This document analyzes the credit risk of UAE banks and corporations. It discusses research methodology, hypotheses, types of credit risk, and principles of managing credit risk. Cross-sectional analysis of corporate financial ratios is used to assess creditworthiness. The empirical analysis finds Etisalat and Surooh to have the lowest credit risk among corporations, while Citibank and HSBC are found to have the lowest risk among banks. Conclusions state that analysis of financial ratios can help identify firms and banks with the highest and lowest credit risk.

1. Credit risk of UAE banks Supervised By: Dr. Hussein Al-Tamimi Student Name: MorshedAbdulqaderParkook

2. Credit RISK analysis: an empirical study OF UAE BANKS

3. Research Methodology The purpose of the study The purpose of the study is to analyze the significance of some credit factors generally considered important by credit analysis The Scope of the study The study focuses on credit risk assessment in a representative selection of UAE banks and corporations. Sources of data Data were obtained from banks and corporations financial reports (report of condition and income statement) Hypotheses of the study In this study I predict that there is a really strong relationship between corporate financial performance and credit risk banks may get in if the lend to the wrong borrower.

4. Credit Risk Credit risk: is the oldest form of risk in the financial markets. If credit can be defined as “nothing but the expectation of a sum of money within some limited time,” then credit risk is the chance that this expectation will not be met. Types: A consumer or business does not make a payment due on a mortgage loan, credit card. A business does not pay a A/R (invoices) when due. A business does not pay an employee's earned wages when due. A business or government bond issuer does not make a payment on a coupon or principal payment when due. An insolvent insurance company does not pay a policy obligation An insolvent bank won't return funds to a depositor. (FDIC !)

5. Credit risk management Credit risk is defined as the risk arising because borrowers may default on their obligations. Or The probability that some financial institution assets, especially its loans, will decline in value and perhaps become worthless (toxic assets) The concept of adverse selection and moral hazard provide a frame work for understanding the principals that financial institution managers must follow to minimize credit risk and make successful loans.

6. Principals Of Managing Credit Risk Screening and monitoring prime lending (credibility) Long-term customer relationships Loan commitments Collateral Compensating balances Credit rationing

7. Credit risk analysis methods3 Questions Is the borrower creditworthy? The 5Cs of credit: Character Capacity Cash Collateral Conditions

8. Continue Can the loan agreement be properly structured and documented? Can the lender perfect its claim against the borrower’s earnings and any assets that may be pledged as collateral? Collateral and popular assets pledged

9. Factors determining the growth and mix of loans The profile of characteristics of the market area that lenders serves Lender size The experience and expertise of lenders officers The expected yield that each loan offers Rules & Regulations (UAE real estate, and other rules)

10. Empirical Analysis Credit Risk of UAE banks

11. Banks Credit risk analysis

12. Corporation's Credit risk analysis common size statement

13. Corporation's Credit risk analysis Common Size Statements Ratios->

14. Cross sectional analysis Liquidity ratios : Current ratio Quick ratio Efficiency ratios The inventory turnover ratio The average collection period Number of days for which inventory is tied up Profitability ratios: Gross profit/ sales Net profit/ sales Leverage ratio Debt/ equity ratio Interest coverage ratio

15. Ratio Analysis

16. Continue Cross sectional analysis

17. Empirical finding If you remember the previous findings, we mentioned that the best two are Surooh and Etisalat. In this section we found that the best firm is also Etisalat in addition to Abu Dhabi Ship Building Company. And the worse one is Tabreed.

18. (Altman) Z-score The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman. The formula may be used to predict the probability that a firm will go into bankruptcywithin two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheet valuesto measure the financial health of a company.

19. (Altman) Z-score if (Z< 1.81) the firm will default. If Z (1.81:2.675), the firm will either default or not. If (Z> 2.675), the firm will not default.

20. Empirical finding

21. Risk Premium analyzing The higher the rate of return will lead to higher the probability of default and high credit risk for lender points of view. Keep in mind also that factors other than credit risk also affect the premium. Financial market participants often mention liquidity of a debt issue as being important for the premium.

22. Beta Beta is a relative measure of the systematic return of the stock to the overall market. Stocks with Betas greater than 1.0 are highly volatile and have a positive correlation with the market; such stocks are termed aggressive securities. Stocks with Betas less than 1.0 are either more stable than the average or have a low correlation with the market or both (defensive securities). Stocks with a negative Beta move in the direction opposite to that of the market.

23. Empirical finding Remember the higher the Beta the higher is the risk.

24. Conclusions Our finding showed to us that the best firms are: Etisalat, Surooh and Abu Dhabi Ship Building. The worst firm only is Tabreed. Regarding the banks, we showed that Citibank and HSBC are the lowest credit risk encountered banks. (Business credit instrument and derivatives, business credit insurance, Credit default swap. ) Recovery and real-estate issue . (See http://www.zawya.com/story.cfm/sidZAWYA20110501055100/Is_Dubai_Back) No FDIC !