Emirates NBD, the UAE's largest bank, plans to sell about Dh1 billion (US$272.2 million) of car loans to Japan. The complex transaction effectively puts money in Emirates NBD coffers at a lower rate of interest than it could get in the market, Rick Pudner, the bank's chief executive, said yesterday.
Finding financing for banks has become harder and more expensive during the financial crisis as capital markets have tightened, spurring large lenders to search for innovative new ways to raise money. The car loans, taken out by Emirates NBD customers in the UAE, are bundled and chopped up into securities that are then used as collateral for bonds issued in Japan. The process is similar to that used to create collateralised debt obligations (CDOs) that came to the fore in the US home loan market before the global downturn.
The proposed deal with Japan Bank for International Co-operation (JBIC), which involves loans covering about 22,000 cars, comes as the UAE's car market begins to show signs of recovery after a year-long slump. Car imports through Abu Dhabi fell by 50 per cent in the first half of last year as sales slowed and dealerships halted new deliveries. But vehicles handled at the emirate's Mina Zayed port in the first half of this year stood at 32,177, a gain of more than 62 per cent from the same period last year, Abu Dhabi Terminals said yesterday.
"We don't see a conservative approach to orders like we did in 2009," said James Crichton, the regional director for the Middle East for Rolls-Royce Motor Cars. Giving Emirates NBD room to make more loans could also be a boon for the Japanese since many customers are likely to use those loans to buy cars imported from the country's giant car industry. About 66 per cent of cars in the UAE are Japanese, according to a report last year by Automechanika Middle East. Japanese manufacturers exported 486,990 cars to the Middle East in the year to the end of March, according to the Japan Automobile Manufacturers Association.
JBIC representatives in Dubai declined to comment because the deal has not been approved by the body's board of directors. Citigroup is presenting the plan to Japanese investors to gauge demand, an exercise that will determine whether it goes through and what rates of interest will be attached to the JBIC bonds. "The auto loan securitisation is a project we've been working on for a few months," Mr Pudner said. "We're building up parts of our auto loan portfolio to form part of the meat of this programme."
The loans are to be packaged as a security and sold to the JBIC, a public body that promotes international financial ties. The JBIC then plans to sell bonds backed by UAE car loans to Japanese investors. Moody's this month gave the securities a provisional "Aa2" rating, one of its highest. "Emirates NBD is pretty much out there pioneering this thing," said Khalid Howladar, a vice president at Moody's Investors Service who evaluated the deal. "It actually works very well. It works for the Japanese and it works for Emirates NBD."
The securitisation is one way Emirates NBD is responding to the strains of the crisis and Dubai's well-publicised struggles with debt at state-owned companies. The bank said second-quarter profits fell 52.7 per cent to Dh402.6m, compared with Dh852m for the same period last year. It set aside major provisions for the first half in anticipation of write-downs on loans to Dubai World, the government-owned conglomerate that is nearing a final deal on its $23.5bn debt restructuring.
Janany Vamadeva, an analyst at Al Futtaim HC Securities in Dubai, said the bank's core performance was strong despite Dh1.19bn of overall impairment losses on loans and investments in the second quarter.
* with reporting by Armina Ligaya