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Mon 16 May 2011 12:43 PM

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Dubai takes over Dubai Bank, to inject capital

Move to buy out Islamic lender aimed at protecting depositors interests, says emirate

Dubai takes over Dubai Bank, to inject capital
Dubai Bank was 70 percent owned by Dubai Holding, the private holding company of the emirates ruler, with the remaining 30 percent owned by Emaar

Dubai's government took control of troubled Islamic lender
Dubai Bank on Monday to prevent a collapse undermining the Gulf Arab state's
banking sector.

Dubai, which is struggling to emerge from a debt crisis,
said it will inject an unspecified amount of capital into the bank and its
takeover would protect depositors' interests.

"In terms of credibility of the UAE banking system, it
was very important that the bank did not default. A default by Dubai Bank would
have raised worries about other local banks operating in the country,"
Mohammed Yasin, chief investment officer at CAPM Investments in Abu Dhabi,

Options for Dubai Bank, which is owned by the private
holding company of the ruler of Dubai, included being run on a stand-alone
basis or merged with another state-owned bank, the government said in a

Dubai already has stakes in six commercial banks in the UAE,
including Emirates NBD , Dubai's largest by market capitalisation, Dubai
Islamic Bank and Noor Islamic Bank. Dubai Bank has been under scrutiny for a

"There have been questions raised about the
sustainability and continuity of their operations for a while. The bank has
some serious liabilities outstanding and those need to be addressed," CAPM
Investment's Yasin said.

Fitch downgraded it in March, citing its weakened financial
flexibility and exposure to Dubai entities that are being restructured. The
ratings agency declined comment on Monday.

Dubai Bank has exposure to a syndicated $2.25bn Islamic
tranche to Investment Corporation of Dubai which lenders agreed to refinance
just two weeks ago.

At the end of 2009, Dubai Bank had total assets of AED17.4bn
($4.74bn) against total liabilities of AED15.7bn. It made a loss of AED290.6m.

It has not yet reported its 2010 results. Customers’
deposits stood at AED14.9bn at the end of 2009.

Continued on next page…

By contrast, Emirates NBD - formed by a 2007 merger of two
local banks ordered by Dubai's ruler - had total assets of AED300.3bn versus
total liabilities of AED266.3bn as of March 31, according to Reuters data.

Dubai has been restructuring state-linked firms to deal with
a debt pile estimated at $115bn built up during a boom that put the emirate on
the map for extravagant construction projects such as an indoor ski slope in
the desert.

The extent of its problems became clear when flagship
conglomerate Dubai World asked for a standstill on $26bn of debt in 2009. It
eventually reached a restructuring deal with creditors late last year.

Neighbouring Abu Dhabi has been central in keeping Dubai
afloat. The UAE central bank and Abu Dhabi extended Dubai a $20bn lifeline in
2009. Dubai said the central bank and UAE finance ministry support the

Dubai Bank is wholly-owned by Dubai Banking Group which
itself is 70 percent-owned by Dubai Holding. The remaining 30 percent is owned
by developer Emaar Properties .

"It's positive because it reduces any uncertainty
around the future commitments that Emaar or Dubai Holding would have to make to
Dubai Bank," said Abdul Kadir Hussain, Chief Executive of Mashreq Capital.

"But the total economics are unclear. We don't know the
size of the injection or how it will be financed."

Shares of Emaar, whose stake is worth AED172.4m, fell 2.2
percent. Dubai's index shed 1.5 percent at 0918 GMT. Emaar said it was
"awaiting further directives and details from the Dubai Government in
respect of the takeover".

The government said the bank's current management team will
not be affected by the takeover. Dubai Bank reorganised its operations last
year, positioning itself as a retail bank for premium customers with merchant
banking on the corporate side.

There was speculation last year that Emirates Islamic Bank,
an affiliate of Emirates NBD, was in talks to buy it.

And last month, Noor Islamic Bank's chief executive said it had
no plans to merge with any other financial institution for the time being.

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