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22 April 2024

Sub-prime fears hit the UAE

By Staff Writer

Banks’ liabilities from US sub-prime mortage crisis could be worse than feared (SUPPLIED)
Analysts warned yesterday that UAE banks may be much more exposed to potential sub-prime mortgage losses than previously forecast.

With global liabilities from structured investments at more than $200 billion, UAE banks may be on course for greater write-downs than predicted, HSBC research claims. However, Abu Dhabi Commercial Bank (ADCB) yesterday played down forecasts that it could face losses of up to Dh900 million due to exposure to US sub-prime mortgage related instruments.

An HSBC research report, obtained exclusively by Business 24|7, said: “Taking into account the size of ADCB’s overall securities portfolio of Dh3.6bn (as of September 2007) and the decline in the ABX index during second quarter of 2007, ranging from 5 per cent (for AAA-rated products) to 30 per cent (for BBB-rated products), we estimate the overall position to be approximately Dh900m.” However, ADCB rejected the numbers saying its potential losses from structured products were much lower.

“The HSBC numbers are over-exaggerated. It is not right,” a senior official of ADCB told Business 24|7. “Besides, ADCB did not book a loss of Dh283m but only Dh70m. A total of Dh213m was taken to equity account,” he said.

The ADCB official also said the losses are not necessarily due to the sub-prime crisis but due to the fallout of sub-prime and lack of liquidity.  

“Sub-prime was the catalyst but losses are not necessarily due to sub-prime. It is because of lack of liquidity also.”

Although the position of ADCB’s exposure was not available, analysts, using the ABX index as a proxy for the underlying exposure, worked backward to derive an estimate.

“While these are estimates that can understate or overstate the problem, our main assumption was that if some of the exposures are classified as ‘held to maturity’, they will not be ‘marked to market’ and hence would take longer to materialise,” it said. The HSBC report said the fourth quarter witnessed further decline of the ABX index, which implies a further write-down of Dh330m.

The ABX index represents a basket of credit default swaps on high-risk mortgages and home equity loans.

Arsalan Mustafa, analyst with HSBC Global Research, said ADCB is likely to smooth this loss over the coming quarters. The ABX index indicates that the deterioration has been widespread with the most significant declines coming from the lower rated (A and BBB) tranches, which have declined 60 to 68 per cent since the end of June 2007. And during this period, the non-rated or the equity portions have most probably been wiped out, according to experts in structured products.

“While Dh70m has already been written off, another portion is likely to be written off in the fourth quarter (P&L) and the rest may be taken directly to equity during the year itself,” the report stated.