Playing it safe: Financial institutions have been able to address a raft of issues while maintaining growth

After three years of low to modest growth, Dubai’s banking sector appears to have rebalanced itself following the 2009-11 economic crisis. Buoyed by rising asset quality throughout 2013, most of the eight national banks headquartered in Dubai have resolved legacy issues stemming from the collapse of the emirate’s property market, restructured bad loans on their balance sheets and built up substantial capital buffers to protect the sector from a repeat of the boom-and-bust cycle that precipitated the credit crisis.

During the first half of 2013, the UAE’s banking sector saw net profits rise an average of 20% to Dh13.6bn ($3.7bn), compared to 15% annual growth in 2012, according to Abdul Aziz Al Ghurair, the chairman of the UAE Banking Federation and CEO of Dubai-based Mashreq Bank. Total assets of UAE banks grew 8% to Dh1.9trn ($517bn) also in the first half of 2013. After two years of stagnant loan growth, in the first half of 2013 bank lending totalled Dh48.3bn ($13.14bn), the highest volume of new loans since June 2011.

Though ratings agencies and the IMF continue to warn that some Dubai-based banks have yet to fully resolve issues related to their high concentration of loans to government-related enterprises (GREs), since Dubai won its bid in November 2013 to host World Expo 2020, the emirate’s most pressing priority appears to have shifted from how it will repay the estimated $103bn in debts it accumulated before the economic downturn to financing the projected $43bn in infrastructure spending needed to host the world fair.

Ratings Upgrades

 Less than one year after Moody’s downgraded three of Dubai’s largest lenders, Emirates National Bank of Dubai (Emirates NBD), Commercial Bank of Dubai and Mashreq Bank, and put a fourth, Dubai Islamic Bank (DIB), on its watch list, the ratings agency raised its investment outlook from negative to stable in November 2013. Moody’s said in a statement that the upgrade reflects “continued improvements in the operating environment, as well as the ongoing recovery of the local real estate market”. The sector was expected to support an increase in profitability over the next 12-18 months and further declines in the overall problem loans to gross loans ratio for the banking sector from 10.5% at year-end 2012 to 8-9% between 2014 and the first half of 2015. Though Moody’s noted that the non-performing loans (NPL) ratio for Dubai’s banks was still higher than the system-wide ratio at an estimated 14% as of the third quarter of 2013, economic growth in the emirate in 2014 was expected to support a 7-10% increase in bank credit.

Going Forward

 At the close of 2011, the banks carried a total of Dh82.4bn ($22.4bn) of bad loans on their balance sheets and had an overall NPL ratio of 7.2%, according to the “2012 Financial Stability Review” published by the Central Bank of the UAE (CBU). While loan loss coverage levels remained relatively low at 53% as of June 2013, according to Moody’s, Tier 1 capital levels for the UAE’s banking sector stood at 16%, meaning banks have built up sizeable capital buffers to protect against potential future economic shocks.

A further improvement in asset quality was expected to push loan-loss provisions down and drive up banks’ average net income to 2.5% of risk-weighted assets, compared to 2% at the end of 2012. In December 2012 the average loan-to-deposit ratio for UAE banks dropped to 93%, the first time it has fallen below 100% since 2008, when it stood at 108%.

Despite discernable improvements in the overall performance of Dubai’s banking sector, the ratings agency ended its statement with a word of caution, signalling that certain issues still need to be fully resolved.

“Moody’s does note, however, that exposures to large corporate restructurings and government-related issuers will continue to pose asset-quality risks, particularly for Dubai-based banks,” the statement read. “Other persistent structural weaknesses, such as limited transparency, sizeable related-party lending and high loan and deposit concentrations, will also continue to leave UAE banks susceptible to single-borrower or sector-specific risks, such as real estate and construction.”


 The banking sector had assets totalling $560bn as of late 2013, said Sultan Nasser Al Suwaidi, the governor of the CBU, at a press conference in late November 2013. In addition to 23 national banks, eight of which are headquartered in Dubai, there were also 28 foreign banks operating in the country, including six from the GCC, according to the central bank’s “2012 Annual Report”. Domestic banks are regulated by the CBU according to federal law and UAE nationals must own a minimum stake of 51%.

