Government takes over Dubai Bank

Dubai: The Dubai Government yesterday took over Dubai Bank, an Islamic bank owned by Dubai Holding and Emaar Properties, ending several months of speculation on the future and financial strength of the bank.

"The Government of Dubai emphasised that it has decided to act swiftly to ensure the preservation of all of Dubai Bank's depositors' interests," said a statement issued through the Dubai Government Media Office.

"The Government of Dubai will immediately make adequate capital injection into Dubai Bank, thereby taking over the bank. The injection will effectively dilute the complete holding of Dubai Bank's current shareholders, and consequently allow the 100 per cent takeover of the bank by the Government of Dubai," the statement said.

Before the government acquisition, Dubai Bank was jointly owned by Dubai Holding and Emaar with 70 per cent and 30 per cent stakes respectively. Bankers and analysts said the government action has put to rest all doubts on the systemic health of the UAE's banking system and has proved that the authorities are prepared to intervene.

Sovereign decision

The UAE Central Bank and the Ministry of Finance have welcomed the move.

Although no official comment was available from Dubai Bank, a senior official said the acquisition is a sovereign decision and it has reaffirmed the government's support for the bank.

"I believe the impact will be positive, the market was anticipating some action regarding Dubai Bank and this removes the uncertainty and also shows once again the commitment that all concerned parties in the UAE have to protect depositors," said Abdul Kadir Hussain, Chief Executive of Mashreq Capital.

By the end of 2009, Dubai Bank had total assets of Dh17.4 billion against total liabilities of Dh15.7 billion. It made a loss of Dh290.6 million, wiping out 15 per cent of its equity, driven by high loan losses, investment losses and a high cost/income ratio. Customer deposits stood at Dh14.9 billion at the end of 2009.

The bank has yet to report its 2010 results. Rating agency Fitch said it expects a loss for 2010 as it feels full-year results to be "negatively affected by its significant exposure to certain Dubai entities that are being restructured". In March Fitch downgraded the bank to D/E from D and kept it on rating watch negative.

Assessing the situation

The Dubai Government yesterday clarified that its 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.

Last year there was speculation that the bank would be merged with Emirates Islamic Bank, a fully owned subsidiary of Emirates NBD. But many think that such a move would have put undue pressure on Emirates NBD's balance sheet.

"Even if ENBD [56 per cent owned by Investment Corporation of Dubai] would get Dubai Bank for free, it would reduce its Tier-1 capital by 90 basis points taking into account a 12.5 per cent writeoff of Dubai Bank's loan book," said Jaap Meijer, head of the bank team at AlembicHC.

Exposure problems