Thursday, November 26, 2009

Goldman on HSBC And Standard Chartered Exposure to Dubai World

Goldman's Roy Ramos and Gurpreet Sing Sahi say even on a worst case scenario HSBC and STAN have manageable exposure to Dubai World. They write:

Backdrop

Many investors have asked about HSBC/STAN exposure to Dubai World (a leading government-linked property developer/holding company) and its affiliates, amidst Nov 26 press reports of Dubai World’s request for a creditor standstill agreement on its c.US$59bn debts (source: Bloomberg). Both HSBC and STAN have declined to comment on individual firm exposures. However, press reports (Bloomberg, FT), past descriptions by both banks of their UAE wholesale banking businesses, and HSBC’s/STAN’s status as the largest and second largest foreign banks in the UAE would all suggest some level of exposure to Dubai World and other similar entities.

Context on likely HSBC, STAN exposures

HSBC had US$15.9bn of loans/advances to the UAE as at end-June 2009. More specifically, HSBC had US$3.475bn of real estate and mortgage loan exposure to the UAE as of the same period, representing 25.9% and 2.7% of our 2010E net profit and shareholders’ equity projections for the group. STAN had US$12.3bn of cross-border loan exposure to the UAE as at end-June 2009 (and US$7.8bn of locally-booked loans to the UAE as at YE08). More specifically, STAN had US$1.674bn of real estate and mortgage loan exposure to the Middle East/South Asia region as of the same date. We estimate c.60% of this exposure, or US$1.0bn, was to the UAE, representing 22.4% and 3.4% of our 2010E NPAT and shareholders’ equity projections for STAN.

More clarity needed; first stab at worse-case loss estimates

Immediate questions include: how much actual exposure do HSBC, STAN have to Dubai World and other potentially similar situations, and what level of ultimate write-downs may need to be taken, what impact to EPS, BVPS? Key swing factors: level of continued support from other parts of the UAE, mode of loan restructuring undertaken by major creditors, degree of knock-on impacts to other UAE corporates, other emerging markets. Our first stab at potential worst-case loss estimates suggest a manageable impact: assuming a 50% NPL ratio/50% loss given default on commercial real estate loans, and a 20% NPL ratio/50% loss given default on mortgage loans, we estimate the potential credit losses to HSBC and STAN at US$611mn and US$177mn – or 4.6% and 3.9% of 2010E NPAT, 0.5% and 0.6% of 2010E equity.

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