International banks with headquarters in the Dubai International Financial Centre are supervised by the free zone’s independent regulatory body, the Dubai Financial Services Authority, and operate under an English Common Law legal framework, although they are also subject to federal anti-money laundering regulations and the UAE Penal Code.

The CBU created the Financial Stability Unit (FSU) in 2012 to analyse systemic risks and propose appropriate regulatory reforms to address identified issues. Responsibility for enforcing banking regulations is assigned to the Banking Stability Committee within the central bank. Because there is currently no formal mechanism for information sharing between regulators, the central bank and other agencies share information on a voluntary basis, according to the IMF.

The CBU is in the process of gradually imposing a general provisioning requirement of 1.5% on the banking sector, which is expected to be fully implemented by 2014. Currently, the central bank’s only regulation on liquidity levels is a 100% cap on the advanced to stable resources ratio, which is a similar measure to the loan-to-deposit ratio. In other countries in the GCC this ratio is capped at between 60% and 90%, according to the IMF’s figures. The CBU also requires banks in the UAE to have a minimum capital adequacy ratio (CAR) of 12% and an 8% Tier 1 ratio.

In May 2011 the CBU introduced new rules for personal retail lending, which accounts for 30% of the domestic credit of local banks, according to the IMF. The law caps the total amount customers can borrow at 20% of their monthly income and the loan-repayment period at 48 months, and requires that monthly repayment instalments not exceed 50% of a borrowers’ gross salary or income. Though the rule has been difficult to implement without an operational credit bureau to monitor individual debt, the federal Al Etihad Credit Bureau is expected to make credit-scoring services available in 2014 and to be fully operational by 2015, according to media reports. The bureau was established by the Ministry of Finance (MoF) in 2012 to reduce lending risk, and in July 2013 the bureau launched limited operations to collect credit data.

New Regulations

 The UAE’s banking system rests on a heavily local deposit base – as of the third quarter of 2013 non-resident deposits in the UAE banking system dropped 7.5% year-on-year (y-o-y) to Dh124bn ($33.7bn), while resident deposits grew 10.9% during the same period to Dh1.15bn ($312.2bn), according to CBU data – and GREs have traditionally been the largest single source of borrowing, as well as the main drivers of economic growth in the country. In a report published by Bank of America Merrill Lynch in September 2013, analysts estimated that since 2008 the UAE’s domestic banking sector had lent $42bn to the government and related entities, representing 42% of its capital base, the highest ratio in more than 30 years.

Staying Balanced

 These two characteristics, as well as the centrality of real estate as an asset class, and credit risk concentration among other factors, made the banking sector particularly vulnerable during the 2009-11 financial crisis, the IMF said in a consultation document published in July 2013. The IMF paper also said, “Name lending to large borrowers that are often well-known and considered low-risk is prevalent. Disclosure is often limited to some of a group’s entities only, which makes it difficult to identify all group members and monitor their links.”

The lack of a local currency fixed-income market also increased the sector’s exposure. The IMF paper adds, “Given the dominance of the hydrocarbon sector and the relatively small share of some other economic sectors such as manufacturing, real estate lending has a significant share in banks’ credit portfolio. As in many other countries where moveable collateral is not widespread and creditor rights are relatively weak, real estate serves as the most important form of collateral. Thus, the episodes of real estate boom and bust cycles raise systemic risk in the financial system.”

According to a FSU report, in 2011 real estate loans after provisions totalled Dh232bn ($63.1bn) and grossed Dh243bn ($66.1bn), accounting for 21.5% of banks’ overall deposit base and 21.3% of net loans in the UAE. Individual loans composed just over 45% of this total – 27.5% of which were to UAE nationals – while the remainder was split between the corporate sector and commercial developers. Loans to GREs comprise around 40% of total bank lending.

