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Abu Dhabi Govt Injects $4.36 Billion to Bolster Banks | ASHARQ AL-AWSAT English Archive 2005 -2017
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ABU DHABI/DUBAI, (Reuters) – The government of Gulf oil exporter Abu Dhabi said on Wednesday it would inject 16 billion dirhams ($4.36 billion) into five of its banks through capital notes to bolster confidence as loan defaults mount.

United Arab Emirates banks have posted 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 global financial crisis.

Some banks in the world’s fifth-largest oil exporter have delayed posting their earnings after the central bank last month asked for a review of major loans and provisions that are likely to weigh on the bottom line this year. 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.”

The cash injection takes the form of Tier 1 capital notes, which will pay 6 percent annual interest for five years and a floating rate thereafter. The securities would be callable, the government of Abu Dhabi said in a statement.

“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,” it said.

The injection comes in addition to 120 billion dirhams of emergency funding facilities launched by the central bank and finance ministry since September to defrost credit markets.

Despite these efforts, the one-month Emirates Interbank Offered Rate, which had traditionally tracked U.S. dollar London Interbank Offered Rate (LIBOR), was 3.2 percent on Wednesday versus an equivalent LIBOR rate of 0.445 percent.

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 would each borrow 2 billion dirhams under the plan.

TOUGH 2009

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.