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Emirates NBD to Convert $1.7b Deposits into Capital

DUBAI — Emirates NBD, the United Arab Emirates’ biggest bank by assets, plans to convert about Dh6.3 billion ($1.7 billion) of government deposits into capital as a cushion against losses amid the financial turmoil.

“The terms are pretty good, the pricing is 4.5 per cent,” Sanjay Uppal, chief financial officer of state-controlled Emirates NBD, said in a phone interview from India late Wednesday. “I think most banks would” exercise the option.

Emirates NBD received the deposits as part of the first tranche of the Dh70 billion capital infusion programme the government announced in October to relieve the impact of the credit crunch. Including a second tranche, Emirates NBD has received Dh12.6 billion in deposits. Banks have the option to convert the first deposit tranche into Tier 2 capital.

UAE banks are being hurt as the biggest financial crisis since the 1930s crimps lending, weakens capital-market activity and batters share prices. Provisions for bad loans and investment impairments are rising as the emirate’s key property and financial services industry slows and job losses increase.

Tier 2 capital is a bank’s secondary capital and includes items such as undisclosed reserves, general loss reserves and subordinated term debt. It protects depositors after the value of Tier 1 capital has eroded. Tier 1 consists of items such as common stock, retained earnings and perpetual preferred stock.

“This would be good for them and the stock, it is adding capital and not giving a stake to the government,” said Janany Vamadeva, an analyst at Al Futtaim HC Securities Co. in Dubai. “This is not adding any new liquidity though, and they need to find money to repay Dh6 billion of notes this year.” Emirates NBD has Dh5.8 billion of notes maturing in 2009, the bank said on February 12. A Dh1.84 billion floating rate note was repaid in January and repayments are “well within the bank’s funding capacity,” it said then. UAE lenders have until March 31 to decide whether they wish to exercise the option to convert deposits into capital, Uppal said. The government may also turn these deposits into equity if needed, he added. The Dubai government-run lender had Dh2.26 billion of writedown and impairment charges in 2008. Non-performing loans stood at 1 per cent of total loans, while its capital adequacy ratio declined to 11.4 per cent from 12.5 per cent in 2007.

Last month, five state-controlled Abu Dhabi banks received 6 per cent, Tier 1 capital notes from the Abu Dhabi government to buffer losses and add liquidity. National Bank of Abu Dhabi PJSC, Abu Dhabi Commercial Bank PJSC and First Gulf Bank PJSC received Dh4 billion each, while Union National Bank PJSC and Abu Dhabi Islamic Bank PJSC both received Dh2 billion.

The U.A.E. central bank and representatives of local banks will form a task force to suggest measures to address the impact of the global financial crisis, the regulator said yesterday.

The Dubai-based banks, whose capital base is not as strong as the Abu Dhabi banks, will opt for the conversion, Vamadeva said. “The government though still has to add more liquidity.” Other Dubai-based banks include Dubai Islamic Bank PJSC, Mashreqbank PSC and Commercial Bank of Dubai PSC.

Emirates NBD shares closed unchanged at Dh3.13 on the Dubai Financial Market on Thursday after gaining 4.8 per cent earlier.