Officials explain rationale behind Emirates NBD, Dubai Bank merger (page 1 of 2)

Dubai's ruler, Sheikh Mohammed Bin Rashid Al Maktoum, this week ordered that the UAE's biggest lender take over an unprofitable rival, in a bid to consolidate the emirate's banking system. In an emailed statement, the government's Media Office declined to give financial details but said the takeover of Dubai Bank by Emirates NBD came "in line with Dubai government's efforts to enhance the banking sector in the emirate."

Observers have characterised the move as a handover rather than a typical merger, claiming that the emirate's government simply bailed out the troubled Islamic lender, before passing it on to its larger rival. The Dubai government owns 56% of Emirates NBD, while Dubai Bank was 70% owned by Dubai Holding and 30% by Emaar

Properties, before its nationalisation in May this year, at which point Emaar Properties took a writedown of Dhs172m ($47m) on the investment.

Nationalisation came after losses increased - Dubai Bank has not reported figures since 2009, when it had total assets of Dhs17.4bn against total liabilities of Dhs15.7bn, and posted a loss of Dhs291m.

In the first half of 2011, meanwhile, Emirates NBD reported a net profit of Dhs2.157bn, up 43% from the first half in 2010. And Emirates NBD CEO Rick Pudner is adamant that the deal "will not affect profit and loss [at Emirates NBD or] the non-performing loan percentages due to the transaction structure and the support provided by the government of Dubai". The bank is currently rated A3 at Moody's Investors Service, the seventh-highest investment grade.

Merger sends 'positive' signal to investors

"This acquisition was very much in line with the Dubai government's efforts to reinforce the UAE's position as a first-class regional and international financial hub," said Pudner. "The takeover will strengthen the domestic banking sector and reinforce trust in it.

"It sends a very positive signal to investors in the market," he continued. "It's a clear indication that the government of Dubai is determined to strengthen the financial marketplace here, and overall it's a very positive sign that the government is moving forward."

Pudner said only that Dubai Bank would be capitalised by Emirates NBD "to the extent considered necessary", adding that such action would have a "negligible impact on the group's overall capital ratios". Following the announcement, investment bank EFG-Hermes Holding said that Emirates NBD would pay cash for the acquisition, lowering its total capital adequacy ratio by 100 basis points, or 1 percentage point. "Emirates NBD has the capacity to absorb Dubai Bank," it said, a statement reinforced by officials at Emirates NBD.

"It's a deal that has been structured to enable us to take [Dubai Bank] over with zero profit and loss hit and zero non-performing loans hit, so from that perspective it meets our shareholders' requirements," said Pudner. "There's execution risk, of course, but we think it's a very manageable deal from our point of view."

Dubai Bank being taken over at 'fair value'

Officials denied suggestions that Dubai government had already injected cash into Dubai Bank to ensure that Emirates NBD is not saddled with a financial burden, as well as suggestions that they had been 'gifted' the smaller institution by the government after it had failed to find a buyer on the open market.

"Subsequent to the announcement on May 16th when Dubai government took over full ownership of Dubai Bank, no [payments] have been made since by the government to the bank," said Dubai Bank CEO Giel-Jan M.