FINANCIAL SERVICES IN 2010

A hangover of debt from the global recession posed fresh challenges for the financial services industry in 2010. Nonetheless, clear signs of recovery buoyed the country's banks and financial markets. The resolution of Dubai World's Dh91.4 billion debt restructuring deal in September provided a much-needed tonic to volatile local markets. In addition, successful bond sales by sovereigns and companies helped refinance borrowings and lift investor confidence.

Banking Sector
Many banks' balance sheets were dented by debt restructuring at Dubai World, Dubai Holding and other defaults. Lenders had set aside Dh41.2 billion by the end of November to cover non-performing loans, according to Central Bank data. That figure rose 28.8 per cent from the same month last year.

Catalysts for strong performance in the pre-crisis era remained absent in 2010. Few indications of recovery emerged from the property market, which lenders had previously used to boost their growth. Credit expansion also remained nascent. Private sector lending declined for the first 11 months until October, although appetite for borrowing had risen. As lending started to resume, however, many risk-averse banks only provided credit with stricter conditions attached.

The financial crisis led to a rise in the number of non-performing loans on banks' balance sheets. As a result, banks spent much of the year setting aside provisions to guard against the losses. Lenders were also under pressure from the Central Bank to clean up their portfolios. For example, the regulator in December told banks to raise to 80 per cent their provisions against exposure to the Saad and Al Gosaibi groups of Saudi Arabia. Many UAE banks were impacted when the pair defaulted on their debt obligations in the summer of 2009. Lenders were also hit by their exposure to Dubai World and Dubai Holding.

Nevertheless, bank liquidity steadily improved during the year and Central Bank data showed that the volume of bank deposits outstripped loans in October 2010 for the first time since September 2009. The development signalled an element of success in lenders' attempts to rearrange their balance sheets. Higher deposits also helped bring down the Emirates interbank offered rate (EIBOR), used to help determine the amount of interest charged for lending.

The year also saw the onset of new banking rules designed to bring the country into line with international standards on bad debts. The Central Bank informed lenders that they needed to classify loans as being in default after 90 days of delinquency, instead of the current six months. The legislation requires banks to bring forward provisioning for those bad loans.

Stock Markets
A shortage of liquidity and weak investor sentiment linked to corporate debt problems hampered the country's stock markets in 2010. Bourses in the UAE ended the year in need of new money. Over the course of the year, the Abu Dhabi Securities Exchange (ADX) General Index dropped 0.8 per cent to 2,719.87, while the Dubai Financial Market (DFM) General Index fell 12.6 per cent to 1,630.52.

In a move aimed at stimulating trading activity and creating a more unified regulatory environment, DFM merged with NASDAQ Dubai, the emirate's other exchange. In May, DFM, the Arab world's only publicly listed stock exchange, acquired 67 per cent of NASDAQ Dubai, through a cash and share payment. The following month the two bourses consolidated after NASDAQ Dubai outsourced its trading, clearing and settling activities to DFM. This means that NASDAQ Dubai stocks also now trade on the DFM platform.

The possibility of a further consolidation of exchanges has been considered. A potential merger between DFM and ADX has been under discussion by officials and would create the second-largest exchange in the region after Saudi Arabia's Tadawul All-Share Index.

Hopes of a much-needed lift for the financial market were dashed after Axiom Telecom cancelled the launch of an initial public offering. In November, Axiom had said it expected to launch on NASDAQ Dubai in early December with a market value of up to US$1 billion, claiming that it had sold up to one third of its shares to institutional investors. However, the following month the company changed its mind. Widespread concerns about market conditions and liquidity prompted the decision, the company said. In what would have been the first IPO in the UAE in nearly two years, Axiom had set a share price range between US$0.80 and US$1.15. It had indicated that it would use US$100 million of proceeds from the share sale and a US$55 million property sale to pay back part of US$354 million in existing credit lines.

Dubai World and Dubai Holding
Dubai World's Dh91.4 billion debt restructuring was one of the biggest economic and financial issues the UAE faced during 2010. For many years been, the company was at the forefront of Dubai's rapid growth. From transport and logistics to investment and financial services and property, Dubai World's interests extended into a variety of sectors through its units.

At the start of the year, the Dubai government-controlled conglomerate was still locked in discussions with creditors about extending debt maturities. This followed an announcement the previous November that it would ask for a delay on repayments while negotiations continued. Months of talks followed between Dubai World and banks that lent it money during the pre-financial crisis era until a final agreement was reached in October. Under the deal, existing debt will be rolled into new five and eight-year loans. Nakheel, the property developer behind The Palm Islands and The World, was also included in the restructuring. Dubai Government had pledged Dh29.4 billion in financial support to Nakheel in March 2010. Limitless, another development unit of Dubai World, is also engaged in a plan to reschedule debt repayments.

However, Dubai World's restructuring did not include other parts of the company's portfolio, such as Infinity World, Istithmar World, and Dubai Ports World and Free Zones World.

In addition to Dubai World, some units of Dubai Holding sought to extend debt repayments in 2010. Dubai Holding Commercial Operations Group, an arm owning hotel operator Jumeirah Group and free-zone operator TECOM, received a two-month extension on Dh2.03 billion of debt in July. Two further extensions were reached, the latest in December involved converting debt into a new five-year loan.

Dubai International Capital, the private equity unit of Dubai Holding, signed an agreement in December 2010 with its creditors to move ahead with a Dh9.5 billion debt restructuring. In addition, Dubai Group, the financial division of Dubai Holding, began talks with lenders in November. As 2011 begins, there are expectations that both Dubai World and Dubai Holding may consider embarking on a round of asset sales to enable both conglomerates to trim their debts.

Bond Sales
A significant positive spin-off from Dubai World's debt deal was the stimulant given to bond markets in the country. Progress on the conglomerate's debt situation opened the way for a spate of issues towards the end of 2010.

First off, in late September Dubai issued Dh4.6 billion of bonds in what was its first round of fund raising since the financial crisis worsened the previous year. The sale was more than four times oversubscribed, signalling a vote of confidence in the prospects for the economy by international investors.

Other companies, including Emaar Properties and Dubai Electricity and Water Authority (DEWA), soon followed with their own bond issuances. Emaar raised Dh1.8 billion from issuing five-year bonds. Some of the money was used to pay contractors, with the remainder going towards converting part of its short-term debt into long-term debt. DEWA successfully issued Dh7.3 billion in new bonds in October through Thor Asset Purchase, a Cayman Islands vehicle.

In a step expected to open the way for the country's first Federal Government bonds, the Federal National Council in December passed a public debt law. Until now, debt has only been sold at emirate level by Abu Dhabi, Dubai, Ra’s al-Khaimah and other emirates. A federal issue is viewed as important by analysts to help provide a consolidation of the country's debts. It would also create a benchmark for companies to use to price their own sales.

UAE banking indicators

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