Local Commentators: UAE Central Bank Unlikely to Require Provivions for Dubai World

The 8 December issue of AlBayan Newspaper Abu Dhabi contains an interesting article on Dubai World.

Looks like a piece designed to steer towards a goal:  no provisions for Dubai World.

The argument builds its case through a series of steps.

It begins by quoting unnamed British bankers as saying that the current negotiations would lead to a mutually satisfactory solution of a rescheduling.  AA:  As this story goes, it's a simple matter of coming to an agreement to re-time payments.  And such a mutually satisfactory agreement is close at hand.   No real problem.

Then Abdul Rahman Al Saleh, Director General of the Emirate of Dubai Finance Department, is quoted  that the Emirate of Dubai is fully capable of discharging its obligations.  AA:  A bit of misdirection.  The issue isn't the Emirate's capacity to service its debts but its commercial companies'.

Then he's quoted strongly refuting the assertion that the Government of Dubai had recently announced that it would never guarantee Dubai Group's debts as though it were a surprise.  He noted that the fact that Dubai Group's constituent documents clearly state that there was no guarantee and that it's appropriate to make a distinction between the Government and these companies such as Nakheel and Limitless.  AA:  If you thought you had a government guarantee, you were mistaken.  It's your own fault.  No quibble from me on this point.  Even though you might have noticed the Government of Dubai "logo" on the prospectus for the DEWA Sukuk (with the Government in the honored "on the left" position.  But buying financial instruments is just like buying toothpaste.  One has to be able to distinguish among the claims made.  Will this toothpaste really improve my social life?  Does this sukuk really have a government guarantee?  If you read the prospectus, you saw that it didn't!

Then Moody's is quoted that Dubai World and DEWA are fully capable of attracting new investments once the current hubbub quiets down.  AA:  I'd like to see the original.  I'll bet there are all sorts of caveats.  Higher pricing.  Limited amounts.

Then Jean Claude Trichet, Governor of the European Central Bank, that Dubai does not pose any sort of a real crisis to the world economy.  AA:  The collectability of the debt and its impact on the world economy are two different things.  The world economy does not have to collapse for a lender to lose a good portion of his loan to Borrower A.  Or Borrower "D".

Bankers and financial experts consider it unlikely that the Central Bank will require local banks exposed to Dubai World to take any provisions since it is a large company and still continues to enjoy the confidence of local and foreign investors.  As well since the company merely asked for an extension of payments and not any cancellation of its debts.  AA:  This is the heart of the argument.  Not sure the too big to fail argument works w\ithout a government guarantee.  Usually too big to fail is the argument for getting one.  Many large companies have gone "south".   Enron for one.   From the rush by various financial institutions to make it clear through public announcements that they have not extended credit to Dubai World, I'm guessing there's a strong argument against the maintenance of confidence by investors.  From the reaction of local stock markets, there's a similar indication.   Finally, let's wait to see the final restructuring package before we rush to determine that there is no haircut - either direct or indirect.  There are rumors that Nakheel and other companies were offering construction companies 75% payments as final settlements with a confidentiality/non disclosure agreement part of the package.   If they can't pay suppliers why should we think they can pay bankers?  To be fair as well we shouldn't yet be assuming there will be haircuts.

Of course the Central Bank will make up its own mind and will speak for itself. AA:  And here there will probably be public policy considerations mitigating against significant provisions unless the situation  becomes obviously desperate.  Likely outcome is to put a bandage on the wound and hope that a miracle cure is found in the not too distant future.

Central Bank of UAE to Guarantee Dubai World?

Rumors in market that an announcement will be made before the stock markets open in the UAE today.

Just a few hours from now.

Nothing on WAM so far.

Could last Thursday's announcement been a shrewd move by Dubai in the face of Abu Dhabi reluctance to step up for US$10 billion for the second tranche of the bond issue?

