NBAD to bolster capital to reduce risk

CAPITAL ADEQUACY: National Bank of Abu Dhabi moves to improve capital position. (Getty Images)

National Bank of Abu Dhabi (NBAD) said on Wednesday it would seek to improve its capital adequacy ratio by converting into regulatory capital $1.53 billion of United Arab Emirates (UAE) government deposits.

NBAD, the largest bank in Abu Dhabi, is the latest UAE bank to convert into subordinated debt deposits the Ministry of Finance gave out late last year. The debt can be treated as Tier 2 capital, at an annual coupon of 4.5 percent.

Banks in the second-largest Arab economy are looking to shore up their stockpile of capital as loan defaults mount and they take provisions for more bad loans to come.

"This improves the capital adequacy ratio and enables the bank to leverage lending," NBAD Chief Executive Michael Tomalin told reporters after shareholders approved the plan to convert 5.6 billion dirhams ($1.53 billion) of state deposits.

"It is attractive because it is Tier 2 capital, the coupon is 4.5 percent and the tenure is seven years. So it is all reasonably attractive," Tomalin said.

The bank's capital adequacy ratio would rise to 23.5 percent from 15.4 percent now after converting federal deposits and because NBAD got 4 billion dirhams of Tier 1 capital, a class of subordinated debt, from the Abu Dhabi government in February.

Abu Dhabi injected 16 billion dirhams into five of its banks to improve their capital adequacy ratio as they face economic slowdown.

The capital adequacy ratio - the ratio of a bank's capital to risk - is used to identify how well a bank can absorb losses.

"The reason you want a high capital adequacy ratio is that people have confidence in the bank and ratings agencies have confidence," said Raj Madha, a banking analyst at EFG-Hermes. "The more secure the bank, the cheaper it is to borrow."

Banks across the oil-producing Gulf have written down the value of investments and taken provisions against an expected rise in bad loans after the region's economic boom came to an end late last year as oil prices collapsed.

NBAD's fourth-quarter profit fell 34 percent because it booked 289 million dirhams in provisions and said it held non-performing loans worth 1.072 billion dirhams at the end of the year, up from 859 million dirhams a year earlier.

The UAE Ministry of Finance set up a 70 billion dirham facility last year to deposit money in banks. So far, it has deposited 50 billion dirhams of that cash.

The economic downturn has raised the prospect of some mergers between banks in the UAE, where more than 50 finanical institutions serve a population of about 4.5 million people.

NBAD Deputy Chairman Jauan Salem al-Dhaheri said a merger of Abu Dhabi's largest banks could happen at the "appropriate time".

Meanwhile, shareholders also approved the distribution of a 30% cash dividend and 10% stock dividend to shareholders listed on the share register as at March 22 2009. (Reuters)

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