19 May 2011
The announcement was both stark and bleak: "The Dubai government, acting under directions from His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of UAE, Ruler of Dubai, announced today that it has taken over Dubai Bank with immediate effect". The announcement was made through WAM, the UAE state-owned PR company on Monday.
According to the statement the government will inject an unspecified amount of cash into DB, completely diluting the holdings of DB's current shareholders, Dubai Holding and Emaar, who own 70% and 30% respectively and allow the government to make a complete takeover. According to Dow Jones, "The book value of Emaar's investment in DB as of March 31, 2011 was AED172m ($46.9m)."
The history of DB has been checkered. The bank was granted a license to operate as a conventional bank in September 2002, but it quickly became apparent the newcomer could not compete in the retail market with 51 other banks and in 2004 its new CEO former JPMorgan man Ziad Makkawi was brought in to turn DB into an investment bank.
This was not a successful move, so in 2007 DB became an Islamic bank, just in time to reap the whirlwind of the global financial crisis and the collapse of the Dubai property market. Under a new CEO, Giel Jan Van Der Tol formerly of ABN Amro DB began a restructuring program in 2010, but still looked like a bank without focus or direction.
Amar Meher, senior associate with Vinson & Elkins in Dubai told The Islamic Globe: "We have four leading Islamic banks in Dubai with Dubai Islamic Bank, Noor, Emirates Islamic Bank and DB competing for the same business. It makes sense to me that the role of DB in this market is revisited, particularly in view of the impact of the global economic crisis on the banking industry in general."
Dubai's move will have a negative knock-on effect for both Emaar and Dubai Holding, as the dilution will mean the companies will have to shoulder a hefty write-down.
The real question now is whether the government will allow the bank to continue to function as a standalone entity in a notoriously overbanked market or whether there is a more prosaic answer to be sought through merger?
David Testa, MD of David Testa Consultancy, an Islamic finance consultancy, told The Islamic Globe: "This might be a way to clear the decks and consolidate Islamic banking assets and avoid another round of [local banking] instability, as Dubai is making some progress at this time in light of other regional concerns such as those affecting Bahrain."
The successful merger of Emirates Bank International and the National Bank of Dubai to form EmiratesNBD has so far not been repeated in UAE in spite of constant rumor that ADCB and NBAD would make perfect bedfellows. There is any number of banks that might sit well alongside Dubai Bank including Noor Islamic Bank and Emirates Islamic Bank as well as Emirates NBD itself.
Meher said: "Locally the press had speculated that DB might merge with EIB. I understand that merger fell through though as EIB was not keen on assuming any losses that may have been incurred by DB and thus passed on to its stakeholders."
It appears DB's problems lie in past heavy lending to parts of Dubai Holding, a conglomerate owned by Sheikh Mohammed, Dubai's ruler. The latest figures made public by the bank show a loss of AED291m ($80m) for 2009 at which point it had total assets of AED17.4bn ($4.76bn) and outstanding loans of AED14.1bn ($3.86bn) and the unspecified bailout of DB by the government is likely to be a sign that DB's loan book is unappetizing, which could have a stymieing effect on any merger prospects - as the abortive merger between the two UAE-based Islamic home financing entities Amlak and Tamweel showed.
One Dubai based lawyer, who preferred not to be named said: "It's most likely that DB will hook up with DIB in a shotgun wedding. DIB's main dealmakers have moved onto other entities within Dubai Inc, Noor is a different kind of beast and DIB has a tarnished reputation because of some of the things that went on in the past - so a tie up between these two banks would be sensible."
The situation remains deliberately vague to allow maximum room for manoeuvre. DB declined all requests from The Islamic Globe for an interview.
Testa concluded: "It's a wake-up call for Islamic banks, showing that even with strong government backing, it's not always easy to make money in Shari'ah compliant banking."
© The Islamic Globe 2011
The announcement was both stark and bleak: "The Dubai government, acting under directions from His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of UAE, Ruler of Dubai, announced today that it has taken over Dubai Bank with immediate effect". The announcement was made through WAM, the UAE state-owned PR company on Monday.
According to the statement the government will inject an unspecified amount of cash into DB, completely diluting the holdings of DB's current shareholders, Dubai Holding and Emaar, who own 70% and 30% respectively and allow the government to make a complete takeover. According to Dow Jones, "The book value of Emaar's investment in DB as of March 31, 2011 was AED172m ($46.9m)."
The history of DB has been checkered. The bank was granted a license to operate as a conventional bank in September 2002, but it quickly became apparent the newcomer could not compete in the retail market with 51 other banks and in 2004 its new CEO former JPMorgan man Ziad Makkawi was brought in to turn DB into an investment bank.
This was not a successful move, so in 2007 DB became an Islamic bank, just in time to reap the whirlwind of the global financial crisis and the collapse of the Dubai property market. Under a new CEO, Giel Jan Van Der Tol formerly of ABN Amro DB began a restructuring program in 2010, but still looked like a bank without focus or direction.
Amar Meher, senior associate with Vinson & Elkins in Dubai told The Islamic Globe: "We have four leading Islamic banks in Dubai with Dubai Islamic Bank, Noor, Emirates Islamic Bank and DB competing for the same business. It makes sense to me that the role of DB in this market is revisited, particularly in view of the impact of the global economic crisis on the banking industry in general."
Dubai's move will have a negative knock-on effect for both Emaar and Dubai Holding, as the dilution will mean the companies will have to shoulder a hefty write-down.
The real question now is whether the government will allow the bank to continue to function as a standalone entity in a notoriously overbanked market or whether there is a more prosaic answer to be sought through merger?
David Testa, MD of David Testa Consultancy, an Islamic finance consultancy, told The Islamic Globe: "This might be a way to clear the decks and consolidate Islamic banking assets and avoid another round of [local banking] instability, as Dubai is making some progress at this time in light of other regional concerns such as those affecting Bahrain."
The successful merger of Emirates Bank International and the National Bank of Dubai to form EmiratesNBD has so far not been repeated in UAE in spite of constant rumor that ADCB and NBAD would make perfect bedfellows. There is any number of banks that might sit well alongside Dubai Bank including Noor Islamic Bank and Emirates Islamic Bank as well as Emirates NBD itself.
Meher said: "Locally the press had speculated that DB might merge with EIB. I understand that merger fell through though as EIB was not keen on assuming any losses that may have been incurred by DB and thus passed on to its stakeholders."
It appears DB's problems lie in past heavy lending to parts of Dubai Holding, a conglomerate owned by Sheikh Mohammed, Dubai's ruler. The latest figures made public by the bank show a loss of AED291m ($80m) for 2009 at which point it had total assets of AED17.4bn ($4.76bn) and outstanding loans of AED14.1bn ($3.86bn) and the unspecified bailout of DB by the government is likely to be a sign that DB's loan book is unappetizing, which could have a stymieing effect on any merger prospects - as the abortive merger between the two UAE-based Islamic home financing entities Amlak and Tamweel showed.
One Dubai based lawyer, who preferred not to be named said: "It's most likely that DB will hook up with DIB in a shotgun wedding. DIB's main dealmakers have moved onto other entities within Dubai Inc, Noor is a different kind of beast and DIB has a tarnished reputation because of some of the things that went on in the past - so a tie up between these two banks would be sensible."
The situation remains deliberately vague to allow maximum room for manoeuvre. DB declined all requests from The Islamic Globe for an interview.
Testa concluded: "It's a wake-up call for Islamic banks, showing that even with strong government backing, it's not always easy to make money in Shari'ah compliant banking."
© The Islamic Globe 2011