UPDATE:  No guarantee from the CB UAE or for that matter from the Emirate of Dubai.

More Dubai Aftershocks: UAE Central Bank Affirms Support for Banking Sector

The Central Bank of the UAE issued a press release today:

1. advising that it was making available an additional liquidity facility to both domestic banks and branches of foreign banks in the Federation
2. noting that the UAE banking sector was in better shape than it had been one year ago
3. pointing out that the banking system is composed only of retail banks with stable deposits  "the best banking model"
4. in light of the previous comment, it noted that UAE banks get most of their funding from customers with interbank deposits only at 10.3% of aggregate liabilities and foreign deposits only 5%

Issuing such a statement during the Eid Holiday indicates a strong concern at the CB UAE about a potential run on banks tomorrow.

This is in line with rumors of heightened expat "chatter" about securing their funds.

Dubai Raises US$5 Billion from "Private Sector" - Or Did It?

You've probably seen the news that Dubai raised US$5 billion in the second tranche of its US$20 billion bond program.

Much is being made of the fact that it secured funding this time from the "private sector" and didn't have to rely on help from the Emirate of Abu Dhabi.

Last time I looked the majority owner of both National Bank of Abu Dhabi and AlHilal Bank was the ADIC (Abu Dhabi Investment Council).

Isn't this pretty much what happened with Tranche #1?

Abu Dhabi didn't actually directly  purchase the bonds from Dubai.  The Central Bank of the UAE did (the first US$10 billion.)  Of course, with money given it by Abu Dhabi.

To characterize Tranche 2 as a non Abu Dhabi Government private sector deal is a bit of a stretch.  Well, maybe more than a bit.

And when you think about it, if you're Abu Dhabi, isn't it better to have the CBUAE or NBAD/AlHillal fronting your money?  It's a lot easier for a Sheikh Mohammed to stiff a brother ruler than it is the central bank or two financial institutions.

EmiratesNBD Exposure to AlGosaibi and Saad - Around US$350 Million

Khaleej Times reports.

And not a big deal for EmiratesNBD in terms of any real harm.

At 30 September 2009, the Bank had AED 32. 3 billion (US$8.8 billion) in shareholders' funds.  And had earned AED 3.2 billion (US$897 million) for the first nine months of 2009 - even after increasing loan loss provisions 163% to AED 2.0 billion from AED 0.7 billion in the corresponding period in 2008 (Note 7).

Awal Bank - Analysis of 3Q08 and 4Q08 Financials

Summary

Based on limited financial information available, it appears that there was a severe reduction of the liquidity in Awal's balance sheet in 4Q08.  Without more financial reports (only 3Q08 and 4Q08 are available on Awal's website) and a full set of financials including the notes (only summaries are posted in public area of the website), it's impossible to determine what caused this reduction in liquidity.  

It's also equally difficult to determine if Awal's problems in 2009 (leading to Administration) were the result of illiquidity (reasonably good assets but illiquid so they could not be converted to pay off short term creditors) or insolvency (a decline in asset values significantly below carrying value).  As outlined below, my initial view is that it was the latter.    

Background

On 30 July 2009 the Central Bank of Bahrain announced that pursuant to Article 136 of the Central Bank Law, it had placed Awal Bank under administration.  Later on 9 August it announced the appointment of Charles Russell LLP as Administrator.

The Central Bank of Bahrain and Financial Institutions Law of 2006  ("CBBFIL") provides that three cases under which the CBB may place a licensee under Administration.:

1. "If the Licensee becomes insolvent or appears most likely to be insolvent.  
2.  If the license is amended or cancelled pursuant to the provisions of items (1) and (3) of paragraph (c) of Article (48) of this law.  
3. If the Licensee continued to provide regulated services which resulted in inflicting damages to financial services industry in the Kingdom." 

Presumably, the reason for the CBB's action was the first.  But note that Article 133 of the CBBFIL of 2006 defines insolvency as "A Licensee is deemed to be insolvent if his financial position becomes unstable and he stops paying his due debts other than administrative fines and whatever type of tax."

