Dubais efforts to revive its financial sector continued last month as ruler Sheikh Mohammed ordered the merger of troubled Islamic firm Dubai Bank with the UAEs biggest lender, Emirates NBD.
In May the Dubai government intervened in Dubai Bank, formerly owned by state-linked Dubai Holding and government-owned Emaar Properties, after mounting loan losses. The government announced it would inject an undisclosed amount to prevent a default.
The acquisition of Dubai Bank by Emirates NBD comes after the replacement of former Emirates NBD chairman Ahmed Humaid Al Tayer with Sheikh Ahmed bin Saeed Al Maktoum, the Dubai rulers uncle and adviser. Like Dubai Bank, Emirates NBD is majority owned by the government.
"Dubai Bank will join the Emirates NBD family as a fully owned subsidiary and will continue to operate with its brand," according to Rick Pudner, chief executive of Emirates NBD. Over the next year, Emirates NBD will look at "synergies and areas of efficiency". One option for the future could be to combine back-office operations of Dubai Bank with Emirates NBDs Islamic banking subsidiary, Emirates Islamic Bank.
Pudner said with the acquisition of Dubai Bank, "Emirates NBDs financial results will not be affected in terms of profit and loss and non-performing loans due to the transaction structure and support provided by the Government of Dubai".
Dubai Banks balance sheet as a percentage of Emirates NBDs
Philip Smith, bank analyst at Fitch Ratings, says: "The main financial effect of the deal on ENBD will be a slight reduction in ENBDs capital ratios. ENBD has indicated a drop of 65 basis points in tier-1 capital for ENBD (or 100bp of total capital)."
Emirates NBD announced a net profit of Dh175 million ($47 million) for the third quarter of 2011, down 59% from Dh424 million in the same period last year. Dubai Banks balance sheet amounts to between 6% and 7% of Emirates NBDs balance sheet, according to Emirates NBD CFO Surya Subramanian.
"Dubai Bank was facing substantial losses on mainly related-party lending and was in dire need of capital. The acquisition by Emirates NBD was a cure to this and restores confidence in the banking sector," says Mahin Dissanayake, a Dubai-based Fitch analyst.
There have been similar mergers. Last year, government-controlled Dubai Islamic Bank acquired the now revived local mortgage firm Tamweel, for example.
Analysts in Dubai say Amlak, another Dubai mortgage lender, has also been struggling since Dubais property bubble burst in 2008. The government had broached a merger between Amlak and Tamweel after the crash.
With Tamweel and Dubai Bank now under the umbrella of other government-owned entities, analysts in Dubai say a similar takeover of Amlak could come in the next six to 18 months.