Fears over banks' Dubai exposure 'over-discounted'

Fears over banks' Dubai exposure 'over-discounted'

Worries over global banks' exposure to Dubai's government backed investment group, Dubai World, and its debt problems had been overdone, after shares dropped sharply yesterday, according to JPMorgan.

While the news continued to weigh on the UK banking sector Friday, with banking shares continuing to pull back, UK banks themselves have moved too downplay the impact from Dubai.

Yesterday during its AGM, Lloyds Banking Group reportedly said its exposure to Dubai was 'modest', with the bank's head of wholesale banking, Truett Tate, adding it did not represent a material threat to the bank.

Analysing the situation this morning, JPMorgan said: 'We are less concerned for global banks about Dubai World's direct $59 billion outstanding debt exposure.'

RBS and Barclays, which were also hammered yesterday, have less exposure than their Asian-focussed peers HSBC and Standard Chartered to direct lending risk in the region, although according to JPMorgan RBS is the most exposed to Dubai World’s debt.

Again though, JPMorgan said it was ‘less concerned’ about this exposure.

It said only a small amount of the total loans were set to mature in the near term anyway, and it added that it had no worries regarding sovereign debt.

'We are also not concerned about Abu Dhabi, considering the $150 billion of currency reserves and $300 billion sovereign wealth fund,' JPMorgan said.

Much of the focus now is on banks with large exposure to Asia and the United Arab Emirates (UAE). Analysts at Nomura said in terms of the recent events in Dubai, after meeting Standard Chartered's management it believed any loss for the group would not be material to profitability.

JPMorgan said that the real concern now was whether there would be any spillover into other countries in the region.

It said banks which lend directly into the region faced the most risk now from their loan exposure, with Standard Chartered and HSBC the most exposed. But it added: 'Potential markdowns will be a fraction of the exposures.

It concluded: 'Overall we would argue the UAE direct loan exposure risk is to some extent over-discounted within global banks, except for some selective banks.'

JPMorgan also reiterated HSBC as one of its top picks, even taking into account its Dubai exposure.

Some of the banking shares were more resilient today after the wave of upbeat statements were released. RBS was up more than 4% at 34.45p, while Lloyds was ahead 1.8% at 60.13p.

However, HSBC was down 1.3% at 696.5p, while Barclays was down 0.7% at 289p, and Standard Chartered was off 0.4% at £15.06.

citywire.co.uk