The government of the emirate of Abu Dhabi injected Dh16bn ($4.4bn) of capital in five of its banks this week - highlighting the depth of the global credit crash and sparking fears over the health of banks in Dubai.
The National Bank of Abu Dhabi, First Gulf Bank and Abu Dhabi Commercial Bank will each receive Dh4bn. Union National Bank and Abu Dhabi Islamic Bank are to receive Dh2bn.
The liquidity support will be in the form of tier one capital qualifying non-voting, non-cumulative perpetual securities with JPMorgan acting as adviser.
"The Abu Dhabi banks generally had adequate capital adequacy ratios before the announcement of this new capital and so it will be interesting to see if they use it to try and continue their recent rapid growth or whether they are privately anticipating a more challenging operating environment than they have publicly acknowledged so far," said Robert Thursfield, a director in Fitch’s financial institutions team.
"The new capital looks like a financing plan to enable Abu Dhabi projects to continue as planned, although it could also be a cushion for potential future problems in loan books, in particular real-estate related exposures."
Capital outflows, refinancing woes, falling stock prices and increased funding costs have altered the Gulf banking landscape since the mid-September collapse of Lehman Brothers. evertheless, the regional liquidity squeeze differs significantly with G7 markets. The fear of counterparty risk and systemic deleveraging has savaged banking stability in developed markets. This week’s announcement flies in the face of bullish opinion voiced in recent months that regional banks were relatively immune to the global debt crisis due their well-capitalized base and asset quality.
Gulf monetary authorities in the second half of last year attempted to buttress market confidence by entrenching its lender of last resort status, while mandating banks to raise customer deposits in return. Recently, Dubai-based banks Amlak and Tamweel received support from the United Arab Emirates’ federal authorities but this week’s support has come from the emirate of Abu Dhabi.
This places the emirate at a comparative advantage and has raised questions about the ability of the Dubai authorities to support its banks whose property portfolios are also challenged by a correction in the real estate market. This uncertainty has left markets concerned with five year Dubai sovereign credit default swaps rising by 75bp on hearing the news to around 775bp to 825bp.
"People are turned off Dubai now, and don’t want to be lending there anymore," said one syndicated loans banker in London. "People might still be keen to do some transactions, with pure sovereign risk, but not with distant affiliates that seem to think that the halo effect of somehow being linked to the government is going to help."
"It bolsters the idea that Dubai could default on its loans," said another syndicated loans banker. "Dubai has a colossal amount of debt, and you wonder whether all the borrowers in Dubai can get propped up by Abu Dhabi.
"The estimates are that there is $10bn in pure government debt, and about $70bn debt associated with affiliates of the government."