Banks in the UAE will try to repay capital to the tune of AED70bn (US$19.1bn) this year, placed with them at the height of the global financial crisis.
The country’s Ministry of Finance put the money into the banks to steady their balance sheets after the collapse of Lehman Brothers in September 2008.
This support was converted into seven-year capital-boosting bonds in 2009, but some banks are now turning to the bond market again as the current market prices offer a more favourable interest rate.
As an example, Reuters reports that National Bank of Abu Dhabi, the UAE’s largest lender by market value, has a US$750m bond maturing in March 2017 that was trading on Tuesday at a yield of 2.36 percent – less than half the price it will pay this year on the US$817m of government bonds it still has outstanding.
As the banks will pay five percent on the government bonds this year, and 5.25 percent in the final three years to maturity, on top of the 4.5 percent in 2012 and 4 percent in 2010 and 2011, many banks are planning to use the market’s current low interest rate environment to replace their more expensive obligations.
Timucin Engin, associate director for financial services ratings at Standard & Poor’s, said: “If you look at how much banks are paying on the bonds compared to where their senior debt is trading, it is a significant difference.”