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12| pfi | Middle East Report 2009 UAE banks


Dh12.6bn (US$3.43bn), and will see the bank's capital ade- quacy ratio increase from 11.4% to 15.6%. The capital will be converted by Emirates NBD into a seven-year bond paying 4.5% interest, which will be non-convertible for five years. Emirates Islamic Bank was the second bank to announce plans to convert support scheme funding into Tier 2 cap- ital, although it disclosed neither quantity nor timing. NBAD was the first from Abu Dhabi, with shareholders approving a plan to convert Dh5.6bn (US$1.53bn) into a seven-year bond paying a 4.5% coupon. Combined with the Dh4bn of Tier 1 capital notes it issued to the Abu Dhabi government, NBAD raised its capital adequacy ratio from 15.4% to 23.5%, giving it one of the strongest capital ratios globally. UAE banks have traditionally had capital ratios far exceeding the levels of banks in other countries, but those figures have been eroded in recent years and only through recent initiatives are they heading up again. Mashreq Bank and RAK Bank have announced inten- tions to make the conversion, although they also have been quiet on details. ADCB converted Dh6.6bn (US$1.8bn), Commercial Bank of Dubai Dh1.84bn (US$501.2m), First Gulf Bank Dh4.5bn (US$1.23bn) and Union National Bank Dh3.2bn. Abu Dhabi Islamic Bank converted Dh2.2bn, saying that with other banks doing so, any bank that didn't would leave itself appearing weak- er than its rivals. Capital ratios at the banks were pushed above 20% as a result of the conversions. Other capital expansion plans include DIB, which plans to increase its capital by Dh3bn (US$817m) over the next five years. With DIB's current share capital towards Dh3.5bn, the plan amounts to almost doubling the bank's capital during the period. DIB last raised its capital through an Dh1bn rights issue in 2006, with shares at the time priced at Dh3 each. They're currently trading under Dh2.5. Emirates NBD exchanged US$1bn of medium-term bonds for shorter-term bonds in an effort to boost its reg- ulatory capital ratios. The exchange offer was for the US$1bn of its outstanding dollar-denominated Lower Tier 2 bonds that were issued in 2006, and saw the cur- rent Emirates Bank International 2016s, which were rated A2/A–/A+ and had a call option in 2011, swapped for dollar-denominated three-year floating-rate notes with a coupon of three-month Libor plus 450bp. The new FRNs are rated slightly higher than the pre- vious bonds at A1/A/AA– and have a minimum new issue size of US$100m. The minimum exchange price is 70%. Emirates NBD Capital, HSBC and UBS led the exchange, which closed on April 22. The bonds being exchanged were issued in October and December 2006 and were both US$500m offerings. The latter issue, in December, came through Credit Suisse and HSBC. The subordinated floating notes were priced at 63bp over Libor and were placed with mostly Middle Eastern and Euro- pean accounts. The October issue carried a slightly high- er coupon of 70bp.


At Gulf International Bank (GIB), shareholders elected to purchase US$4.8bn of toxic assets from the bank to help shore it up its capital and prevent the need for further write-downs. The governments of the six GCC countries that own the bank have acquired all of GIB's exposure to CDOs and other asset-backed securities, which made up close to 70% of the bank's investment portfolio. The move has left GIB with a book, according to its annual report, that comprises mainly highly rated government debt worth US$2.2bn. According to the report, GIB's capital adequacy ratio stood at 12.5% at the end of 2008. The perceived potential in the last year for a revalua- tion of GCC currencies saw strong capital inflows, but this bulk of short-term deposits being lent out on longer tenors reinforced the market cycle, initially adding to the boom, but now disappearing, leaving an illiquid market behind as economic growth slows. While the boom was under way, banks aggressively increased lending, pushing loan deposit ratios above the CBUAE marker of 100%. This has meant that liquid or not, banks' lending capacity are lim- ited by the need to increase deposit levels first. A Credit Suisse report measured an average loan- deposit ratio of 122.8%. In January, ADCB's ratio was as high as 147.2%, followed by Emirates NBD at 121.8%. CBUAE said in January that gross loans and advances at UAE banks exceeded deposits by Dh116bn. UAE banks have been increasing their deposit base and the total reached Dh950bn by Q2 2009, compared with Dh840bn at the start of July 2008. Outside the UAE, Kuwait's Gulf Bank has given the UAE banks plenty of incentive to pre-emptively raise funds. The bank was forced to complete an emergency 100% rights issue to raise KD375m (US$1.3bn) after sustaining heavy losses from clients in currency derivatives trading. As well as losing cash on the currency trade, the bank lost a portion of deposits as panicked savers rushed to remove their money from the bank in the hours after the initial announcement. Kuwait was forced to guarantee bank deposits after savers began withdrawing their funds from Gulf Bank, despite assurances from the bank that it was well capitalised and could easily cover the ini- tially unspecified losses


In a two-week subscription period shareholders were


offered 1.25bn new shares at KD0.3 each. Shareholders took 68% (850.6m shares, totalling KD255.2m), with the remaining 403.3m shares allocated to the Kuwait Invest- ment Authority. The sovereign wealth fund underwrote the capital call and will now hold 16% of the bank's stock going forward.


Gulf Bank's shares were suspended from the Kuwait Stock Exchange while the restructuring took place. When trading resumed in mid-April, the price instantly halved, falling from KD0.97 at the point of suspension to KD0.45 as the stock caught up with the drops it had missed in the six months it was off the exchange.


UAE banks have traditionally had capital ratios far exceeding the levels of banks in other


countries.


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