Exposures that United Arab Emirates banks have to NMC Health PLC are set to exacerbate asset quality troubles as COVID-19 and low oil prices put pressure on corporate borrowers, analysts said.

The recent spate of mergers has concentrated exposures to the London-listed healthcare provider among some lenders while the scandal also raises questions over corporate governance standards in the UAE. NMC Health is a holding company for NMC Healthcare LLC and other affiliates, the largest provider of private healthcare services in the UAE.

This comes as the "one-two punch" of COVID-19 and the low oil price will likely extend to credit markets, with potentially higher incidents of defaults, leading to worse asset quality among UAE banks, said Maria Elena Ponceca, a UAE-based portfolio manager.

"For the regional banks with exposure to the NMC Group this would mean even worse asset quality: higher Stage 3 loans, higher provisions, higher [risk weighted assets], higher cost of risk — ultimately eroding value: lower profits, lower book value," said Ponceca.

According to Dubai Islamic Bank (PJSC), or DIB, as many as 80 local, regional and international banks have extended finance to the group, which has operations in 19 countries.

DIB has large exposures to NMC, as do Abu Dhabi Commercial Bank PJSC, or ADCB, and Emirates NBD Bank PJSC. Exposures among international banks include Standard Chartered PLC, with around $250 million, and Barclays PLC, with around $146 million.

Doubts over accuracy of books

In March, NMC Health reported it had found evidence of suspected fraud in its finances, following a report in December by Muddy Waters Research that raised doubts about the company's financial statements, including its asset values, cash balance, reported profits and reported debt levels.

Its total debt ballooned to $6.6 billion, more than three times the $2.1 billion in debt it had previously declared in its official accounts. The High Court in London placed the company into administration on April 9.

With NMC no longer a going concern, this will reduce the recoverability and increase the loss given default ratios, said Jaap Meijer, managing director and head of equity research at Arqaam Capital.

Whether creditors can be paid back — and when — will depend in part on the outcome of a thorough investigation of NMC's books of accounts to determine the depth of problems, said Krishna Dhanak, executive director at Alpen Capital.

"The timeline will be affected with the terms of debt restructuring of the group and/or a bailout of the group by a strategic player who sees value in the brand and operations over a long period," said Dhanak. He described the situation as "a unique opportunity for strategic players to acquire a long-running diversified services healthcare group that built a powerful brand for itself in the region."

Credit losses expected

Most analysts expect credit quality among UAE lenders to worsen due to the economic impact of the coronavirus and the oil price despite measures by the UAE Central Bank to mitigate potential insolvencies.

"We think that the vast majority of banks will not have to resort to additional capital, and can absorb 7% loan loss charges in the next two years and a further 4% to 5% from excess capital, and can take in two years as much [in credit losses] as they took during the [global financial crisis] over the period 2008-2012," said Meijer.

Banks may choose to postpone reporting their first-quarter results, said Meijer. The country's Securities and Commodities Authority has given all listed companies, including banks, the option to delay first-quarter results until their second-quarter results are due.

ADCB, the country's third largest by assets, reported the largest exposure, totaling $981 million, to NMC, as well as an additional $181 million to Finablr PLC, a London-listed remittance holding also founded by Bavaguthu Raghuram Shetty, a well-known Indian businessman. That company is also in distress.

The loans disclosed by ADCB were extended by ADCB, Al Hilal Bank PJSC and Union National Bank prior to the merger of the three banks on March 1, 2019, and together represent about 1% of the bank's assets, equivalent to around 80% of its 2019 net profits.

Meanwhile, DIB has an exposure of $425 million, with an additional $116 million via its subsidiary Noor Bank PJSC, which was extended prior to its acquisition by DIB, the bank said in a statement to the Dubai bourse. The aggregate exposure constitutes approximately 0.7% of the bank's total assets.

Other banks with significant exposures include Abu Dhabi Islamic Bank PJSC, with exposure of $291.4 million in addition to a $31.0 million sukuk exposure; and Emirates NBD with 747.34 million dirhams of direct exposure — 676.46 million dirhams of this via Emirates Islamic Bank PJSC.

Some smaller UAE banks also have significant exposures relative to their loan books: Commercial Bank International PSC, a bank in Ras Al Khaimah that is 40% owned by Qatar National Bank (QPSC), declared it has an aggregate exposure of 425.6 million dirhams, equivalent to 2.22% of net assets at end of year 2019, and almost four times its 2019 net profit of 111 million dirhams.

Big name brands not immune to failure

The NMC saga, coupled with the fate of The Abraaj Group, highlights concerns about corporate governance in the UAE. The Dubai-based private equity group was liquidated after it received a $315 million regulatory fine in 2019 for deceiving investors and misusing investor funds.

Ponceca said the NMC case "above all underscores how much more work is needed by Mid-East corporates to bring operational risk assessment and compliance up to par."

"[T]he dust has barely settled on the Abraaj case and here we are facing another corporate scandal. This does not bode well for the international investment community, who already has concerns about governance and transparency issues with this side of the world," she said.

There is no doubt that investor confidence has been damaged, said Ali Al-Salim, a co-founder at Arkan Partners, a consulting firm dedicated to alternative investments.

"Investor due diligence in the region is not very sophisticated, we see it in the funds space too, people gravitate toward big brand names thinking they're somehow immune to failure.

"Blame however can't be saddled with any one party, it will likely be shared between directors, creditors, shareholders, regulators and auditors," he said.

As of April 14, US$1 was equivalent to 3.67 UAE dirhams.