Abu Dhabi banks: Abu Dhabi’s banks are in an odd position. They look more exposed to the real problem areas in neighbouring Dubai than most western banks. But they have a better trump card.
The National Bank of Abu Dhabi, the emirate’s largest lender by assets, has a $345 million exposure to Dubai World, the property-dominated conglomerate which is suspending payments on its $59 billion of debts for six months. But Abu Dhabi Commercial Bank, the second largest, could have $1.9 billion of exposure. Unlike commitments by western banks, this has probably not been syndicated.
If ADCB wrote off its entire lending to Dubai World, almost 40 percent of its core equity would be wiped out. This concentrated exposure has prompted rating agency Standard & Poor’s to flag a likely future ratings downgrade.
But this may not be a disaster for Abu Dhabi, which already has a 65 percent stake in ADCB and a 70 percent holding in NBAD. The restructuring of Dubai World should salvage something for creditors, and Abu Dhabi can comfortably afford to recapitalise its banking sector to plug any hole. It has 8 percent of global oil reserves and a $700 billion sovereign wealth fund.
While Abu Dhabi may be able to prevent a domestic banking crisis, its lenders will not escape the fallout from Dubai completely, though. The potentially sizeable losses will leave clients asking questions. And while ADCB may have been no more gung-ho than western banks in extending credit to Dubai, global investors will treat it with more caution.
The cost of insuring Abu Dhabi’s sovereign debt has now fallen back to 135 basis points, after spiking up to 195bps late last week in the immediate aftermath of the Dubai shock. Such uncertainty will translate into higher wholesale funding costs – an important consideration given that deposits fund only 77 percent of ADCB’s loans.
Longer term, Abu Dhabi’s banks will have to reassess their regional revenue prospects. Its wealth means it can survive Dubai’s nasty slap, but the memory of its bloody nose could undermine the region's economy for some time to come.
