UAE banks are likely to face the brunt of the Dubai World restructuring in the second quarter, after the central bank told lenders they are not required to book provisions until there is more clarity.
The central bank in a circular dated April 22 told local banks they are not required to provision their related exposure to Dubai World.
It said it would provide further guidance to banks concerning the treatment of Dubai World debt in their books.
Banks in the United Arab Emirates have an estimated exposure of $15 billion to Dubai World , the state conglomerate that is holding debt talks with its nearly 100 creditors.
The circular allows local banks to avoid taking a full hit related to Dubai World in the first quarter, analysts said.
Once the banks accept the (Dubai World) proposal they will have to announce the accounting impact, said Deepak Tolani, a banking analyst at Al Mal Capital. It (Q2 headlines) could be negative.
However, some banks indicated they already started booking provisions against Dubai World debt, despite the circular.
Irrespective of what the central bank said in its circular on Thursday, the bank is taking provisions in first quarter, said an official from an Abu Dhabi-based bank with exposure to Dubai World, asking not to be identified.
Under the restructuring, the bank is losing substantially on interest and that is what we are providing for, the official said.
An executive at another UAE bank said: We are booking some provisions generally but nothing specific to Dubai World in line with the central bank order. We will wait for further directions from the central bank.
Emirati banks have already kicked off the first-quarter earnings season but until last week the lenders, their auditors and the central bank have been holding discussions on when to book provisions against their Dubai World exposure, one banker familiar with the situation said.
The question was whether to account immediately for Dubai World, based on assumptions as the final outcome of the negotiations isn't clear yet, or wait until the next quarter when precise figures are available, the banker said.
Emirates NBD and Abu Dhabi Commercial Bank , two of the local banks believe to be most exposed to Dubai World, are expected to post a 51 percent and 23.7 percent fall in first-quarter net profit in the next weeks.
Dubai World recently offered creditors a 1 percent interest rate on two new tranches of debt as part of its restructuring plan, but it was rejected as too low.
The banks are grumbling, they're definitely not happy, said one investment banker. But in the end they will reach a deal.
Another source familiar with the matter said that banks feel that they have been pushed aside in favor of trade creditors of Dubai World and its property developer Nakheel.
Nakheel trade creditors were offered a 10 percent return on an Islamic bond as part of the restructuring in order to make sure that the Dubai economy is not stalled by unfinished projects, a source told Reuters on Thursday. .
The plan is back in Dubai World's court, said the source. It will be resolved eventually but I'm not sure all parties will be happy.
Sheikh Ahmed bin Saeed Al Maktoum, the chairman of the Supreme Fiscal Committee of Dubai, said in a television interview on Sunday that the proposal has largely been well received but still needs time to be finalized.
(Additional reporting Stanley Carvalho, Editing by Dinesh Nair and Louise Heavens)