Banks in the UAE are unlikely to exceed the minimum benchmark capital ratio of eight per cent even if they take a 40 per cent reduction in their exposure to Dubai World Group (DWG) debt, Moody's Investors Services said yesterday, underlining the fundamental strength of the country's banking sector.
A Dubai Government spokesperson had last week confirmed to this newspaper that neither the Dubai Government nor DWG had made an offer to creditors on the latter's debt restructuring plan, rejecting some media reports that the conglomerate would be offering 60 cents on a dollar to its creditors as part of a restructuring deal.
The 40 per cent haircut, of course, was a hypothetical situation against which Moody's stress-tested its rated banks. "UAE banks are in a position to weather sizeable haircuts, if that is what happens," Moody's analyst John Tofarides wrote in a note received by Emirates Business.
"None of the rated banks is expected to be in breach of the minimum eight per cent regulatory Tier One ratio, even in the case of a 40 per cent haircut loss on its DWG exposures," he said.
Moody's rates 13 banks in the UAE, covering loan market share of around 85 per cent. The ratings agency ran the stress scenarios with various haircuts, and concluded that, even in the case of a 40 per cent haircut, "UAE banks would incur losses amounting to only around nine per cent of their capitalisation as of year-end 2009. This would hurt 2010 profits, but not jeopardise solvency," the note said.
"Although very few banks in the UAE have publicly disclosed their actual exposures to DWG entities, we have received sufficient information from most rated banks to conclude that the overall exposures of domestic banks to DWG entities are in the vicinity of Dh55 billion, or $15 billion," the note further added.
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