Bankers here said that most UAE banks – if not all – will increase capital by 20-40 per cent this year. Banks are under pressure to utilise their record 2007 profits to strengthen their capital base according to Basel II requirements.
They are likely to limit their cash dividend payouts to a minimum and opt for bonus shares to their shareholders, analysts said.
Last year banks in the UAE enjoyed strong growth, but as more business is sought and with the new Basel II–based regulation – which would lower capital adequacy ratios by 0.5 to 1.0 per cent – on the verge of implementation, boardroom chatter of how to raise capital, and by how much, continues.
Tammam El Barbir, Dubai-based Morgan Stanley banking analyst, told Emirates Business: “It would be natural for banks to raise capital in light of strong long growth expected, compounded by the impact Basel II will have on capital adequacy ratio. When Basel II is applied it will lower the capital adequacy ratio and that results in lost loans.”
He also said more capital would allow room on the balance sheet for more acquisition opportunities. The global credit crunch is expected to trickle down to the GCC in the second half of 2008, and will mainly affect mega-project financing. This will either force delays in projects, or present new opportunities to local banks to enter the sector.
“In terms of project financing, sukuk and corporate bonds, local banks don’t have much of a market share,” El Barbir said, noting that most of the arrangers are foreign banks such as HSBC and Citi.
Abu Dhabi recently announced it would spend $200 billion on urban infrastructure in the next five years, of which 60 per cent will be financed by the private sector. “You are talking about a $25bn increase in loans per year, so I would not be surprised to see banks shoring up their capital bases,” El Barbir said.
To reap maximum benefits, the banking sector may need to look at acquisitions to grow, another way that increased capital might be deployed. Investment bank EFG-Hermes says: “The sector is expected to see expansion and consolidation, with more domestically focused banks looking towards consolidation and larger banks engaging in expansion across Mena.”
In coming months, ABN Amro’s 40 per cent stake (which could be worth $5bn) in Bank Saudi Hollandi will be up on the block – an acquisition that a number of lenders in the UAE will actively bid on.
The Commercial Bank of Dubai yesterday announced a record profit and proposed a bonus issue of shares that will increase its equity capital by 25 per cent and a cash dividend of 30 per cent. Other banks are expected to follow suit.
Some analysts do not foresee banks shoring up capital on a massive scale this year.
Hatem Alaa, an analyst at Cairo-based HC Securities, said: “Most banks are adequately capitalised, and given that loan growth is not projected to be higher in 2008 than last year, I don’t see many banks taking this route.”