Years of chasing business in Dubai's property boom means Abu Dhabi banks have built up an exposure to Dubai-based companies worth at least 30 percent of their loan books, senior bankers in Abu Dhabi said on Friday.
As a result, banks face heavy provisioning and the risk that interbank lending costs would leap or that some banks would stop lending to others they see at risk.
Dubai grew very fast. There were no controls and now banks that cashed in on the boom have to pay a heavy price, said an executive at a major Abu Dhabi-based bank, who spoke on condition of anonymity.
Most of the credit flow was inevitably to the big, government-backed entities in Dubai in recent years because Abu Dhabi's growth story is relatively very recent, the executive said.
In particular, Abu Dhabi Commercial Bank has at least 8 billion-9 billion dirhams ($2.18 billion-$2.45 billion) exposure to Dubai World and related entities, which will require the bank to book more provisions, a senior executive of the bank said.
During those years, the property market was still in its infancy in Abu Dhabi, so like other banks here, we, too, diverted our credit to Dubai, the ADCB executive said.
We have to face the stress that will be caused to our balance sheet and profit and loss account due to this exposure to Dubai World and associated companies because it is a default, the executive, who declined to be named, told Reuters by telephone. Yes, we will have to take more provisions.
Sheikh Ahmed bin Saeed al-Maktoum, head of a top Dubai financial body, said in a statement late on Thursday that more information about the Dubai World restructuring would be issued early next week. He said he understood concerns in markets and among creditors, but added that decisive action was needed.
Separately, First Gulf Bank has at least 5 billion dirhams ($1.36 billion) exposure to Dubai and its associated companies including Nakheel, an executive at the bank said.
At this stage, all we can say is, yes our credit is about 5 billion dirhams to the Dubai government-owned companies. We have an exposure to Nakheel's bonds, the FGB executive, who also declined to be named, told Reuters.
Neither executive could be named as they were not authorized to speak to the media.
FGB later issued a statement, saying amounts reported by newswires on its exposure to Dubai World and its subsidiaries were incorrect and absolutely overstated. It gave no details.
In reaction to Dubai's debt problems, Fitch Ratings said it downgraded Dubai Bank, Tamweel and Bahrain's TAIB Bank .
Moody's Investors Service said it would make no changes for now, adding that most banks with sizeable exposure were already on review for possible downgrade or have a negative outlook.
Both said the overall exposure of leading banks in Abu Dhabi, the nation's capital, not to mention banks in Dubai, a regional trading and tourism hub, was huge -- at least 30 percent according to one, likely over 40 percent from the other.
The resulting risks and stresses are likely to drive up interbank lending costs, even provoke a stop on lending to some banks seen by others to be at risk.
There will certainly be greater pressure on banks and an expected run on deposits and reduced lending, said Ghanem Nuseibah, senior analyst at consultancy Political Capital.
Although unwarranted, some customers may pull their money out of banks to avoid any risk, said Dmitry Levshenkov, treasurer at Citibank in Bahrain.
We may experience within the next few days or weeks possibly banks unwilling to lend to each other, and hopefully we will avoid a customer lack of confidence or crisis where customers are taking deposits out, he said.
(Additional reporting by Rania Oteify in Dubai; editing by Thomas Atkins, Toby Chopra, Toni Reinhold)