UAE banking sector can absorb rise in bad loans: Fitch

International ratings agency Fitch said the UAE banking sector could absorb a fairly significant increase in bad loans following its recent capital sensitivity test.

The UAE banks' overall capitalisation level of 18 per cent of risk-weighted assets provide a substantial buffer, it said.

The UAE Central bank recently launched a new liquidity support facility for the local banks.

Fitch Ratings also affirmed the long-term Issuer Default Ratings and placed the Individual ratings of four local banks on Rating Watch Negative (RWN).

The banks affected are Commercial Bank of Dubai (CBD), Emirates NBD (ENBD), Mashreq, each with an Individual rating of 'C', and HSBC Bank Middle East, with an Individual rating of 'B'.

Fitch will continue to monitor the situation of all rated UAE banks and expects to resolve these RWN on the Dubai banks over the next two weeks as more information arises.

However, the the review of the RWN could take longer, it said.

Dubai Holding Commercial Operations Group (DHCOG), was revised by Fitch to 'BB' from 'BBB-' on December 2, 2009 and remains on RWN.

In another report on Abu Dhabi, the ratings agency said that Abu Dhabi could preserve its own balance sheet strength and avoid actions that could jeopardise its own creditworthiness.

It said Abu Dhabi's considered and so far indirect financial support is in line with the agency's understanding of Abu Dhabi's attitude to support.

A conservative attitude to support helps underpin Abu Dhabi's 'AA' Long-term foreign currency Issuer Default Rating (IDR) which has a Stable Outlook.

Abu Dhabi's economic development is being carried forward by state-owned companies, some of which have been prolific borrowers on markets, especially in 2009, when they raised $9 billion (Dh33bn).

Fitch has previously warned of the potential for rising public sector liabilities to weaken the sovereign balance sheet. For the time being, however, public sector debt remains small enough not to raise significant concerns, given the strength of Abu Dhabi's balance sheet. Total public sector debt is estimated by Fitch at just $24.1bn, of which only $4bn is directly sovereign, with the rest owed by fully government-owned entities.

This is equivalent to 17 per cent of GDP, compared to sovereign foreign assets of more than 200 per cent of GDP.

It also affirmed UAE-based Emirates Telecom Corp's (etisalat) Long-term Issuer Default Rating (IDR) at 'A+' with a stable outlook.

The state-owned company's Long-term IDR continues to reflect Fitch's view of the UAE Government's creditworthiness, given the company's strong operational and strategic ties with the UAE.

Etisalat's current ratings are also underpinned by the strong operating performance and financial standing of the company which would justify a comfortable investment grade rating level on a stand-alone basis.

The company's liquidity remains strong with a cash position of Dh13.5bn at H1 2009 compared with short-term financial debt and amounts payable on new investments and licenses of Dh0.6bn and Dh2.5bn respectively.

Etisalat's long-term financial debt of Dh1.9bn is also mainly concentrated in one to three years and Fitch still expects the company to record a consolidated net cash to Ebitda ratio of 0.5x at 2009 year due to underlying revenue growth. The agency is also confident that management will maintain a conservative financial policy, with a maximum gross debt/Ebitda ratio of 2.5x under a worst case scenario.

Fitch also revised down Hamriyah Free Zone Authority's (HFZA) Long-term Issuer Default Rating (IDR) to 'BBB-' from 'BBB+'.

It simultaneously downgraded the Sharjah-based property and real estate company's Short-term IDR to 'F3' from 'F2'. Both ratings have been placed on Rating Watch Negative (RWN)

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