S&P Asgns 'Pi' Rtgs to 5 UAE Banks.

LONDON--(BUSINESS WIRE)--Standard & Poor's CreditWire 10/1/97-- The strength of the United Arab Emirates (UAE) banking system rests on public-sector involvement, improved regulation by the central bank, and the healthy financial profile of individual banks, offset by a lack of financial information disclosure and an economy sensitive to the price of oil, Standard & Poor's said today in assigning ratings based on public information, or 'pi' ratings, to five UAE Banks. Four banks were rated triple-'Bpi': National Bank of Abu Dhabi, Emirates Bank International Ltd., Abu Dhabi Commercial Bank, and MashreqBank. One bank, National Bank of Dubai, was rated single-'Api'.

As announced in November 1996, the 'pi' subscript following the rating indicates that Standard & Poor's employed analytical procedures that parallel its traditional credit ratings but differ in that they are primarily based on public disclosure of bank information and other sources. The new 'pi' ratings continue Standard & Poor's initiative to provide expanded banking coverage of global financial institutions, particularly outside mature markets.

The two 'national' banks that have been assigned 'pi' ratings (National Bank of Dubai and National Bank of Abu Dhabi) have strong positions in emirate-related business. The National Bank of Dubai exhibits the strongest financial profile of the five banks assigned 'pi' ratings because of its superior asset quality and exceptionally high capitalization. It had an equity-to-risk weighted assets ratio of 61% at year-end 1996. The National Bank of Abu Dhabi has a privileged relationship with the authorities in Abu Dhabi, which is the UAE's economic powerhouse and accounts for 94% of the country's total oil reserves.

Emirates Bank International and Abu Dhabi Commercial Bank were both created by the merger of ailing banks, rescued by the Dubai and Abu Dhabi governments, respectively, in the mid-1980s. Both banks now have good earnings, healthy capitalization, and enjoy close relations with their respective governments.

Of the five banks assigned a 'pi' rating, only MashreqBank has no government or ruling family ownership. Accordingly, it mainly targets private-sector business, with a specialization in retail banking. This retail focus has helped it achieve strong profits but is also responsible for a high-risk lending profile, reflected in asset-quality indicators.

According to Standard & Poor's analysts, public-sector ownership and close ties with the emirates is a strength of the UAE banking system for two reasons. Firstly, each of the seven emirates that make up the UAE has a 'national' bank, which is de facto its banker of choice. Secondly, there have been a number of state bail-outs, notably during the banking crisis of the mid-1980s, when the economy went into recession because of a slump in oil prices. Moreover, privatization does not seem to be on the agenda in the near term.

"The Central Bank of the UAE has made important strides to strengthen the regulatory regime since 1991 when the Bank of Credit and Commerce International (BCCI) was closed," said analyst Alain Branchey. Governor Al Suwaidi, a catalyst for change, has reinforced the authority of the central bank and overseen the introduction of tighter prudential standards. "There is no doubt, however, that prior to the initiatives of recent years, UAE banking supervision had lagged that of other countries in the region," added Mr. Branchey. Thanks to their healthy profits -- partially a result of the low-cost structures facilitated by the high percentage of foreign workers on their staff -- the stand-alone financial position of the largest five banks has continued broadly to improve this decade. The common equity-to-assets ratio of the major banks came to an average 12% at year-end 1996, compared with 10% for those in neighboring Saudi Arabia.

A drawback of the UAE banking system for the external analyst is the low level of disclosure, particularly regarding asset quality. Disclosure falls short of international best practice and even compares unfavorably with that of some regional peers. Any analysis of the banks needs to take into account rather high information risk. "It goes without saying that the UAE economy is based on oil-financed government spending," said analyst Richard Thomas. A decline in the oil price would have negative implications for the economy that would ultimately cause strains in banks' loan books. Nonetheless, Dubai in particular has diversified its economy substantially in recent times as its oil revenues have declined. In addition, much tighter large exposure regulations, combined with robust capital bases, mean that the banks would go into any downturn in much better shape than was the case in the mid-1980s.

Launched in 1996, the BankRatings Service is being expanded to accommodate the addition of approximately 250 new public ratings. Full analyses of the UAE banking system and its leading banks are available in the September edition of the BankRatings Service, Standard & Poor's said. -- CreditWire

CONTACT: Alain Branchey, Paris (33) 1-4420-6690

Richard Thomas, London (44) 171-826-3627