Bloomberg News

Dubai Islamic Bank Needs Capital to Avoid Downgrade: Arab Credit

December 30, 2012

Dubai Islamic Bank Needs Capital to Avoid Downgrade

A logo sits on display outside Dubai Bank PJSC's offices in the Jumeriah district of Dubai, United Arab Emirates. Photographer: Duncan Chard/Bloomberg

Dubai Islamic Bank PJSC (DIB), the world’s oldest Shariah-compliant lender, may need to boost capital to absorb bad loans stemming from a real estate slump to avert a possible ratings downgrade.

The biggest the United Arab Emirates lender complying with Muslim banking rules was placed on ratings watch because loan quality “remains very weak compared to peers” and it hasn’t set aside enough money to cover losses, Moody’s Investors Service said Dec. 6. Competitor Abu Dhabi Islamic Bank sold perpetual debt in November to raise capital so it can lend more as the U.A.E. economy recovers from a property crash that sent Dubai home prices tumbling more than 65 percent.

“Dubai Islamic will soon need to find fresh capital, or alternatively cut back on loan growth substantially,” Jaap Meijer, a director of equity research at Dubai-based Arqaam Capital Ltd., said in an e-mail Dec. 26. He cited DIB’s “high dividend payout and low capital-generation capacity.”

The bank’s five-year Islamic bonds, sold in May, have fallen since the credit warning, pushing the yield up 10 basis points, or 0.1 percentage point, to 3.49 percent on Dec. 28. That contrasts with a four basis-point drop to 2.89 percent in the average yield on emerging-market financial debt tracked by HSBC/Nasdaq Dubai’s U.S. Dollar Sukuk Financial Services Index.

Perpetual Bonds

Dubai Islamic’s Tier-1 capital ratio, the core resources used to cushion against losses, stood at 13.6 percent at the end of last year, below the U.A.E. average of 15.4 percent, according to Moody’s.

By selling $1 billion of Islamic notes that don’t mature Abu Dhabi Islamic (ADIB) will raise its Tier-1 capital ratio to 19.3 percent in 2013 from 13.7 percent at the end of September, Arqaam said last month. Perpetual bonds can be counted as equity and thus used to supplement capital.

“An adequate Tier-1 ratio for Dubai Islamic Bank will be in the 16 percent to 17 percent area,” Montasser Khelifi, a Dubai-based senior analyst at Quantum Investment Bank Ltd., said in an e-mail Dec. 27. “We believe that it is more plausible for Dubai Islamic to sell a perpetual sukuk in 2013 than a conventional capital increase.”

The lender didn’t respond to a phone call seeking comment on Moody’s ratings-watch decision.

Bad Loans

Bad loans at the Dubai-based bank comprised 16.8 percent of the total at the end of 2011 and are expected “to remain elevated through to year-end 2013,” Moody’s said. That’s above the U.A.E. average ratio of 10.6 percent, it said.

Banks in the second-largest Arab economy, which comprises seven emirates including Abu Dhabi and Dubai, are struggling to recover after boosting lending by more than 30 percent annually in the four years through 2008, as regulations allowed foreigners to buy properties in some parts of Dubai, sparking a real estate boom.

As speculators fled with the onset of the credit crisis, and many state-linked businesses grappled with debt they couldn’t pay off, banks were left to shoulder mounting non- performing loans. Moody’s downgraded three Dubai banks this month, including the biggest one, Emirates NBD PJSC (EMIRATES), because they haven’t done enough to address the pile up of bad debt.

Building Capital

Still, Dubai Islamic has reduced its exposure to real estate. Credit to the property industry comprises 27 percent of its loan book, down from 40 percent at the end of 2008, Moody’s said. The bank’s profit is set to grow 14 percent in 2013 after declining this year, according to the median forecast of three analysts compiled by Bloomberg.

The “issues with banks in the U.A.E. not making enough provisions and not recognizing the full extent of the losses on their loan book are well known,” Aliasgar Tambawala, a Dubai- based fixed income fund manager at Mashreq Capital DIFC Ltd., said by e-mail on Dec. 27. “I don’t see any material change in their credit profile on the back of these ratings action.”

U.A.E. banks are looking to boost capital to support lending, which in Dubai Islamic’s case grew 6 percent in the nine months through September. Emirates Islamic Bank PJSC, a unit of Emirates NBD, received shareholder approval this month to raise 1.5 billion dirhams ($408 million) from a sale of equity to existing share owners to help shore up capital.

Selling perpetual notes may attract investors seeking higher returns, Khelifi at Quantum said. The average yield on financial services sukuk was 2.89 percent on Dec. 28 after dropping 15 basis points this year.

Abu Dhabi Islamic’s notes, the first of their kind, secured $15.5 billion in bids and were priced to yield 6.325 percent. Demand has since pushed that down to 5.99 percent on Dec. 28. Dubai Islamic would probably be able to price perpetual notes at between 7 percent and 8 percent, Khelifi said. “Sukuk investors appreciate the high yield of such issues,” he said.

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net

To contact the editor responsible for this story: Alaa Shahine at asalha@bloomberg.net


Video Game Avenger
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus