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15 April 2024

ENBD to convert Dh12.6bn ministry deposits to equity


By CL Jose

Emirates NBD, the largest bank in the UAE in terms of assets, equity and profit, has initiated moves to expand its equity base by about 50 per cent, thus raising it from the present Dh25.761 billion to Dh38.361bn.

The bank has already taken a decision to seek shareholders' permission to convert the Dh12.6bn deposits it received from the Ministry of Finance as part of the Dh50bn liquidity injection programme by the ministry recently, to Tier 2 capital of the bank.

All local banks have received three to five years' deposits from this pool on a pro rata basis with respect to the size of their asset book. It is quite evident that Emirates NBD, that controls the largest asset base with a size of Dh282.413bn, has bagged the biggest chunk of this deposit pool, at about 25 per cent, which works out to Dh12.6bn.

Once the extra-general meeting (EGM) to be held on March 25, following the annual general meeting, gives the go-ahead to the proposal to convert this sizeable deposit to Tier 2 capital, the bank will boast a much higher regulatory capital that can be leveraged to expand its asset base, which is already close to 25 per cent of the aggregate asset size of the country's banking system.

Tier II capital is secondary bank capital that includes items such as undisclosed reserves, general loss reserves, subordinated term debt, and more, but can be taken into consideration while computing the capital adequacy of a bank.

While Tier one capital can absorb losses without a bank being required to cease trading, Tier two capital can absorb losses in the event of a windup, and so provides a lesser degree of protection to the depositor – here the Ministry of Finance.

More than serving as a base to grow the asset book, analysts view that Emirates NBD needs an upsizing of its equity as the bank's capital adequacy ratio (CAR) has fallen close to the minimum required level of 10 per cent. ENBD's ratio has dropped marginally towards 2008-end to 11.4 per cent from 12.5 per cent, the level the bank maintained during the same period in the previous year.

As per the regulations stipulated by the Central Bank of UAE, banks operating in the country needs to maintain a capital equal to 10 per cent of the risk-weighted assets of the bank.

"Though this is higher than the CAR of eight per cent stipulated by the Bank of International Settlements (BIS), it is always advisable to maintain a higher capital, especially at a time when the financial services industry is going through one of its toughest periods," said an analyst.