Financial Analysis

Since Awal was not traded on any exchange, it is not required to publish its full financials.  It did, however, release financial highlights: balance sheet, income statement, cashflow statement and statement of changes in equity - all consolidated.  3Q08 and 4Q08 reports are here.

Without detailed footnotes, the following analysis is somewhat limited.  Admittedly, it raises more questions than it answers.

Let's focus on the balance sheet changes between 30 September 2008 and 31 December 2008.  This would be the first critical period after the financial crisis hit but before the full force was felt.

1. Between these two periods, total assets declined US$1.8 billion dollars. 
2. Equity is only US$25 million lower between 3Q and 4Q08 (the change in YTD net income between the two periods). Therefore, we can say that in effect liabilities accounted for the entire change.
   
3. Every liability category declined:  long term debt US$779 million, due to non banks US$605 million, repos US$227 million (probably greater haircuts by counterparties), due to banks US$141 million, and other liabilities US$46 million. 
   
4. This reduction of liabilities (a negative cashflow) was funded by reductions in assets.   Cash and cash equivalents decreased US$1.429 billion  (from US$2.2 billion to US$785 million).  loans US$630 million, equities and options US$366 million, Funds US$315 million, and interest bearing securities US$49 million.  Partially offsetting these were increases of  US$841 million in Investment Properties and US$125 million Other Assets.

What does this all mean?

Without notes to the financials it's hard to tell, but here are a few observations.

1. A substantial outflow of cash --19.25% of the entire balance sheet -- occurred during the last quarter of 2008.
2. Investment properties (illiquid) increased while more liquid instruments (at least presumably more liquid) equities and options as well as funds declined.
3. Due to non banks declined roughly 45%.  Due to banks only 6%.  Were these contractual maturities?  Or did non banks have a greater insight into credit?  Or inside information?
   
4. Long term debt declined 43%.   It would be very interesting to see the notes to the financials to confirm this was a scheduled payment and not a prepayment.  LTD decreased over the year from US$2.373 billion (31 December 2007) to US$0.867 million (31 December 2008).

Conclusion

As far as the public reports I've seen, there was no payment default.  Rather Awal announced its decision to initiate debt rescheduling with its creditors.  One might expect that if there had been any sort of significant payment default, it would have become public fairly quickly.  Here's the CI downgrade and withdrawal of ratings report.  It does not mention a payment default.

That leaves a more classical balance sheet insolvency as the likely cause of Awal's problems: assets worth less than liabilities.

At 31 December 2008, Awal had US$7.6 billion in total assets supported by US$4.9 billion in liabilities and US$2.7 billion in equity.

That means a drop of at least 35% in the value of assets to reach insolvency.

The recent instruction by the Central Bank of the UAE to its banks to provide 100% for their exposure to Awal supports that view. 

As you'll recall from my earlier post on this topic, the CB UAE Governor is reported to have said that the provision requirements were in line with regional and international supervisors.  A 100% provision implies no recovery - which implies that Awal's assets are worth zero or close to zero (administrators, lawyers, and accountants always feast first on the estate of the bankrupt).

UAE Central Bank Implements Basel II

Лучше поздно чем никогда

Article here.

UAE Central Bank: US$2.9 Billion in Exposure by UAE Banks to Saad and AlGosaibi

The Gulf News (Dubai) reports that CB UAE has disclosed that 13 national banks and 7 foreign bank branches in the UAE (20 banks in total) have exposure of US$2.9 billion to the AHAB and Saad Groups.

The article also reveals the identity of the bank that asked for and received a court freeze on Saad Group assets in the UAE:  Abu Dhabi Commercial Bank, which has reported exposure to both AHAB and Saad at some US$609 million.

