Moody's Investors Service has downgraded the local and foreign currency deposit ratings of Dubai Bank by two notches to Baa2/Prime-3 from A3/Prime-2.

At the same time, Moody's has also downgraded Dubai Bank's bank financial strength rating (BFSR) to E+ from D, which now maps to a baseline credit assessment (BCA) of B1 instead of Ba2.

Moreover, the ratings on DB Sukuk Company's $5 billion Trust Certificate Issuance Programme, launched on behalf of Dubai Bank in 2008, have also been lowered to Baa2/Prime-3 from A3/Prime-2.

The ratings carry a negative outlook, reflecting the moderate risk of a further deterioration in the credit fundamentals of Dubai-based debtors that could impact the bank's BCA and deposit ratings. Today's rating action concludes the rating review initiated in December 2009.

Moody's downgrade reflects the material weakening in Dubai Bank's standalone strength as a result of the ongoing credit issues surrounding the Dubai corporate sector in which the bank is active.

Pressure on asset quality has been growing since the end of 2008, resulting in significant provisioning charges throughout 2009, which led to a sizeable Dh291 million ($79.2 million) net loss last year.

Moody's expects further provisions to be accounted for, especially as Dubai's corporate debt shows little sign of recovery, concentrations are very high in Dubai Bank's credit portfolio, its capital metrics are weakening and its strategic positioning as a Dubai Holding subsidiary will likely become a challenge going forward.

Moody's said that the bank's BCA is now B1 instead of Ba2 prior to the rating action. Moody's stress-tests of Dubai Bank's exposures to the troubled Dubai government-owned entities show that the bank's current capital adequacy could come under pressure.

Moody's added that a moderate risk of further deterioration in the credit fundamentals of Dubai-based corporates could materially impact the bank's BCA.

Moreover, Dubai Bank's recurring earnings capability has declined while its cost of risk has increased, at a time when liquidity as well as funding potentially remain an area of further vulnerability, for Dubai Bank and all its Dubai-based competitors alike.

Risk aversion in global and regional debt capital markets is continuing and competition for deposits in the UAE is intensifying, said Moody’s.

The funding pressures in the UAE will prevent Dubai-based banks from engaging in new lending for some time, thereby impacting their short- to medium-term growth prospects.

The bank's weakened standalone rating reflects its limited size and ability to weather challenging market conditions.

However, Moody's said it believes that the UAE central bank, and the federal government will be very supportive of Dubai Bank, especially as the government of Dubai remains the bank's dominant shareholder.

In line with Moody's joint-default analysis framework, Dubai Bank's external support
considerations are reflected in a five-notch uplift from the bank's BCA of B1 to its long-term deposit rating of Baa2.

The uplift currently embedded in Dubai Bank's ratings remains unchanged from that which applied to the bank's previous ratings. – TradeArabia News Service