Fitch Warns on $23 Billion of Dubai Inc. Debt Held by Banks

(Bloomberg) -- A “significant portion” of $23 billion in loans made to Dubai government-related companies maturing at the end of 2021 may need to be restructured -- again, according to Fitch Ratings Ltd.

Banks in the United Arab Emirates -- still suffering the fallout of Dubai’s 2010 property crisis -- are at risk once again due to falling home prices and non-performing loans, the ratings agency said in a report on Tuesday.

Oversupply, weaker consumer sentiment due to lower oil prices and a less supportive economic environment are all impacting prices, according to Fitch. Foreign buyers have also been deterred by the U.A.E. dirham appreciation and geopolitical tensions.

Property prices in Dubai, the country’s tourist and financial services hub, have fallen 27% since a five-year peak in October 2014. Banks are said to be renegotiating more than $3 billion of bad loans with the Al Jaber Group, Amlak Finance PJSC and Limitless LLC. The ongoing slump is a stark reminder of the 2009 global financial crisis when state-owned Dubai World restructured $23.5 billion of debt and property developer Nakheel PJSC had $10.5 billion of unpaid bills.

2010 Flashback

“Loan restructuring in the real estate, contracting and other related sectors has increased -- a sign of weakening asset quality,” Fitch said. The company expects more restructuring and a rise in so-called Stage 3 loan ratios in the next 12-18 months.

Banks “have not fully recovered” from the 2010 crash and “smaller banks are more vulnerable to deterioration in credit conditions due to thinner capital buffers and lower revenue generation,” according to Fitch.

Still, not everyone shares Fitch’s concerns. A day before the company’s report, the U.A.E. central bank Governor Mubarak Al Mansoori said lenders in the country still have room for more real estate lending.

“Real estate -- in terms of exposure -- is not excessive and it’s not alarming in terms of the overall picture. Banks have been cautious and have taken the appropriate provisions,” he said in interview in Kuwait City on Monday.

Non-performing loans at U.A.E. banks climbed to 4.99% of gross loans at the end of 2018 compared to 4.01% in the preceding year, according to data compiled by Bloomberg Intelligence. That compares with 1.5% in Saudi Arabia and 1.9% in Qatar at the end of 2018, the data show.

Abdul Aziz Al Ghurair, the chairman of the U.A.E. Banks Federation and chief executive officer of Mashreqbank PSC, said in March that banks need to give customers more time to repay loans to protect the economy and the banking system because of the ongoing property downturn.

Real estate and construction accounted for about 20% of banks’ gross loans at the end of the first quarter, Fitch said. The true exposure may, however, be higher as central bank data excludes retail mortgage lending and some lending to investment companies that finance development, it said.

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Vernon Wessels

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