Dubai: Emirates NBD’s decision to sell an additional 10.5 per cent stake in card processing company Network International Holdings (Network International) is expected to boost the bank’s profitability and capitalization, according to credit rating agency Moody’s.
The recent stake sale in Network International follows ENBD’s sale in April of a 28.6 per cent stake in Network International (through a listing on the London Stock Exchange and the exercise of an overallotment option), which reduced its stake to 22.4 per cent from 51.0 per cent.
“ENBD’s latest 10.5 per cent stake sale in Network International is credit positive because the realised gains will increase its 2019 profitability and capitalisation, providing additional buffer to absorb the sizeable capital consumption from its acquisition of Turkey-based Denizbank completed on 31 July,” said Mik Kabeya, an analyst at Moody’s
Following the most recent stake sale, ENBD’s shareholding in Network International has been reduced 11.9 per cent. “We estimate that ENBD’s realised gains from the transaction will be around Dh998.8 million ($272.1 million), which equates to around 10 per cent of its 2018 profit or 0.2 per cent of tangible assets at the end of 2018,” said Kabeya
The sale proceeds will increase ENBD’s already strong capitalisation (its tangible common equity to risk-weighted assets ratio [TCE ratio] was 17.5 per cent at 30 June 2019). Based on ENBD’s reported risk-weighted assets as of June 2019, Moody’s analysts estimate that the realised gains from the sale will increase ENBD’s TCE ratio by around 32 basis points (bp), while ENBD’s potential rights issuance of up to $2 billion would increase its TCE by up to around 238 bp.
The rating agency expects ENBD’s strong underlying profit generation will also help maintain solid capitalization. In addition, given that ENBD’s stake in Network International is now less than 20 per cent, the bank could change the accounting method it uses to value the stake on its books, which could lead to some unrealized gains on the investment.
“We do not expect the sale of Network International to have negative strategic implications for ENBD given that the bank will remain a customer of Network International and retain the ability to use the services of other card processing companies if necessary. Also, we expect a limited effect on ENBD’s future profitability from Network International’s reduced contribution,” said Kabeya.