HSBC/STAN exposures to UAE, amid Dubai World standstill request by Goldman Sachs

November 26, 2009 Asia Pacific: Banks
Goldman Sachs Global Investment Research 1
November 26, 2009

Asia Pacific: Banks
HSBC/STAN exposures to UAE, amid Dubai World standstill request
Backdrop

Many investors have asked about HSBC/STAN

exposure to Dubai World (a leading government-linked

property developer/holding company) and itsaffiliates,

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 2010

E 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.


ANALYTICS

Note we have opted to use 2010E as opposed to 2009E

projections on two premises: that 2010 is a more

normalized year versus 2009, and that clarity on

exposure/needed haircuts is unlikely until 2010.

See Exhibit 2 for a ranking of foreign banks in the UAE by

loans and by deposits, as sourced from the Emirates Banks

Association. Note that HSBC and STAN are the largest and

second largest, by a considerable margin.


HSBC STAN
UAE exposures (no breakout avail for Dubai)
a Total loans and advances, end June 09 1 5,906
Total loans and advances, YE08 1 7,537
Total loans and advances, end June 08 1 6,416
Memo: customer deposits, end June 09 19,284

UAE cross-border exposures (no breakout avail for Dubai)
b End June 09 1 2,357
YE08 1 0,535
End June 08 1 0,949
2010E net profit 13,398 4,489
2010E shareholders equity 128,167 29,121
UAE exposure as % of 2010E NPAT 119% 275%
UAE exposure as % of 2010E equity 12% 42%

On UAE commercial real estate exposures
STAN had US$680mn of commercial real estate loans and US$994mn of mortgage loans
to Middle East/South Asia at end-Jun 09; we estimate c.60% of this combined exposure
(or US$1,004mn) to the UAE, or 22.4% of 2010E NPAT and 3.4% of 2010E equity
HSBC had US$1,755mn of commercial real estate and US$1,720mn of mortgage loan
exposure to the UAE as at end-Jun 09; this US$3.475bn combined exposure
equates to 25.9% of 2010E NPAT and 2.7% of 2010E equity.

Potential credit loss analysis
Commercial real estate exposures 1 ,755 408
Assumed NPL ratio on commercial real estate loans 50% 50%
Assumed loss given default 50% 50%

Potential credit loss on CRE 439 102
Mortgage loan exposures 1720 5 96
Assumed NPL ratio on mortgage loans 20% 25%
Assumed loss given default 50% 50%

Potential credit loss on mortage loans 172 75
Total potential credit losses 611 177
As % of 2010E net profit 4.6% 3.9%
As % of 2010E equity 0.5% 0.6%
Source: Company data, Goldman Sachs Research estimates.

Roy Ramos
+852-2978-0457 roy.ramos@gs.com Goldman Sachs (Asia) L.L.C.
Frederik Thomasen
+44(20)7552-9363 frederik.thomasen@gs.com Goldman Sachs International
Gurpreet Singh Sahi
+852-2978-1287 gurpreet.s.sahi@gs.com Goldman Sachs (Asia) L.L.C.

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