Quick Action

 Though the IMF noted the strong liquidity position of the UAE’s banking sector during the first half of 2013, its Article IV consultation report for the same year urged the “swift implementation” of the planned prudential regulations in order to “mitigate the risk of rapid credit expansion and undue loan concentration to the real estate and GRE sectors”. The IMF also suggested that mortgage lending rules be coupled with targeted increases in real estate-related fees, which were capped at 2%, should housing price increases continue unabated. However, it noted that capping the loan-to-value (LTV) on individual mortgages would not be sufficient in the context of the UAE, due to the “low share of residential real estate transactions financed by mortgages, and the importance of lending to developers for both residential and commercial purposes”.

The Dubai Land Department heeded the IMF’s advice and doubled the transaction fee for freehold properties, excluding warehouses and industrial sites, to 4% in October 2013. Overall, Dubai’s property market was ranked second out of the 27 cities covered in the Prime Global Cities Index by property consultancy Knight Frank. Prices in the emirate rose nearly 22% y-o-y by the end of the third quarter of 2013, according to the report, though growth was slower in the third quarter at 3.4% than the second, which saw a 6.1% increase in prices from the previous quarter.

The central bank had released two new regulations limiting mortgage lending and loan concentration in December 2012, but suspended both within a few months due to an outcry from the banking and real estate sectors. The proposed circular on mortgage lending initially capped home loans for first-time foreign buyers at 50% of the property’s value and 40% for subsequent home purchases, and imposed a 70% LTV ratio on UAE nationals for first homes and 60% for additional properties. The UAE Banks Federation and other industry groups criticised the CBU for failing to consult with the industry before issuing the new rules. In response, Al Suwaidi issued a statement in January 2013 saying the circular was meant as a consultation document to elicit feedback before enacting any regulations. In October 2013 a new rule went into effect that echoed the more liberal 75% LTV ratio for firsttime expatriate homebuyers and 80% for nationals, as well as limiting off-plan property loans to 50% of the purchase price for buyers of all nationalities.

Additional Measure

 Although the banking industry has welcomed the new mortgage rules for the most part, whether they will be able to effectively cool an overheating property market that is largely cash-based is less certain.

The other controversial regulation the central bank issued, suspended and then modified in 2013 was an amendment to a 1993 regulation that prevents excessive loan concentration risk for the purpose of residential or commercial construction to 20% of a bank’s total capital base. The CBU issued rules in 2012 requiring banks to reduce the excessive balance sheet exposure to GREs to 100% of their capital base over a period of six months. The circular also prohibited them from lending more than 25% of deposits to any single borrower. The rules were suspended after the UAE Banking Federation and individual banks protested that they were difficult to comply with in such a short time frame. Although the CBU was reportedly prepared to negotiate individual timelines with certain major banks that had extended loans to GREs in excess of 100% of their capital bases, in December 2012 the central bank announced the suspension of the rule. In November 2013 a new timeline was introduced which allows banks to reduce excess lending to GREs by 20% annually over five years until they meet the 100% exposure limit.

Reuters reported that bonds that are rated by credit ratings agencies and the debt of “commercial” state entities which can stand on their own will not be counted as exposure under the revised large concentration rules, though the CBU has not to date clarified whether the later exemption allows unrestricted bank lending to real estate development companies that are fully or partially owned by the government In December 2012 the CBU also suspended a third liquidity rule that was supposed to take effect in January 2013. The rule, which was the first of four new planned liquidity ratios proposed in July 2012 to help banks comply with higher capital ratios under Basel III, would have required banks to hold 10% of their liabilities in high-quality assets such as cash, central bank certificates of deposits or federal government bonds. The CBU announced that the postponement of the rule in a statement after reviewing banks’ comments and did not give a new timeline for implementation.


The UAE’s banking sector saw assets grow 8% y-o-y to Dh1.8trn ($489.9bn) in 2012, amounting to 31% of total banking assets in the GCC region, according to the UAE Banks Federation’s 2012 annual report. In 2012 the ratio of banking sector assets to GDP in the UAE was 136%, and local banks account for more than 75% of total national banking assets, according to Emirates NBD. Due to increasing loan-loss provisioning sector-wide, Emirati banks saw profits decrease slightly in 2012 to Dh26.5bn ($7.2bn), compared to Dh26.6bn ($7.2bn) in 2011, the report said. Meanwhile, total deposits increased from Dh1.07trn ($291.2bn) in 2011 to Dh1.16trn ($315.7bn) in 2012 and capital and reserves rose from Dh258.4bn ($70.3bn) to Dh276.4bn ($75.2bn) during the same period. The volume of loans, advances and overdrafts also grew by 2.6% to Dh1.09trn ($296.6bn) in 2012 over Dh1.07trn ($291.2bn) in 2011.

