Bloomberg News

Emirates NBD Sees Profit Unaffected on Dubai Bank Takeover

October 11, 2011

(Updates with CEO’s comment in fourth paragraph.)

Oct. 11 (Bloomberg) -- Emirates NBD PJSC said its takeover of unprofitable Dubai Bank PJSC, the Islamic lender rescued by Dubai’s government in May, won’t hurt profit as the emirate cleans up its banking industry.

The takeover “will not affect the profit and loss, the non-performing loan percentages due to the transaction structure and support provided by the government of Dubai,” Emirates NBD Chief Executive Officer Rick Pudner told reporters in a conference call today. “Dubai Bank will be capitalized by Emirates NBD to the extent necessary and this will have negligible impact on the group’s overall capital ratios.”

The takeover was ordered by the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, the government’s Media Office said in an e-mailed statement, without giving financial details. “This comes in line with Dubai government’s efforts to enhance the banking sector in the emirate,” it said.

Dubai Bank, an Islamic lender formerly owned by Dubai Holding LLC and Emaar Properties PJSC, was rescued by the government after loan losses increased as the credit markets froze following the global financial crisis. Government- controlled Dubai Islamic Bank PJSC last year bought a majority stake in cash-strapped Tamweel PJSC as part of a plan to boost mortgage lending in the emirate.

Dubai Holding LLC, a company owned by the ruler, held a 70 percent stake in Dubai Bank, while Emaar Properties PJSC owned the rest. The bank posted a loss of 291 million dirhams ($79 million) in 2009, according to the latest financial statements posted on its website. It had had total assets of 17.4 billion dirhams at the end of 2009.

Debt Restructuring

Dubai Holding, one of the three main state-owned holding companies, is restructuring about $10 billion of debt at one of its investment subsidiaries. Dubai World, another holding company, restructured about $25 billion of debt this year.

“The problem was that Dubai Bank was a little too close to Dubai Holding and a solution needed to be found,” said Raj Madha, a Dubai-based analyst at Rasmala Investment Bank Ltd. “I do have some concerns that impairments at Dubai Holding will impact Dubai Bank.”

Emirates NBD will take over Dubai Bank at “fair value” and details of the transaction will be announced with the bank’s fourth-quarter results, Chief Financial Officer Surya Subramanian said on the conference call. The impact of the takeover will not be “material” because Dubai Bank’s assets are about 6 to 7 percent of Emirates NBD group assets, he said.

Yields Fall

The yield on Dubai Holding Commercial Operations’ 4.75 percent bond due January 2014 dropped 25 basis points, or 0.25 percentage point, to 17.66 percent, the lowest in a week, at 4:48 p.m. in Dubai. The yield on Dubai government’s 5.591 percent bond fell 5 basis points to 6.3 percent and the rate on Emaar’s Islamic note dropped 29 basis points to 8.73 percent.

Emirates NBD’s shares fell 1.6 percent to 3.74 dirhams, the lowest close in six months. The shares have gained 36 percent this year compared with a 15 percent drop in the Dubai Financial Market General Index.

Emirates NBD may also be forced to buy Amlak Finance PJSC, the Islamic mortgage company that’s being reorganized by the government, said Jaap Meijer, head of the bank team at AlembicHC Securities. he said.

Emirates NBD, formed in October 2007 after the merger of Emirates Bank International PJSC and National Bank of Dubai PJSC, reported a smaller-than-expected 87 percent jump in second-quarter profit. The bank, 56 percent owned by the Dubai government, is one of the biggest creditors to Dubai World.

“Consolidation makes sense, and it’s a trend that is going to continue for the foreseeable future,” said Akram Annous, Middle East and North Africa strategist at Al Mal Capital PSC in Dubai. “This is an overbanked market and consolidation is important for long-term business viability.”

--With assistance from Zahra Hankir in Dubai. Editors: Shaji Mathew, Peter Branton

To contact the reporters on this story: Stefania Bianchi in Dubai at sbianchi10@bloomberg.net; Arif Sharif in Dubai at asharif2@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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