Capital ideas in the UAE
UAE banks have made varied efforts to strengthen their balance sheets to protect against declines in loan recovery rates and asset prices. By Mark Kolmar.
Going into the year, Abu Dhabi Commercial Bank (ADCB), First Gulf Bank and Dubai Islamic Bank (DIB) had their rating outlooks downgraded by Moody's from stable to negative, with previously positive 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. Emirates Bank International and National Bank of Dubai were revised downwards from stable to negative, while Sharjah 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 growing 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 methods 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 period of heavy price drops.
In Abu Dhabi, one of the major steps has been the raising 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 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 structured and arranged the transaction.
The fact that it was solely Abu Dhabi institutions that received capital boosts raised concerns over Dubai's ability 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 adequacy ratio to meet the recent CBUAE edict. CBUAE governor, 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 followed national rule changes preventing the government from converting the loans into equity stakes in participating 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 liquidity 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 Dh12.6bn (US$3.43bn), and will see the bank's capital adequacy 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 capital, 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 intentions 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 weaker 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 regulatory 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 current 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 previous 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 European accounts. The October issue carried a slightly higher 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 revaluation 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 limited 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 initially 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 Investment 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.