With 119 branches throughout the country, Emirates NDB is the largest bank in the UAE, and the most exposed national bank to Dubai GREs that have yet to restructure debt accumulated before the financial crisis, according to EFG Hermes’ 2013 “MENA Investment Perspectives Report”. The state-owned Investment Corporation of Dubai owns a 55.6% stake in the bank.

In December 2012 Moody’s downgraded Emirates NBD’s credit rating to “Baa1”, due to the mounting NPLs the bank held on its balance sheet. The ratings agency said in a statement that the bank’s NPL ratio was 17.8% by the end of the third quarter of 2012. After exceeding analysts’ expectations and seeing its second-quarter net profit rise 50% during the first six months of 2013, residuals from the financial crisis returned to challenge Emirates NBD by the third quarter.

As one of the biggest lenders to Dubai Group, Emirates NBD saw impairment provisions rise 50% y-o-y in the third quarter of 2013 to Dh1.52bn ($413.7m), covering approximately 54.8% of bad loans, compared with 48% a year ago, Bloomberg reported in October 2013. The bank’s target is to cover 55-60% of the NPLs on its balance sheet by the end of 2013. Despite increased provisioning, the bank reported Dh776m ($211m) in profits in the third quarter of 2013, a 21% increase yo-y on Dh640m ($174.2m), but shy of analysts’ projections, according to Bloomberg.

In the second quarter of 2013, Emirates NBD’s impairment provisions rose marginally y-o-y, from Dh954m ($259.6m) in the second quarter of 2012 to Dh997m ($271.3m) in the same period in 2013, only to jump in the third quarter of that year. The bank’s NPL ratio increased from 13.9% in the second quarter to 14.1% in the third quarter of 2013, which Emirates NBD attributed to a Dh1.1bn ($299.4m) increase in impaired loans in its Islamic portfolio, Bloomberg reported.

Despite increased provisioning costs, the bank still benefitted from the positive operating environment in Dubai during the second half of 2013. The bank saw revenue from consumer banking and wealth management grow 13% to Dh1.24bn ($337.5m) during the first half of 2013, during which lending increased by 12%. Retail banking accounted for 9% of Emirates NBD’s total loan book as of the third quarter 2013 and has become a larger source of income for the bank than corporate banking, which accounted for 43% of total lending during this period. Meanwhile, the bank’s stock price rose over the course of 2013 from Dh2.85 ($0.77) in January to Dh6.27 ($1.70) in late December 2013, after reaching Dh3 ($0.81) per share throughout 2012.

Staying Strong

 The Dubai-based Mashreq Bank is the leading retail bank in the emirate and the fifth-largest player in the UAE’s combined banking sector with approximately 4% of total national banking assets, according to Fitch Ratings, and 66 branches nationwide. The Al Ghurair family owns 87% of Mashreq Bank. Due to lower provisioning levels, Mashreq’s net profit increased 40% during the first six months of 2013 to Dh828m ($225.5m), compared to Dh591m ($160.8m) during the same period in 2012.

Loans and advances also rose 15% to Dh47.4bn ($12.9bn) at the end of the first half of 2013, and Mashreq’s liquid assets stood at 22%, according to the bank’s own figures. Its CAR was also well above the regulatory requirement at 18.5% at the end of the first half of 2013. Mashreq reported a 60% rise in profits totalling Dh1.3bn ($353.8m) and a 10% increase in lending in 2012. However, the bank’s assets dropped a modest 4% during the year, which Mashreq attributed to the process of “balance sheet optimisation” in its 2012 annual report. In the first half of 2013, Mashreq’s share price also rose to Dh4.90 ($1.33), compared to Dh3.50 ($0.95) as of the first half of 2012.

