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Dubai Ruler Orders Emirates NBD To Take Over Dubai Bank

Wednesday, Oct 12, 2011

(This story was originally published Tuesday.)

--Dubai ruler's order aimed at consolidation in local banking sector

--Order comes after government took control of Dubai Bank in May

--Analyst says deal makes sense, but transparency needed

DUBAI (Zawya Dow Jones)--Dubai's ruler on Tuesday ordered Emirates NBD (EMIRATES.DFM), the largest Gulf Arab bank by assets, to take over smaller competitor Dubai Bank , which was nationalized earlier this year, as the emirate's government seeks to strengthen a banking system that's still reeling from a regional property slump and the global financial crisis.

The takeover order follows a government announcement in May that it had taken full control of Dubai Bank , an Islamic lender which has posted huge loan losses, in a bid to keep it afloat and protect its deposit holders. The government said at the time it would inject capital into the bank and that it would consider a merger with another lender.

"Dubai Government is keen to take the necessary steps to empower financial institutions to fully operate in a way that serves the national economy and consolidate the country's position as a first class international financial hub," according to an emailed statement from the Dubai Government Media Office. No financial details were disclosed.

Officials at Emirates NBD said the takeover would have no impact on the bank's profits and level of loan losses. Shares of ENBD closed 1.6% lower at AED3.74 on the Dubai Financial Market .

Analysts and bankers welcomed the government's move, saying Emirates NBD would be in a better position to provide liquidity and capital support to Dubai Bank . Questions remain, however, about whether the deal's terms are favorable to ENBD 's shareholders and how the lender would deal with absorbing another Islamic entity. ENBD also owns Emirates Islamic Bank.

"The deal makes sense since both banks have the same stakeholders but more transparency on the price of the takeover is required to protect the interests of minority ENBD shareholders," said Tamer Bazzari, chief executive officer at Genero Capital.

Emirates NBD was created in October 2007 through the merger of Emirates Bank International and National Bank of Dubai. The Dubai Financial Market -listed lender is 55.64% owned by Investment Corp. of Dubai, a government investment firm, according to Zawya.com data.

Before Dubai Bank 's government bailout in May, the lender was 70% owned by Dubai Holding, the investment company of the emirate's ruler, Sheik Mohammed bin Rashid Al Maktoum, while Dubai-based real-estate developer Emaar Properties (EMAAR.DFM) held a 30%-stake.

"We expect ENBD to acquire the bank for nil, as the government nationalized the bank and diluted its shareholders," analysts at HC Securities said in a note.

The government's latest move is an example of how Dubai, which directly or indirectly owns stakes in most of the local lenders, is trying to spur consolidation among the emirate's banks, which saw profits erode after being forced to take large provisions against their exposure to heavily-indebted companies and cope with the fallout from the global economic downturn.

The banking sector in the U.A.E., and the wider Arab Gulf region, is widely regarded as ready for consolidation as it is highly fragmented and the biggest lenders are too small to play a global role. But merger and acquisition deal flow in the sector has been limited, partly due to the reluctance by government stakeholders to cede control, in particular in any cross-border merger plans.

Last year, Dubai Islamic Bank (DIB.DFM), the U.A.E.'s largest Islamic lender, raised its stake in Dubai-based mortgage lender Tamweel.

ENBD 's chief executive Rick Pudner also said that the management changes in recent months at the group and its Islamic subsidiary were not related to the takeover announced Tuesday. Earlier this year, Sheik Ahmed bin Saeed Al Maktoum was named chairman of the bank, replacing Ahmed Humaid Al Tayer. Last month, the entire board at ENBD 's Islamic affiliate resigned and was replaced.

Dubai Bank in 2010 carried out a strategic review of its business after it made a net loss of AED291 million in 2009. Its total assets stood at AED17.4 billion as of Dec. 31, 2009, while total liabilities stood at AED15.7 billion, including customer deposits of AED14.9 billion. The bank was for sale several years ago but the lender could never find a buyer.

Ratings agency Fitch in March downgraded Dubai Bank 's rating to D/E from D and kept it on rating watch negative, as it expected full-year results for 2010 to be "negatively affected by its significant exposure to certain Dubai entities that are being restructured."

Dubai Bank was turned into an Islamic bank in 2007 and last year appointed Giel-Jan Van Der Tol, a former ABN Amro banker, as its new CEO.

"The question is now what will ENBD do with two Islamic banks? The next natural step I would say is to consolidate both Dubai Bank and Emirates Islamic Bank," Bazzari said.

Executives at Dubai Bank and Emirates NBD weren't immediately available to comment.

-By Nicolas Parasie, Dow Jones Newswires; +9714 446-1681; nicolas.parasie@dowjones.com

(Mirna Sleiman in Dubai contributed to this item.)

Copyright (c) 2011 Dow Jones & Co.

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12-10-11 0402GMT