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Moody's assesses UAE banks' 'divergent reporting' of problem loans.

Since the $25 billion distressed debt restructuring by Dubai World Group (DWG) concluded in June 2011, Moody's Investors Service has observed a divergence in the accounting treatment of the sizable DWG exposures among banks in the United Arab Emirates (UAE).

A new report published by the rating agency focuses on how the credit risk of restructured exposures is captured in Moody's ratings, irrespective of these risks' accounting treatment by UAE banks. The report outlines how the three different approaches taken by UAE banks can affect the reported non-performing loans (NPLs) and profitability metrics. The report also explains the adjustments that Moody's makes to these reported figures to reflect the rating agency's credit views and to ensure consistency in its assessment of banks' problem loans and profitability.

The report, entitled UAE Banks: Problem-Loan Reporting in the Context of Local Restructurings, is available on Moody's report identifies three differing approaches among UAE banks to classifying DWG's restructured loans. Simplistically, these approaches involve reporting the restructured loan as:

impaired at the original balance;

'performing' at a reduced balance; or

'performing' at the original balance.

"While our findings show that the first approach does not impact reported NPLs figures, the second and third approaches resulted in declines in reported NPL levels in 2011," said Nitish Bhojnagarwala, an analyst based at Moody's Dubai office.

Regardless of reporting variations, Moody's incorporates significant restructured exposures into its analysis of asset quality until there is substantive evidence of improvements in borrowers' ability to repay at maturity, "Our approach aims to uphold consistency and maintain comparability across our rated banks," said Khalid F Howladar, Dubai-based VP - Senior Credit Officer at Moody's. "It also recognises the uncertainties related to large restructurings, particularly in the context of non-commercial interest rates, bullet repayments or as-yet-untested corporate cash flows."

Based on Moody's assessment, corporate restructurings continue to be a credit-negative for the UAE banking system. Understanding the reporting precedent set by the restructuring of Dubai World Group and its effect on key ratios will enable stakeholders to better assess the upcoming $16.6 billion (approximately 34 per cent of system Tier 1 capital as of year-end 2011) of publicly disclosed corporate debt restructurings.

2012 CPI Financial. All rights reserved.

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Publication:CPI Financial
Date:Jul 16, 2012
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