Fitch affirmed Mashreq’s long-term issuer default rating at “A” with a stable outlook, and its viability rating at “bb+” in September 2013, reflecting its “strong and resilient franchise, its capacity to absorb higher losses through diversified recurring earnings and capital, and comfortable liquidity position primarily due to its large and stable deposit base”, the ratings agency said in a statement. Fitch also lauded the authorities’ strong support for the domestic banking system.

Mashreq’s loan impairment charges dropped throughout 2012 and the first half of 2013 to a total of Dh2.68bn ($729.4m) by the end of June, when its NPL ratio stood at 6.5% and its reserve coverage ratio was at 82.3%. Fitch noted that while Mashreq’s NPL formation appears to have stabilised in 2013, due to the modest improvement in the UAE’s operating environment, the rising asset quality “is mainly due to further reclassification of Dubai government-related exposures as performing”. Fitch’s statement also contained what has become a familiar word of caution from ratings agencies in 2013. “Fitch expects asset quality to continue to improve in 2013 albeit at a slow pace in line with the recovery in the UAE economy,” the press release said. “However, concerns remain about high borrower concentrations and the future performance of its renegotiated loan book, particularly to Dubai GREs.”

Compfortable Position

 CBD is the fourth-largest bank in Dubai and the second-largest conventional bank in the emirate. The bank was incorporated in 1969 and is 20% owned by the Investment Corporation of Dubai, which is majority owned by the emirati government. Several local business families also own stakes in the bank. According to its 2012 annual report, the bank posted its fourth successive annual increase in net profit since 2008 that year. Net profit for 2012 reached Dh853m ($232.2m), up 4% from the Dh822m ($223.7m) seen in 2011. Due to a slight drop in net interest income, however, operating income fell y-o-y, from Dh1.86bn ($506.3m) to Dh1.85bn ($503.6m).

Changes in the bank’s approach to loan loss provisioning helped lower its impairment charge by 4.3% to Dh490m ($133.4m) at the end of 2012, but its NPL coverage ratio increased to 79% as of December 21, 2012, 11% higher than the coverage ratio at end-2011. Total assets stood at Dh39.5bn ($10.8bn) at the end of 2012, up from Dh38.3bn ($10.4m) a year earlier.

Clients’ loans and advances stood at Dh27bn ($7.35bn), 1% higher than the Dh26.8bn ($7.29bn) in 2011. The bank’s sharia-compliant offerings have also seen significant growth: its Attijari Al Islami division saw assets increase by 126% in 2012, accounting for 6% of CBD’s total asset portfolio. Islamic deposits currently account for 12% of CBD’s total client deposit base.

In October 2013, Fitch affirmed the bank’s long-term issuer default rating at “A-” with a stable outlook. The agency said the rating is a result of the bank’s strong capitalisation and consistent performance in recent years but noted that key constraints are a high NPL ratio and adequate reserve coverage. Moody’s downgraded CBD’s long-term rating in late 2012, from “A3” to “Baa1”. At the same time, the agency changed its long-term deposit rating outlook from negative to stable, citing its strong capitalisation and profitability.

Other Sector Player

 Established in 1975, Dubai Islamic Bank (DIB) is the third-largest bank in the UAE and the largest sharia-compliant lender in the country. DIB had 1.4m subscribers and 85 branches across the UAE and assets valued at Dh111.1bn ($30.2bn) as of the first half of 2013. The government of Dubai owns a 30% stake in the UAE’s first Islamic bank and the federal pension fund controls 4%, while the remaining shares are publicly traded. In 2013 DIB acquired an additional 28% stake in the regional real estate financing firm Tamweel, bringing the bank’s total ownership share in the firm to 87%. In December 2012 DIB was put on Moody’s ratings downgrade watch list due to the high volume of NPLs on its balance sheet. At the time, the bank’s non-performing financing (NPF) ratio was 14.6%, down from a peak of 15.6% in 2011, but well below the 10.6% average sector-wide.

