Moody's UAE ratings disturb local bankers

19 April 1996

Credit ratings agency Moody's has jumped into the crowded pond of UAE banking with a splash, assigning ratings for deposits and financial strength to four local banks. Bankers are grumbling at the results, criticising either Moody's conclusions or its energetic approach to the delicate issue of assessing banks' health.

On 26 March, Moody's Investors Service allocated ratings for long and short-term deposits and for financial strength to four of the UAE's biggest banks: National Bank of Abu Dhabi (NBAD), Emirates Bank International (EBI) Abu Dhabi Commercial Bank (ADCB) and Mashreqbank. It also rated two banks in Bahrain.

Bankers say Moody's approached banks, saying it planned to rate them. 'Moody's decided to give unsolicited ratings then invited banks to co-operate. Some were interested and some not,' said one UAE banker.

NBAD and EBI came top among the UAE banks. Moody's said both have a strong asset base, a good market position and a consistent track record. Both got investment-grade ratings of Baa1/Prime 2 for long and short-term deposits - at the sovereign ceiling set by Moody's for the UAE. They got D-plus for financial strength, indicating a sound position with possible question marks over financial fundamentals or the business environment.

Moody's assigns its financial strength ratings to banks on a stand-alone basis- - that is, without considering external factors that might affect a bank's ability to meet its obligations, such as government support. 'These (ratings) have proved to be particularly helpful in markets where the sovereign ceiling is below the A level,' said Elisabeth Jackson-Moore, Cyprus-based managing director of Moody's Interbank Credit Service. But the financial strength ratings have caused most disquiet.

'We're unsure of the logic of the financial strength rating,' said the UAE banker. 'People understand the headline ratings but they're wondering why such liquid institutions get a D-plus why some institutions in the Philippines get a C-rating. It's hard to understand the comparability.' ADCB also got Baa1/Prime 2 deposit ratings, but only an E-plus for financial strength. 'The bank's ratios are satisfactory, but asset quality problems. remain an area of concern,' Moody's said, adding that ADCB competes with the larger NBAD in the crowded local market.

'They have not given us a fair rating. This is a government institution and good from all angles. The least we deserve is a C-rating,' said ADCB chief executive Khalifa Mohammed Hassan. 'The bank is in a much better position than the agency has given it. Banks in the UAE have overcome their problems, but this seems to have been ignored (by Moody's). The economy is growing and the banking sector is doing exceedingly well.' Mashreqbank is also unhappy with its ratings.

Moody's gave the Dubaibased bank Ba1/Not Prime ratings for deposits because, in contrast to the other three banks, it is 'entirely privately owned and has no direct access to government business or support.' It got a D for financial strength. Moody's noted the bank's 'exposure to the competitive and highly problematic' retail banking market which it said could pose problems if the UAE economy falters. The agency also said it was concerned by lack of detail in the bank's published accounts about provisions or exposure to the controlling family shareholder.

'We don't agree with the rating,' said a Mashreqbank source. 'They've missed the point. Being private is not a weakness.' 'The UAE retail market is not problematic.

All the banks, local and foreign, are trying to penetrate this market,' the source said, arguing that exposures to institutional clients could be potentially more problematic. 'The only question is of disclosure, and ours is no better and no worse than other banks. All banks follow central bank requirements and so do we.' Moody's says it allocates ratings either on a request from an institution or in response to 'investor demand.' It accepts that its conclusions may be criticised. 'Analysts who are familiar with many different markets sit in on each rating committee and our whole process is rigorous,' says Jackson-Moore. 'That said, ratings are a reflection of our opinion. It is almost inevitable that there will be other opinions in the market that may have been arrived at as the result of valid argument, yet differ from the Moody's opinion of the same credit.' Moody's set up an office in Cyprus last year to spearhead its drive into the Middle East, where it has already given sovereign ratings to Tunisia, Turkey, Jordan and Israel. Before assessing the UAE banks, Moody's had already given sovereign ratings to the six Gulf Arab states which drew comment from regional analysts because they were apparently done without the co-operation of the governments concerned (MEED 8:3:96).

Moody's move into the Gulf reflects growing interest in the region among ratings agencies. IBCA. and Cyprusbased Capital Intelligence already have a presence.

Thomson Bankwatch will issue ratings for leading Gulf banks starting from next month, while Standard & Poor's (S&P) plans analyses of banks which will fall short of an actual rating.

Both Thomson and S&P stress that their approach to ratings involves building up relationships with banks, making an implicit contrast to Moody's more forthright approach.

'One wants to establish relationships. (Rating) can be controversial in a part of the world where ratings in the past have not always been well-applied,' said George Dallas, managing director of S&P's European region, which currently includes the Middle East.

Ratings agencies say regional interest in ratings is growing from a small base. Gulf financial institutions rarely issue corporate bonds or commercial paper - the usual reason for seeking ratings - and prefer to raise funds by other means.

'The main interest is in a more generic counterparty context, looking at short-term credit, certificates of deposit issues and arranging money market lines. Slowly and surely, there will be more bond issuance,' Dallas said.

Moody's foray into the UAE may have been poorly received, but the agencies think the idea of ratings will slowly gain acceptance in the Gulf. 'The trend is in a positive direction. But it's going to take a while' said Dallas.

'Gulf banks have a significant reliance on the interbank market,' said Fred Puorro, senior executive vice-president of Thomson Bankwatch. 'To expand or in some cases even to maintain credit lines, a rating is becoming more important. Many Gulf banks have a good story to tell and in many cases they want to tell it.'

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