Rating agencies believe UAE institutions will be negatively impacted by recent declines

By Gaurav Ghose, Financial Features Editor

October 10, 2008

Dubai: Amidst the worsening credit crisis, increasingly being viewed to severely impact global economic growth, the banking sector has been among the worst sufferers.

A majority of banks carry investments and securities on their market portfolios and also have their own mutual funds, which are invested in stocks. In these torrid times, with the markets bleeding profusely, banks, including those in the UAE, are expected to be hit in varying degrees.

Local bankers acknowledge the difficult times they are going through. Uncertainty in the markets makes it even harder to pass a judgement on the outlook.

Coming to the UAE banks, I would say, what’s happening in the world, they would have some elements of investments that would see some impairment, said Sanjay Uppal, chief financial officer of Emirates NBD.

I think, one, they are not material to the overall balance sheet of the country or the individual institution. And two, they are one-time events — not as a sustainable event. But the other thing is, nobody knows when sensibility is going to return to the market.

Rating agencies such as Fitch believe the UAE banks are negatively impacted by recent declines in GCC stock markets, although sector profitability and capitalisation are unlikely to be materially affected.

Most banks have exposures to domestic and regional equities, largely held available for sale, with negative mark-to-market valuations taken to equity reserves, said Robert Thursfield, director, financial institutions, Fitch Ratings.

Some banks with trading portfolios will take negative hits directly to their income statements. The impact will partly be seen in third quarter results, due out soon, although the worst of the market crash occurred in October.

Three worst performers

Coming to funds, according to Zawya Mutual Fund Monitor, the three worst performers in the entire Gulf region, year to October 8, are Abu Dhabi Commercial Bank MSCI UAE Index Fund, down 54 per cent year to date, Al Nokhitha Fund, an ADCB fund, sliding 52 per cent, and Makaseb Emirates equity Fund (part of Mashreqbank) shedding 51 per cent.

The ones that have been really hit badly are the direct equity funds, said Deon Vernoy, senior executive officer, Emirates Investment Services, a division of Emirates NBD.

The MSCI Arabian Market Index last month lost around 15 per cent and our funds have done better than that, but it will still be down quite sharply. The global funds, it depends on the asset class and the geographical exposure, but all would have been down a bit.

If September was tough, October looks tougher for many fund mangers and their funds and they feel that it can only get better from the lows it has reached.