Another leading lender headquartered in Dubai is Emirates Islamic (EI). EI is a subsidiary of Emirates NBD and has 49 branches in the country, making it the sixth-largest lender by physical footprint, according to EI’s 2012 annual report. The bank returned to profitability in 2012 with a net profit of Dh81m ($22.04m), after suffering a net loss of Dh448m ($121.9m) the previous year. The bank’s assets stood at Dh37.26bn ($10.1bn) in 2012, up from Dh22.7bn ($6.17bn) in 2011, and liabilities during each period totalled Dh34.6bn ($9.4bn) and Dh20.26bn ($5.51bn), respectively.

Two Abu Dhabi-based lenders are among the country’s top five banks. The second-biggest bank in the UAE is the National Bank of Abu Dhabi (NBAD), which had 85 branches nationwide, according to the CBU’s 2012 report. As of the third quarter of 2013, the bank’s assets totalled Dh354.1bn ($96.3bn), compared to Dh304.5bn ($82.8bn) in the same period in 2012. Despite a 3.1% increase in net impairment charges totalling Dh622.8m ($169.5m) in the second quarter of 2013, the bank saw second-quarter net profit rise 15.8% y-o-y to Dh2.6bn ($707.7m) and boosted lending by 6.8%.

Abu Dhabi Islamic Bank (ADIB) is the fourth-largest bank in the UAE and the country’s second-largest sharia-compliant lender, with assets totalling Dh96.38bn ($26.2bn) and liabilities amounting to Dh83.4bn ($22.7bn) as of the third quarter of 2013. In late 2012 ADIB issued a Tier 1 perpetual sukuk to boost its market capitalisation and cover the NPLs on its balance sheet, a move that has also been replicated by other major players in the sector.

Loans and Deposits

 As the banking sector’s performance began improving in late 2012, total lending grew at 2.6% during the year to Dh1.09trn ($296.6bn), according to CBU figures. In 2012 loans to the government increased by 19.4% to reach Dh123bn ($33.4bn), the highest credit growth of any sector, followed by real estate loans, which rose 5.4%, personal loans by 3.6% and corporate loans by 1%, according to the UAE Banking Federation’s annual report.

Net loans and advances increased Dh16.3bn ($4.4bn) to Dh1.14trn ($310bn) during the month of June alone, marking the highest rate of credit growth in the UAE since September 2011, according to CBU data. Personal loans to residents during the first five months of the year amounted to Dh9.8bn ($2.66bn), according to CBU figures from June 2013. By the end of September 2013, total lending had grown 7.2% to Dh1.17trn ($318.4bn). Personal loans accounted for Dh285.1bn ($776.04bn) of this total, a 9.4% year-to-date increase.


In May 2013 Dubai World announced that it had reached an agreement with creditors to restructure $10bn in debt and aimed to finalise the deal in the near future, bringing to an end a three-year-long negotiation over the last major unresolved debt stemming from the financial crisis. Banks own an estimated 60% of the Dubai Group’s debt. Under the terms of the agreement, creditors will extend the Dubai Group’s loan repayments for up to 12 years in order for the group’s assets to recover in value. Unsecured creditors have the option of either being repaid at a mark down within five years or accepting the offer of a 12-year repayment extension, according to Bloomberg.

The looming question facing Dubai, aside from how to fund a new spate of infrastructure development for the World Expo, is how the government and the emirate’s GREs will meet the first $30bn of restructured debt payments scheduled for 2014, according to IMF estimates. In March 2013 the debt of Dubai’s GREs, including those which continue to operate on a commercial basis and borrow based on their perceived credit strength, increased from an estimated $84bn to $93bn. Between 2013 and 2017, $60bn of this debt is scheduled for repayment, the IMF reported.

In 2009 the government of Dubai borrowed $20bn – $10bn of which was lent by the CBU and the remainder was extended by NBAD and the state-owned Abu Dhabi bank Al Hilal. All three debts mature in 2014. In total, the IMF estimated that $22bn of government debt was set to mature in 2014. Sheikh Ahmed bin Saeed Al Maktoum, the chairman of Dubai’s Supreme Fiscal Committee, dismissed media speculation that the government would ask Abu Dhabi to further roll over the debt in September 2013.

New Terms

 Dubai World, a subsidiary of Dubai Holding, will be one of the first GREs to face repayment of $4.5bn in September 2015 under the $25bn restructuring deal it negotiated with the 90 international and domestic banks and creditors that own its debt. The next payment of $10bn is scheduled for 2018, under the terms of the deal it arranged in 2011.

