Banking Sector：Potential impact from Dubai World debt restructuring

austin

DBS Group Research . Equity 27 November 2009                    Analyst: Jasmine Lai

 

The share prices of global banking stocks tumbled yesterday
amid concerns over the proposal by Dubai's Department of
Finance to delay debt payment by Dubai World for six
months until May-10. The state-controlled Dubai World is
Dubai's government flagship holding company that
developed the most spectacular real estate projects in Dubai.
Deloitte is assigned to lead the debt restructuring plan.
Moody's and Standard & Poor's cut the ratings on statecontrolled
companies of Dubai and said that "they may
consider Dubai World's plan to delay debt payments a
default". Dubai World has a gross debt of c. US$60bn,
accounting for 75% of Dubai's total debt. Dubai has
US$80bn total debt that finances its transformation into
financial and tourism hubs.

This news has triggered investors' worries over default risks
in other state-owned companies or private enterprises in the
United Arab Emirates, and create uncertainties in the global
financial markets. Any negative impact on the global
banking sector cannot be not easily quantified in the shortterm
and should have three-fold implications:

1) Direct impact due to any potential securities write-down
or loan provision from Dubai World and other state-owned
enterprises in Dubai
2) Spillover effect to the credit market in the Middle East,
other emerging markets and even the developed countries
which may result in higher credit spreads and hence MTM
losses in corporate bonds
3) Spillover effect to other industries in the Middle East or
countries conducting businesses with the state-owned
enterprises of Dubai (e.g. construction companies,
infrastructure companies and raw material suppliers etc.)
Nonetheless, we believe any contagion effect should be
much more confined than the worst time of the global
financial tsunami in 3Q08 and 4Q08 right after the collapse
of Bears Stearns and Lehman Brothers, and then followed

by the bankruptcy of Iceland. The Central banks and
governments globally are now more ready to intervene
proactively via liquidity injections, quantitative easing and
fiscal stimulus measures etc.

According to market sources, the biggest creditors of Dubai
World are Abu Dhabi Commercial Bank and Emirate NBD
PJSC while the European banks have an aggregate exposure
of US$40bn to Dubai World. It is said that these European
banks include HSBC, Credit Suisse, Barclays, Lloyds and
Royal Bank of Scotland.

With regard to HSBC, the Group declined to comment on
the situation. HSBC also has no separate disclosures in its
financial reports with regard to its Dubai exposure.
Nonetheless, based on its 1H09 financial reports, HSBC's
Middle East operation had US$48.6bn worth of asset,
representing 2% of the Group's total asset. The US$48.6bn
worth of total asset in the Middle East consists of
US$25.1bn of net loan, US$10.1bn of investment securities
and US$6.6bn of interbank lending. HSBC's loan
outstanding in the Middle East represented 2.7% of the
Group's total loan. Its Middle East business also contributed
13% and 10% of the Group's pre-tax profit in 1H09 and
1H08 respectively. Assuming Dubai contributed one-fifth of
the Middle East exposures, we estimate HSBC's asset in
Dubai would be c. US$9.7bn, which is equivalent to 7% of
HSBC's book value and 67% of pre-tax profit. Further
assuming 40% haircut on loan and 40% mark-down on
investment securities, impairment charge of US$3.88bn
would be required, translating into 3% of book value and
27% of pre-tax profit.

Regarding the impact on Hong Kong banks, we shall clarify
with the banks' management later today. But we believe
Hong Kong banks should have immaterial exposures if they
have any. Based on our previous discussion with the
managements, most of them significantly de-risked their
investment portfolio by shortening their securities maturities
(less than 2 years) and not taking much credit risks amid the

bankruptcy of Iceland! in 4Q08 . In fact, the debt problem
of Dubai has been well-aware by the market and most Hong
Kong banks should be prudent enough to offload such
exposures by now.

As for Chinese banks, we also need to find out from the
banks' management whether they have any Dubai or
related exposures. However, given most Chinese banks
generally have low foreign currency deposits (except Bank of
China), we believe they should only have mediocre
exposures to Dubai if there are any.