• Al Jaber seeks to delay interest payments Al Jaber Group - an Abu Dhabi–based company with interests in shipping, construction, and engineering - is reportedly seeking to suspend interest payments for a year to help meet working capital requirements (source: Bloomberg). The existing loan terms require USD27 million per quarter of interest on its USD1.6 billion of debt. Al Jaber is the first major corporate restructuring case to be reported publicly in the UAE since the cycle began to contract and is symptomatic of growing credit risks in the UAE, in our view. The makeup of the credit committee dealing with Al Jaber suggests that Abu Dhabi’s banks are more exposed than Dubai’s. We remain cautious and prefer banks with corporate-focused quality franchises, well capitalised balance sheets, and adequate provision buffers. Our top picks are ADCB and ENBD.
• Impact on banks’ profitability likely to be contained We envisage two scenarios for this restructuring: i) a haircut of up to cUSD100 million (change in NPV of the loan assuming this year’s interest is not repaid); and ii) no haircut with the terms revised so that the NPV of the loan remains unchanged. The timing of the provision charge would depend on when the restructuring talks are completed. If scenario one plays out we expect the amount of provisioning per bank to be small as there are reportedly 30 banks that have exposure to the group. Moreover, UAE banks have adequate loan loss reserves (see figure 3) some of which could be released, which would further mitigate the impact on earnings.
• Al Jaber: a legacy from the financial crisis Al Jaber was one of several UAE companies that restructured its loans after the global financial crisis. The group announced in October 2014 that it had successfully restructured USD4 billion in debt after four years of negotiations with the banks. Since the restructuring agreement, the group has reportedly sold assets and cut its debt to USD1.6 billion. Banks are likely to have upgraded their Al Jaber exposure to performing status in view of the large repayment made by the company. Al Jaber has also had some management changes - a year ago the CFO was suspended after a year in the role, while a new CEO was appointed in December – suggesting that group continues to grapple with operational challenges.
• SME and retail segments continue to be the key near-term challenge With the slowdown in economic growth and weak commodity prices, provisioning for the SME sector has already risen and we expect it to stay high until mid-2016. We believe there is likely to be a second wave of provisioning originating from the retail segment. Layoffs in the financial and oil and gas sectors increase credit quality risks for retail segment, in our view. We expect UAE’s aggregate NPLs to grow 21% in 2016 (-7% in 2015) and expect cost of risk to rise to 106bps from 90bps in 2015.

Shabbir Malik
Murad Ansari