Dubai Holding reportedly came under pressure from creditors in May 2013 to speed up sales of assets, such as Cirque du Soleil, the Mandarin Oriental Hotel and an 80% stake in DP World, according to media reports. The company has pledged to repay the debt in full, but did not sell any major assets until the second half of 2013. In November of that year Dubai World reportedly agreed to sell its district cooling company, Palm Utilities, to the Dubai Electricity & Water Authority. In December 2013 the Investment Corporation of Dubai bought a stake in the Atlantis Resort from Dubai World-subsidiary, Istithmar World, for an undisclosed sum, according to local media. Dubai World also sold British logistics warehouse developer Gazeley in June 2013, according to Reuters, and is reportedly in negotiations to sell Miami’s Fontainebleau hotel.

Other Dubai Holding subsidiaries also accelerated asset sales during the second half of the year to meet debt obligations that were restructured in 2010-12. In November 2013 Dubai International Capital (DIC) sold a minority stake in the luxury goods retailer, Rivoli Investments, to Swatch for an undisclosed sum. DIC, which rolled over payment of $2.5bn in debts that were due in 2012 for five years, sold hotel operator Ishraq Dubai to the Almulla Group in 2011 and a 45% stake in valve manufacturing company KEF Holdings. In June 2013 the Dubai Group also sold its credit card business to the Abu Dhabi lender, First Gulf Bank, for nearly $164m. In October 2013 one of Dubai Holding’s four main subsidiaries announced that it had raised $1.4bn in syndicated loans, prompting Moody’s to upgrade the corporate family rating of the Dubai Holding Commercial Operations Group. Moody’s said the loan would significantly boost the GRE’s debt maturity profile and allow it to fully address its next scheduled debt repayment of £500m that comes due in February 2017.


The Dubai banking sector has much to celebrate in 2014. In addition to Dubai winning its bid to host World Expo 2020, the vast majority of debts that the government and the emirate’s GREs accrued before 2008 have been restructured and the sector has built up adequate liquidity buffers to protect against potential future shocks. The CBU ended 2013 with the introduction of two new regulations on mortgage lending and loan concentration with timelines that the industry players appear to support. NPL ratios are expected to peak in 2013 and 2014, according to the IMF.

According to a recent report from Deutsche Bank, an estimated $43bn in infrastructure development will be needed in the seven years before Dubai hosts the World Expo, and much of this will be funded by the same GREs with debt payments looming on the horizon. This, therefore, presents both opportunities and challenges for banks. In the next three years, Dubai will not only have to borrow to fund this construction, but will also have to repay an estimated $85bn in loans that come due before February 2017, according to the IMF.

Even if GREs restructure the loans held by Dubai’s major lending institutions, most of the banking sector has built up enough liquidity to sustain any future rollovers in debt. Meanwhile, the introduction of the CBU’s new regulation on loan concentration limits will force banks holding GRE debt in excess of 100% of their capital base to gradually reduce this exposure by 20% annually over the next five years, meaning government-owned developers may eventually turn to international debt capital markets or private-sector partners to finance infrastructure projects.

The IMF warned in June 2013 that while “downside risks” have declined substantially in the UAE recently, they “remain substantial”. The fund’s Article IV consultation report said, “Adequate macroeconomic policies and borrowing restraint by GREs in the currently favourable economic conditions can support high and sustainable economic growth without incurring undue macroeconomic risks. ... Close oversight of the GREs will be essential to prevent a renewed cycle of risk-taking.”

Barclays said in its November 2013 research note that if borrowing for the World Expo is done in a fiscally sustainable manner, the government should be able to implement its expo-related investment plans without a major deterioration in the sovereign’s fiscal and debt position. Barclays estimated that hosting the event could boost Dubai’s GDP growth to 6.4% over the next three years and potentially double it to 10.5% by 2020.

Additionally, public finances could also improve as a result of hosting World Expo 2020, Barclays wrote in its report, by boosting government revenues by between 0.5% and 0.6% of GDP annually over the next four years.


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