UK BANKS: LARGE EXPOSURE TO THE UAE, BUT STILL SMALL TO

UNCLAS LONDON 002710

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV UK
SUBJECT: UK BANKS: LARGE EXPOSURE TO THE UAE, BUT STILL SMALL TO
OVERALL TOTAL LOAN AMOUNTS - CORRECTED COPY, ADDED ADDRESSEE


1. (U) SUMMARY: UK banks have greater exposure to the United Arab
Emirates (UAE) than their global counterparts, but the potential
impact of debt problems in Dubai on the UK banking sector is
unlikely to be significant, say industry analysts. Analysts viewed
the initial media frenzy following the announcement that Dubai World
would delay forthcoming debt payments (including some papers
speculating about the possibility of a "Financial Crisis 2"),as
probably unwarranted. More than direct exposure, analysts are
closely watching potential spillover effects of a Dubai World
default within the UAE and among its neighbors - which could signal
a broader problem. End Summary.


2. (U) British banks have total exposure to Dubai World of
approximately $5 billion, making them the organization's largest
foreign creditors. Of British lenders, the Royal Bank of Scotland
(RBS) is the most exposed, at up to $2 billion, according to the
Financial Times. RBS (majority government-owned) and Barclays may
also be more vulnerable to spillover given their global write-downs
and losses. UK bank loans to the UAE as a whole totaled $49.5
billion in June, according to data from the Bank for International
Settlements (BIS),compared to $10.6 billion from the United States,
$11.3 billion from France and $9 billion from Japan. London-based
HSBC had the biggest exposure to the UAE at the end of 2008 (the
latest available figures),with loans estimated at $17 billion by
the Emirates Banks Association. Standard Chartered ranked behind
HSBC as the foreign bank with the most loans to the UAE, with $7.8
billion. Barclays and the Royal Bank of Scotland (through ABN Amro)
ranked next for loan exposure, with loans of $3.6 billion and $2.2
billion respectively. In comparison, Citigroup, ranked highest
among U.S. banks, had loans of $1.9 billion.


3. (SBU) While these exposures are large on an absolute basis, they
are fairly small relative to the size of the groups and their total
loan exposure. In a research note dated November 27, JP Morgan
highlighted that the loans to the UAE as a percentage of the total
loans made by each bank were as follows: HSBC - 1.8 percent;
Standard Chartered - 4.4 percent; Barclays - 0.4 percent; and RBS -
0.4 percent. Consequently, JP Morgan analysts concluded that the
direct loan exposure risk to UK banks should not be cause for
concern. These sentiments were shared by Paul Chisnall, Executive
Director for Financial Policy at the British Bankers' Association
(BBA). Chisnall told us that direct exposures are not out of
proportion for the size of the groups and that the initial media
frenzy following the announcement that Dubai World would delay
forthcoming debt payments (including some papers speculating about
the possibility of a "Financial Crisis 2"),was probably not
warranted. The rating agency Fitch appears to have agreed with the
sentiment at JP Morgan and the BBA; Fitch on December 1 decided not
to change its outlook for major British banks.


4. (SBU) But despite limited cause for concern regarding the banks'
direct loan exposure to the UAE, Chisnall said he is concerned that
Dubai's debt problems could signal a further wave of global
recession. He said this indirect concern is far greater than
problems posed by direct loan exposures and could have a far larger
impact on the UK banking sector. JP Morgan's UK equity analysts are
worried about potential spillover effects within the UAE and among
its neighbors - which could also result in significant problems for
UK banks.


5. (SBU) Comment: An unknown is the significance of Dubai World's
commercial landholdings in the UK. However, a fire sale of assets
in the UK is unlikely, according to reports in The Wall Street
Journal, which quote a Dubai World official saying much of the
company's UK real estate is ring-fenced within offshore companies.
The assets are protected from default by the parent company because
the offshore companies have separate loans. Another unknown causing
concern in the UK banking sector is the degree to which the UAE
government will guarantee Dubai debts. JP Morgan analysts in the UK
speculate that Dubai will continue to receive support from the UAE
federal government or possibly the emirate of Abu Dhabi and would
eventually be able to fulfill all its debt obligations.

SUSMAN