DUBAI – As banks in much of the rest of the world struggle to shore up balance sheets ravaged by weak economies, banks in the Gulf are sucking in capital for a very different reason: to fund expansion plans. The contrast means the Gulf banks are likely to be able to raise money cheaply and relatively easily, helping them compete as they move into markets overseas and challenge some of the big international institutions. “Our growth rates have been phenomenal in the last few years and because of that growth, we needed to refuel after a certain stage,” Tirad Mahmoud, chief executive of Abu Dhabi Islamic Bank (ADIB), told Reuters after his bank raised $1 billion of capital this month. Loan growth across the banking sectors of Saudi Arabia, Qatar and Oman is especially strong, posting double-digit rates this year; in Qatar, bank lending grew 32 percent from a year ago in September, central bank data shows. It is primarily this dramatic expansion of lending - not bad loans, or the need to meet new Basel III capital standards which will be introduced across the world starting next year - that is forcing Gulf banks to raise money. Ratios of capital to assets at banks in the Gulf Cooperation Council (GCC) - Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman - are already high, especially compared to European lenders. In the UAE, for example, the average ratio for both Tier 1 and Tier 2 capital combined - in other words, core and supplementary capital - is 20.5 percent, central bank governor Sultan Nasser Al-Suwaidi said this month. “Some banks in Europe would do anything for a double-digit capital ratio right now,” said Klaus Froehlich, head of investment banking for the Middle East and North Africa at Morgan Stanley. Several Gulf banks have announced plans to boost their capital ratios and others are expected to follow suit in coming months. “There are large opportunities for growth, but you need to look at how you are funding this growth so some will need to be funded by capital,” said Madhukar Shenoy, financial services partner at consultants PricewaterhouseCoopers. Some European banks are having to pay through the nose to raise capital. Spain's Banco Popular, whose 2.5 billion euro ($3.23 billion) rights issue was due to end on Nov. 28, sold shares at a 64 percent discount to their market value on the day before the price was announced. Gulf banks have largely stayed away from raising capital in stock markets, which have not yet recovered from the global financial crisis that began several years ago. Instead, they have focused on issuing debt or debt-like instruments that have attracted solid demand from investors. National Bank of Abu Dhabi, the UAE's largest bank by market value, and Saudi Hollandi Bank, the kingdom's eighth-largest listed lender, printed subordinated deals in November which boosted Tier 2 capital. A ground-breaking $1 billion Tier 1 hybrid sukuk from ADIB, sold in early November, opened the way for banks to use Islamic bonds to boost core capital. The sukuk was described as “hybrid” because it had equity-like characteristics; it was perpetual, meaning it had no maturity date. The sukuk attracted about $15 billion of investor bids, a massive oversubscription, and ADIB was able to price it at a 6.375 percent profit rate, raising money very cheaply compared to conventional hybrid bonds issued by Western banks over the past year. The sukuk's price has continued to rise in the secondary market since issue, showing very strong investor demand for it. In addition to boosting core capital, hybrid instruments can help to diversify a bank's stakeholder base, in a region where ownership has traditionally been dominated by local parties. “Prior to the new issue, ADIB's Tier 1 base was 100 percent UAE investors, so it's the first time they are raising growth capital from outside the country,” said Christoph Paul, head of regional debt capital markets business at Morgan Stanley and one of the bankers who worked on the deal. Timucin Engin, a Dubai-based banking analyst for credit rating agency Standard & Poor's, said: “In an environment where stock market conditions are not necessarily very accommodative, and the fixed income pricing is conducive, issuances of this type of hybrid instruments could be interesting for some banks.” Another capital-raising method which has the benefit of diversifying the shareholder base away from local investors is depositary receipts (DRs) - certificates which represent shares in a bank but which are listed on a foreign stock exchange. Doha Bank, Qatar's fifth-largest listed lender, is eyeing an issue of DRs in London as part of a planned $1.6 billion capital increase. It is a tool that has been used by other Gulf financial institutions but with mixed success. A key factor, said Peter Gotke, head of DR business in the GCC at BNY Mellon in Dubai, is the quality of engagement with investors. “For a DR to be successful and liquid, it is not good enough to put it in place and walk away. It needs to have a dynamic investor relations program behind it and the support of senior management to succeed.” For many Gulf banks, in particular the smaller ones, plentiful pools of money available locally at a time of high oil prices will be enough to complete capital-raising plans. The board of Kuwait Finance House, the largest Islamic bank in the state, has recommended a 20 percent capital hike to shareholders and Ahli Bank, Qatar's seventh-largest listed bank by market value, said in September it would boost its capital by the same percentage. For banks in the UAE, one other factor that will influence thinking on capital levels is the Tier 2 subordinated bonds which the country's central bank bought from them at the height of Dubai's debt crisis several years ago to shore up the system. These seven-year instruments have an amortizing structure which has already begun to undermine the value of the bonds as capital for the banks, said Morgan Stanley's Paul. “While you are paying 100 percent of the coupon, banks are losing 20 percent of the capital benefit per year until maturity. Hence at some stage banks may want to consider replacing this capital.” Some have begun to address the issue; NBAD repaid AED1 billion ($272 million) in August. “They are winding down at the moment and we will look at how we replace the Tier 2 portion of the capital,” Rick Pudner, chief executive of Emirates NBD, Dubai's biggest bank, told Reuters. “But you've got Basel III coming up which makes Tier 2 a little bit less valuable than it used to be, so the question becomes, do you want to replace the Tier 2 or do something like ADIB did.” — Reuters
