ABU DHABI COMMERCIAL BANK REDUCING IRAN EXPOSURE;

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 001881 SIPDIS SIPDIS TREASURY FOR U/S LEVEY. A/S GARDNER, A/S OBRIEN, A/S LOWERY, DAS GLASER, DAS MENDELSOHN, DAS SAEED, DAS BARTH, OFAC DIR SZUBIN, JJERMANO, PCONLON, BGRANT, KHECHT, MMILLERWISE, KBAUER NSC FOR ZARATE, NRAMCHAND STATE FOR NEA/IR, NEA/ARP STATE FOR S/CT, EB/ESC/TFS, INL/C/CP CIA FOR OTI NSA FOR FTM E.O. 12958: DECL: 11/14/2017 TAGS: AE ECON IR KTFN PREL PTER SUBJECT: ABU DHABI COMMERCIAL BANK REDUCING IRAN EXPOSURE; FEELS SUBPRIME FALLOUT ABU DHABI 00001881 001.2 OF 002 Classified By: Ambassador Michele J. Sison, for reasons 1.4 b and d. ¶1. (C) Summary. Abu Dhabi Commercial Bank sees dirham revaluation as inevitable. Subprime fallout starting to affect regional banks. CEO announces "no new Iran activity -- zero." End Summary. ¶2. (C) On 13 November 2007, Treasury Attach Matthew Epstein met with Abu Dhabi Commercial Bank (ADCB) CEO Eirvin Knox. ADCB is the third largest bank in the UAE with almost USD $30 billion in total assets. ADCB is approximately 65% owned by the Emirate of Abu Dhabi, through the Abu Dhabi Investment Authority (ADIA). Senior ADIA official Saeed al Hajeri is Chairman of ADCB's Board. Dollar Peg -------------- ¶3. (C) Knox stated that inflation in the UAE is much higher than reported figures. As an example, he cited housing costs in Abu Dhabi, which now constitute 55% of total employee-related expenses for the bank; annual housing for ADCB senior executives nears USD $100,000. Knox believes that the UAE Central Bank will have no choice but to revalue the dirham against the dollar as a means to partially address this inflation, as well as pressures mounting from expatriate workers' falling remittances. Subprime -------------- ¶4. (C) Knox believes that regional exposure to U.S. subprime mortgage-backed securities is significant. Knox stated that ADCB, along with most other regional banks, holds notes from structured investment vehicles (SIV) that are now impossible to value. While accepting responsibility for some bad investments, Knox complained that in mid-2007 before the crisis became public, ADCB purchased subprime backed securities from a western investment bank that was aware of the imperiled status of the assets, but did not disclose this information to the bank. Knox advised that ADCB was handling this matter directly with the issuer. In the 3rd quarter 2007, ADCB marked down its CDO and SIV portfolio by USD $100 million, and Knox believes that further markdowns could occur depending on credit market conditions. Knox expects similar losses to be incurred by other regional banks. ¶5. (C) Knox stated that the current credit environment did not pose a threat to ADCB's liquidity. ADCB does not have plans to tap debt markets in the short term. If it did, he believes ADCB would now have to pay 75 or 100 basis points over LIBOR, rather than the 25 basis points they borrowed at in April 2007. Iran Exposure -------------- ¶6. (C) Treasury Attach briefed Knox on the increased risks in doing business with Iran, including the most recent U.S. financial measures and FATF advisories. Knox advised that ADCB follows all U.S. lists, as well as advisories issued by the UAE Central Bank on Iran (NFI). Knox stated that ADCB was taking on no new exposure to Iran and that all current limits were frozen. Knox stated that while ADCB held existing letters of credit involving Iranian banks, no new l/c exposure would be incurred. Knox also explained that ADCB was no longer accepting labor guarantees from Iranian banks, a pledge often required for non-resident workers. He stated that as a result of U.S. measures, he has seen the blocking of dollar-denominated payments originating in Europe to listed Iranian entities (NFI). Knox advised that while the bank's existing Iranian relationships are going down, they are seeking to settle existing obligations involving newly blocked Iranian banks. Taking notice that Treasury Attach was taking notes on his response, Knox stated clearly, "no ABU DHABI 00001881 002.2 OF 002 new Iranian activity -- zero." ¶7. (C) Comment: Knox's response escalated in force as the conversation progressed and he seemed to re-evaluate his audience. Treasury Attach assesses that his statements were as much a description of current bank policy, as they were direction on where the bank is heading with regard to Iran. ADCB's pronouncement on Iran stands in contrast to Treasury Attach's recent meeting with Emirates NBD officials who provided no insight on the bank's current or future exposure to Iranian financial activity. End Comment. SISON SISON