Five Abu Dhabi banks to borrow $4.4bn from state

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Issued notes would have fixed annual interest rate of 6% over five years. (Getty Images)

The government of Gulf oil exporter Abu Dhabi said on Wednesday it would inject a total of 16 billion dirhams ($4.36 billion) into five banks through capital notes to bolster confidence as the global crisis bites.

The move comes as the UAE banks post weaker-than-expected fourth-quarter profits due to provisions for bad loans and writedowns on investment losses as the once-booming region suffers the fallout from the credit crunch.

“The Government believes that this strategic initiative is an appropriate and proactive response to ensure that the strong confidence in Abu Dhabi’s financial institutions is further enhanced,” said a statement from the Department of Finance.

Some banks have delayed posting their earnings after the central bank asked for a review of major loans and provisions that have weighed on the bottom line.

Three big Abu Dhabi banks - National Bank of Abu Dhabi, First Gulf Bank and Abu Dhabi Commercial Bank - would borrow 4 billion dirhams each under the scheme, they said in separate statements on Wednesday.

"I would categorise it as shock protection," said Raj Madha, regional banking analyst at EFG-Hermes investment bank.

"Shock protection is not as bad as a bailout, the question is, is it for a shock that they don't know about or for a shock that they do know about.

Wednesday's cash injection, in the form of Tier 1 capital notes, comes in addition to 120 billion dirhams of emergency funding facilities launched by the UAE central bank and finance ministry since September to help banks cope with tighter credit conditions.

"Given current global economic conditions, the government believes that this strategic initiative is an appropriate and proactive response to ensure that the strong confidence in Abu Dhabi's financial institutions is further enhanced," the government of Abu Dhabi said in a statement.

Unlike the earlier facilities, analysts said the new notes issues were very similar to the government buying stock in the emirate's banks, although they would not give it more direct control of bank operations.

"This is a very thin leash," Madha said.

"It is not equity but it is very similar to what we would call in Europe preferred stock ... It is very similar to equity but the government doesn't get extra votes or extra control because of it."

Union National Bank and Abu Dhabi Islamic Bank also said they would borrow 2 billion dirhams each from the government.
 
The end of a building boom in the emirate of Dubai, home to the world's tallest tower and manmade islands in the shape of palm trees and the globe, has raised the risk that home buyers would default on mortgage loans.

Property prices in the Middle East trade and commerce hub have fallen 25 percent already since a September peak, Morgan Stanley said this week, adding that $263 billion of projects in the UAE had been delayed or cancelled.

Amid the downturn, UAE banks have adopted a cautious approach and are holding off on extending new consumer loans.

National Bank of Abu Dhabi and Abu Dhabi Commercial both missed analysts' forecasts for their fourth-quarter earnings this week as they made massive loans provisions to brace themselves for a tough 2009.

National Bank's quarterly profit fell 34 percent, while Abu Dhabi Commercial on Wednesday came out with a 140 million dirham loss, against analysts' forecasts that it would earn 442 million dirhams in the quarter.

The latter, whose loss announcement coincided with news that its chief executive would be replaced, said non-performing loans amounted to 1.26 billion dirhams in 2008.

"This is a precautionary step taken by the Abu Dhabi government given that 2009 is not going to be a great year, and loan quality might deteriorate," said Bikash Rout, a financial analyst at Global Investment House.

He added Dubai "could take cue" from Abu Dhabi's move.

Last week, the UAE, a seven-member federation, said it was considering setting up an emergency panel to deal with the global financial crisis.

Dubai already set up a panel comprising high-profile business figures to find ways to deal with the crisis.

Its mortgage lenders Amlak and Tamweel are being merged with two state-run banks to help them cope.  (Reuters)

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READERS' COMMENTS

Where is the money?!
Posted by Ayman, Dubai on Thursday 5 February 2009 at 12:27 UAE time


Its amazing how fast everything seemed to unravel. Banks are now offering surprisingly high interest rates on deposits and simultaneoulsy they are refusing to lend. The questions stands that how exactly these banks are planning on honoring this high interest rates on deposits to begin with? Once banks step up and start easing their lending, the wheels of the economy would start turning. Abroad, central banks made sure that banks continued lending to support SMEs coz believe it or not they are extrmely important in the proper functioning of an economy.

Why
Posted by Tee, Abu Dhabi, United Arab Emirates on Thursday 5 February 2009 at 09:22 UAE time


I think it funny that this companies that are collecting loans from the Abu Dhabi Government ane still going to be paying dividends at a time like this.

This is not going to improve lending. Its more of a PR move.

Must be worse
Posted by Martin on Wednesday 4 February 2009 at 22:49 UAE time


Wow, the banks in Dubai have not even made any moves or given any indication of needing lifelines. Truly Amazing.

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