-budgetary financial transfers between the UAE federal government, central bank and individual emirates, is a source of weakness in Fitch's assessment of the UAE sovereign credit profile.

The Emirate of Dubai's creditworthiness is weakening as public sector obligations migrate to the sovereign balance sheet. By the end of 2009, Dubai government debt will have tripled to USD30bn compared to a year ago, approaching 40% of GDP. Although the Dubai authorities have indicated plans to issue a second bond tranche of the same size as that which was placed with the UAE Central Bank in February (USD10bn), the source and timing of this issue is uncertain.

Support to date has been provided to improve bank liquidity and solvency, with liquidity support being made available to all UAE national banks through the placement of deposits by the UAE Ministry of Finance (MoF) and the UAE Central Bank. The MoF has provided Dhs70bn of which Dhs50bn has been placed to date, and the UAE Central Bank established a short-term liquidity facility totalling Dhs50bn. Solvency support has been provided by both the MoF and individual emirates with the MoF, allowing conversion of the Dhs50bn of deposits into subordinated debt qualifying as tier 2 capital. Most banks took up this option to improve their total capital adequacy ratios.

Some individual emirates have provided direct tier 1 capital support to their banks where they are significant shareholders. The Abu Dhabi government purchased Dhs16bn of tier 1 securities from its main banks (Dhs4bn each from ADCB, FGB and NBAD respectively and Dhs2bn each from ADIB and UNB). The Dubai government also subsequently purchased Dhs4bn of tier 1 securities from its largest bank Emirates NBD.

The IDRs of all the banks and non-bank financial institutions rated by Fitch in the UAE (except HSBC Middle East) are driven by the probability of support from the UAE authorities and individual emirates. However, as a result of Fitch's revised view of the UAE, the probability of support for Bank of Sharjah, Dubai Bank, RAK Bank and Tamweel has been downgraded to a 'high probability' or '2' Support rating from an 'extremely high probability' or '1' Support rating. The other downgraded banks; Emirates Bank International, Mashreqbank and Commercial Bank of Dubai have their '1' Support Ratings affirmed. The different IDRs and Support Rating Floors for the '1' rated banks reflect the different size, franchise and ownership of the banks and hence their relative importance to the UAE banking system.

Tamweel's Long-term IDR downgrade to 'BBB' from 'A' reflects the weakened credit worthiness of its main shareholder, the Emirate of Dubai. The rating remains on Rating Watch Evolving (along with the Short-term IDR of 'F3', Support Rating of '2', Support Rating Floor of 'BBB') to reflect the continuing uncertainty over Tamweel's future ownership and role in the UAE economy.

Fitch continues to actively monitor the standalone financial strength, reflected in the Individual rating, of all its rated financial institutions in the UAE. The agency will shortly be publishing a separate Special Report focusing on the eight largest UAE national banks' performance and standalone position after the first half of 2009 and commenting on the Outlook for the remainder of the year.

In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs.