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Middle East Report 2009| pfi| 11 UAE banks

Capital ideas in the UAE


oing into the year, Abu Dhabi Commer- cial Bank (ADCB), First Gulf Bank and Dubai Islamic Bank (DIB) had their rating outlooks downgraded by Moody's from stable to negative, with previously pos- itive Dubai Bank brought down to stable. Standard & Poor's lowered its long-term and short-term counterparty credit ratings on DIB from A/A-1 to A–/A-2, and downgraded the outlook from stable to negative. Emi- rates Bank International and National Bank of Dubai were revised downwards from stable to negative, while Shar- jah Islamic Bank went from positive to stable. Moody's said: "The rating action reflects the mounting liquidity pressures in the short to medium term; the grow- ing downward pressures on asset prices (mainly stocks and properties); and the anticipated profitability pressures from rising funding costs derived from increasingly scarce liquidity and loss of confidence." Since then, banks across the region have employed a number of meth- ods to shore up their foundations. Moves from Central Bank of the UAE (CBUAE) have been at the core of the efforts: cutting rates from 4.25% at the start of last year to 1% at present, following the latest cut of 0.5% in January; introducing the liquidity support facility (LSF), a US$14bn emergency lending facility enabling banks to meet existing funding commitments; and introducing a US dollar swap facility to increase dirham liquidity. The bank also held up the release of Q4 and full-year results as it reviewed asset valuations and major loans on banks' balance sheets, concerned that quoted asset values could be unrepresentative after a peri- od of heavy price drops. In Abu Dhabi, one of the major steps has been the rais- ing of Dh16bn (US$4.36bn) by five banks through issuing Tier 1 capital notes to the Emirate's government. ADCB, First Gulf Bank and National Bank of Abu Dhabi (NBAD) will each raise Dh4bn through the note sales, with Union

UAE banks have made varied efforts to strengthen their balance sheets to pro- tect against declines in loan recovery rates and asset prices. By Mark Kolmar.

National Bank (UNB) and Abu Dhabi Islamic Bank (ADIB) raising Dh2bn, with ADIB's coming through a sukuk issue. All the notes were issued at 6% per annum, payable semi-annually over five years, after which a floating rate over six-month EIBOR will apply. JP Morgan struc- tured and arranged the transaction. The fact that it was solely Abu Dhabi institutions that received capital boosts raised concerns over Dubai's abil- ity to support its own institutions, resulting in CDS to insure Dubai sovereign and corporate debt jumping. Five-year Dubai sovereign CDS rose by 75bp to 825bp, while banks in the Emirate saw the biggest jumps: five- year CDS for Emirates NBD, for example, jumped 100bp in the wake of the Abu Dhabi announcement. Emirates NBD has since announced that it intends to raise Dh3.5bn in Tier 1 capital by the end of the year, revealing few details but ruling out an equity issuance as the method. The bank needs to raise its capital adequa- cy ratio to meet the recent CBUAE edict. CBUAE gover- nor, Sultan Bin Nasser Al Suwaidi, insisted that banks in the Emirates needed to boost their capital adequacy ratios, regardless of the quality of their assets, putting a deadline of June 30 this year to reach 11% and June 30 2010 to reach 12%.

Another popular move has been to take money received from the liquidity support scheme and convert it into Tier 2 capital. The move to convert support scheme capital fol- lowed national rule changes preventing the government from converting the loans into equity stakes in partici- pating banks. The new terms for the scheme meant that the government could only take an equity stake if the bank missed an interest payment on the money and that banks could convert cash gained in the first tranche of the liq- uidity scheme, worth Dh70bn overall, into Tier 2 capital. Emirates NBD was the first to announce such a tactic, through plans to convert Dh6.3bn of federal deposits into Tier 2 capital. The figure was subsequently doubled to

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