UAE Banking Statistics - New CB UAE Monthly Report - Aggregate Banking Statistics

The CB UAE has begun publishing monthly UAE Banking Indicators which give an aggregate "snapshot" of the banking sector.

While there are a variety of data series, separate lines for general and specific provisions enable more in-depth analysis of this critical area.

Here's the inaugural October 2009 report.

November and December's data should reflect the provisioning for AHAB and Saad Groups recently mandated by the CB UAE.  

Central Bank of UAE Weighs in on Al Gosaibi and Saad Restructurings - Establishes Mandatory 50% & 100% Provisions

The Board of Directors the Central Bank of the UAE officially mandated that all local banks and branches of foreign banks operating in the UAE  take certain prescribed provisions against their exposure to the Saad Group and to Ahmad Hamad AlGosaibi and Brothers ("AHAB") Group.  Provisions apply to both funded and unfunded exposure (e.g., letters of credit, etc) - that is to all exposure to the two Groups.

Yesterday, the Governor of the Central Bank issued an official circular setting forth the provision requirements which are to be implemented no later than 31 December 2009:

1. 100% of all exposure to Awal Bank Bahrain (owned by Maan AlSanea)
2. 100% of all exposure to The International Banking Corporation Bahrain (owned by AHAB and partially by Maan AlSanea)
3. 50% of all other exposure to AHAB 
4. 50% of all other exposure to Saad Group companies.

Governor AlSuwaidi emphasized in his circular two further points:

1. The level of provisions is consistent with that deemed appropriate by regional and international supervisors.  The reference to other supervisors' assessment is particularly telling.  This is not simply the CB UAE's view.  Nor apparently is it only a regional view.
   
2. The CB UAE will revert in 2010 if additional provisions are required.

This announcement is noteworthy because Central Banks generally do not get involved in publicly  mandating specific loan loss provisions.  This is only done exceptionally for cases  involving large amounts where the Central Bank has made a determination that the prospects for recovery are low.

As such then, this announcement represents a highly negative assessment of both Groups' prospects.

1. Failure of and no recovery at all on the two banks, Awal and The International Banking Corporation.
   
2. At least a 50% loss on other exposure to the AHAB Group and Saad Group - though there is a hint that additional provisions may be required.

For those who don't read Arabic, a much shorter English language press account.

UAE Court Freezes Saad Assets (Maan Al Sanea)

12 November was not a good day for Maan Al Sanea.

Not in the UAE where a court place a protective order on the assets of Saad Group and Saad Trading Contracting and Financial Services in an amount of US$151 million at the request of an unnamed Abu Dhabi Bank.  Article here.   More coverage here and here.

Nor in the USA where the court-appointed liquidator for Saad Investments Company Ltd (Caymans)  ("SICL") made a Chapter 15 filing in Delaware to protect the assets of Saad Investments Finance  (owned by SICL) against third party attachments as per this  report.    

Some details on exposure disclosed so far to Gulf Banks.

Some links to previous SAM posts here and here.

Headlines Say UAE Central Bank to Tighten Regulations - But the Real Story is Personal Loan Losses Loom

Under current CBUAE regulations a sub-standard loan is defined as one on which debt service is 180 days or more late.  This regulation dates to 1988.  Other countries in the Gulf have a 90 day time frame.  The latter is pretty much the international standard.

The National in Abu Dhabi is reporting that the CBUAE intends to tighten its requirement and bring UAE regulation in line with the 90 day standard. 

This report sounds rather ominous.

The immediate thought is that if these new rules are adopted, the amount of non performing loans will balloon.

But is that the case?

The article states that most UAE banks are using the more standard 90 day time frame.  A quick check of several banks' financial statements shows that to be the case.

What I think is more important in this article is some information about personal loans  that is tucked away in the middle of the article:  the estimate of a  potential 10% non performing rate.

One might quibble about the implication that credit bureaus (and quibble I will in a bit) are largely responsible for bad loans, but the ticking time bomb that personal loans represents is unmistakable.

Some signs of distress:

1. A group of Kuwaiti MPs is pushing for the government to buy Kuwaiti financial institutions' personal loan portfolios (Kuwaiti citizens' loans only) to relieve distress of the average Kuwaiti.  Estimates of the cost of doing this range from KD 2.2 billion to  KD 6.5 billion depending on which loans are included.  The appeals are usually accompanied by statements that the cost of living is higher than citizens' income and so borrowing is the  only way they have been able to make ends meet.  This AlQabas interview with Nasser AbdhulMuhsin AlMarri, Deputy Chairman and Managing Director of Noor Investment Kuwait, is one example.  See the first question.
   
2. Living beyond one's means through the use of debt is not uncommon.  In one country I'm familiar with, a lot of the locals I know at the junior level have debt service ratios over 70% of their monthly income - meaning that to make the minimum required payment each month, they should pay the lenders 70% of their salaries.
3. As I've noted in an earlier posting, the Central Bank of Bahrain issued a regulation to set a maximum that banks could lend consumers at 50% of gross monthly income because it was concerned citizens were getting in over their heads.
4. Cars in the Dubai airport parking lot. 
   

Some signs of lending practices that might make a sub-prime lender blush (though I'm told these folks are made of pretty stern stuff);

1. A local I knew was in over his head with credit cards.  With some help he negotiated revised payment terms and a lower interest rate.  Once this was done, one of the banks where he had been max-ed out and which had frozen his credit card wrote him a letter thanking him for clearing up his debt.  And now since he was a customer in good standing, they were not only re-instating his credit card but increasing the limit.  Yes, while his rescheduled debt sat in their work-out group's portfolio.  By the way this bank has won several awards in the GCC for banking excellence of one sort or another.  Marketing seems a natural category, though I think the awards were for something else.
   
2. I received a couple of SMS's from that very bank promising me that if I transferred my outstanding credit card balances from another bank to their fine institution not only would they happily accept my balances, they' also give me a credit line equal to 110% of those balances.  That way I could "afford" to spend a bit more.  Since my phone was registered in a company not a personal name, it seems fairly clear that this bank was happily blanketing the market with mass SMS mailings.  
3. One of my local friends advised me that rotation of creditors was a common strategy. Max-out at Bank A.  Go to Bank B to get a larger line.  Max-out at B. Go to Bank C.  Eventually one winds up back at Bank A and notes one's sterling credit.  Not only did I pay in you (Bank A) and Bank B in full, but look Bank C gives me  this  big a line.  I've got to be a really great credit.  To get me to move to your esteemed bank,  you'll just need to give me a bigger line.
   
4. I've seen outdoor billboards from one Shari'ah compliant lender offering to lend me and everyone else who passes by 95%  of the price of a new home.  Not much margin for error there if the price of one's new house drops just a bit.   To be fair, they no longer offer this level of financing.
5. There were ads from another retail bank offering to make a loan for a vacation with five year repayment terms. 

So now to the quibble.

Yes, a functioning credit bureau (with access to all borrower data) will make my job as a banker easier.

But, how much help do I need?  Do I need to be as smart as Gail Trimble to figure out:

1. Credit cards aren't used to purchase houses.  Or cars.  If they are, that's probably not a sign of good creditworthiness.  By and large they are being used for consumables.  If a prospective borrower already has a very high ratio of existing debt to income, that's also probably a sign that he or she is living beyond his or her means.
2. If this new customer is such wonderful business, how come my competitor is letting him slip away?  If the price of luring this customer to my bank is the simple act of increasing his/her credit line, whey doesn't his existing bank do this?  Am we really that much smarter than they are?  Really?  If this is such a great idea,  then why don't we do this with our existing customers?  After all, we do it with new customers about whom we have even less data.

By the way a tip of the hat to the folks at Emcredit  the Emirates credit bureau.