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European Banks May Have $40B Dubai Exposure
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LONDON (Dow Jones) - European banks face potential losses on an estimated $40 billion in exposure to Dubai after the city state's largest corporate entity, Dubai World, asked creditors for a six month standstill on debt repayments, raising fears that recent signs of improvements in banks' bad debt levels could reverse and Dubai's problems could weigh on the global recovery.
Most banks on Thursday said their exposure to Dubai and Dubai World is small or wouldn't comment. Dubai World accounts for about $60 billion of the city state's $80 billion in liabilities, of which half is estimated by Credit Suisse analysts to be held by European banks.

The city state shocked investors Wednesday by saying it would restructure Dubai World and wants creditors to hold off on demanding interest or repayments until at least the end of May. After several years of rapid and debt-fueled growth, the Dubai economy has suffered in the past 18 months as the global recession took hold and foreign investment in its ambitious infrastructure projects dried up.

Bank analysts at NCB Stockbrokers said Standard Chartered PLC (STAN.LN) is the U.K. bank proportionately most exposed to the United Arab Emirates, with 7% of its loan book in the region. HSBC Holdings PLC (HBC) has about 2% of its loan book in the region, while Barclays PLC (BCS), Royal Bank of Scotland Group PLC (RBS) and Lloyds Banking Group PLC (LYG) have less than 1% of their loans in the UAE, according to NCB analysis.

Fears over Dubai's financial health rattled stock markets Thursday. Major stock indexes in London, Paris and Frankfurt were down by 1.5% to 2% at 1400 GMT. The Stoxx Europe 600 banks index dropped 3.7%, and shares in HSBC and RBS fell more than 4%.

Credit Suisse analysts said European banks could face a 5% increase in their bad loan provisions in 2010, or an aggregate hit of about EUR5 billion after tax, if they lost 50% on their roughly $40 billion exposure to Dubai.

A report by the Emirates Banks Association said the top eight foreign banks in the United Arab Emirates by lending volume--HSBC, Standard Chartered, Barclays, Royal Bank of Scotland's ABN Amro, Citigroup Inc. (C), BNP Paribas SA (BNP.FR), Lloyds and Credit Agricole SA's (ACA.FR) Calyon--extended about $36 billion in loans last year throughout the federation, without breaking down the loans by emirate or type of borrower.

Calyon in an email said it has a "small exposure" to Dubai World's debt, and that it doesn't think it has any cause to worry about the announced restructuring.

Standard Chartered said it doesn't comment on specific clients and would make a statement if it had anything material to disclose, while the other banks declined to comment on their Dubai exposure.

Banks that acted as arrangers or bookrunners on Dubai World's most recent $5.5 billion loan facility in June 2008 include HSBC, RBS, Lloyds, ING Groep N.V. (ING) and Calyon, as well as Bank of Tokyo-Mitsubishi UFJ (MTU), Sumitomo Mitsui Banking Corporation (JD-SMU), Emirates Bank and Mashreq Bank (MASQ.DFM).

ING said its exposure is small. The Asian and Middle Eastern banks couldn't immediately be reached. The Eid holiday means that government and private sector offices are closed throughout the Middle East.

Banks helping entities to place loans typically keep at least 10% of the total, while syndicating the rest to other banks and institutional investors. It is possible some of the banks involved in the financing have no remaining exposure to Dubai World. Most of the banks have also worked on financings for other entities controlled by the city state.

According to Dealogic data, other banks who have worked on bond and loan financings for Dubai entities include Barclays, Citigroup, Credit Suisse Group (CS) and Deutsche Bank AG (DB).
Credit Suisse said its exposure to Dubai World is "not material." A person familiar with the matter said Deutsche Bank's exposure to Dubai World isn't noteworthy.

While it is too soon to predict the outcome of the Dubai World restructuring, financial reorganizations usually result in lenders having to make concessions on how quickly they are repaid, accept lower rates of interest, or to swap their debt for equity.

The cost of insuring sovereign Dubai debt against default rose to $570,000 to insure $10 million of bonds, up from $440,000 at Wednesday's New York close, according to data provider CMA.
In the first half, Standard Chartered took $460 million in impairment charges against Middle East loans, 42% of its total group impairment, and up from $80 million in the first half of 2008, highlighting the rapid deterioration in the region's economy. HSBC's impairment charge in the Middle East in the first half was $391 million, up from $41 million in first-half 2008.
By Margot Patrick, Dow Jones Newswires

Source >
  WSJ | nov 26

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