DUBAI (Zawya Dow Jones)--Dubai's government said Monday it will take full control of Dubai Bank, a local lender owned by an investment vehicle linked to the emirate's ruler, in order to keep the bank afloat and protect deposit holders.
The government said it will inject capital into Dubai Bank, without providing more details, which is expected to dilute current shareholders and allow for a complete takeover. Before the announcement, Dubai Bank was 70% owned by Dubai Holding and 30% by real estate firm Emaar Properties (EMAAR.DFM), it added. Emaar wasn't immediately available to comment.
"The intervention is designed to ensure that Dubai Bank's business continues uninterrupted while options for the bank's future, whether to be run on a stand-alone basis or be potentially merged with another bank in which the government has ownership, are being assessed," the Dubai government said.
Dubai Holding is directly linked to Dubai's ruler Sheikh Mohammed Bin Rashid Al Maktoum and spans the financial, hospitality and real estate sectors. It is one of Dubai's three main investment groups, alongside Dubai World, which in March signed a final deal with all its creditors to restructure about $25 billion worth of debt.
"This seemingly takes care of one of the areas of systemic risk that we have been worrying about," said Raj Madha, a banking analyst at Rasmala.
Dubai Bank in 2010 carried out a strategic review of its business after it made a net loss of AED291 million in 2009. Its total assets stood at AED17.4 billion as on Dec. 31, 2009. Total liabilities stood at AED15.7 billion, including customer deposits of AED14.9 billion.
"This has been in the works for some time, it is the Dubai government rearranging its holdings," Dubai Bank's Chief Financial Officer Ahmed Elshall later told Zawya Dow Jones.
Dubai Bank several years ago put itself up for sale but potential suitors lost interest because of the high sale price and the risk of looming loan losses as a result of the regional property downturn. One banker familiar with the situation said that the bank may require "a couple of hundreds of millions of dollars" worth of capital to repair its balance sheet.
"Capitalization may be required for other reasons," said Dubai Bank's Elshall. "You may need capital to pursue new strategies for the future," he said.
MERGER
Dubai's government said it may consider merging the bank with another entity in which it has a stake.
"From a realistic point of view, there a number of banks owned by governments, that is the case for Abu Dhabi for example, and it is likely in view of the period we've gone through there will be some consolidation," Elshall said.
Analysts at AlembicHC said a possible scenario could involve Emirates NBD (EMIRATES.DFM), one of the region's biggest banks by assets.
"ENBD always stressed it would only do an acquisition on commercial terms, which is only possible after a capital injection and proper cleansing of Dubai bank's loan book," said Jaap Meijer, head of the banking team at AlembicHC.
"Even if ENBD (56% owned by Investment Corp of Dubai) would get Dubai Bank for free, it would reduce its Tier-1 by 90bps (although less negative than a take-over of Amlak), taking into account a 12.5% write off of Dubai Bank's loan book, as its loan loss provision needs would exceed Dubai bank's capital base," he added.
Ratings agency Fitch in March downgraded Dubai Bank's rating to D/E from D and kept it on rating watch negative, as it expected full-year results for 2010 to be "negatively affected by its significant exposure to certain Dubai entities that are being restructured."
Dubai Bank was turned into an Islamic bank in 2007 and last year appointed Giel-Jan Van Der Tol, a former ABN Amro banker, as its new chief executive.
Emaar, in its 2010 annual report, said the group provided an impairment of AED176.6 million (for the year) based on the estimate of the carrying value of its investment in Dubai Banking Group. "This estimate of the impairment is based on the management estimates of the provision required in respect of the loan and advances that may be required to be made by DBG for the year ended 31 December 2010," it said.
-By Nicolas Parasie, Dow Jones Newswires; +9714 446-1681; nicolas.parasie@dowjones.com
Copyright (c) 2011 Dow Jones & Co.
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