UAE banks are searching for new ways to raise capital in Asia in a dramatic shift from financing strategies that once relied heavily on investors from the Gulf. The country's three largest banks have in the past two months raised money from sources outside the Gulf, or announced plans to do so. This has underscored the move in financing strategies away from the region, where investor appetite for bank debt has yet to bounce back after the financial crisis.
Emirates NBD, the UAE's largest bank, this summer agreed to sell about Dh1 billion (US$272 million) of car loans to Japanese investors through a securitisation deal. National Bank of Abu Dhabi (NBAD), the second-largest lender, recently said it planned to offer a 500 million ringgit (Dh583.9m), five-year Islamic bond to Malaysian investors. This would be its first sukuk in Malaysia. And Abu Dhabi Commercial Bank (ADCB), the third-largest bank, launched its own 500m ringgit, five-year bond this month. The bank later increased the amount it planned to raise to 750m ringgit, citing strong investor demand.
Analysts say such moves illustrate a trend in which banks are having to be creative and go overseas to meet their needs as sources of longer-term financing at home dry up. "That's exactly what's happening," said Sofia el Boury, a banking analyst at Shuaa Capital in Dubai. "Banks in the UAE need to be creative in order to raise medium to long-term funds at attractive terms. This, of course, is being done in a context of persistent tight liquidity driving risk premiums higher."
Raising money from investors for five years and longer is important for banks because they need to continuously fund their portfolios of loans, many of which do not mature for years. Selling bonds and notes to investors, as Emirates NBD, NBAD and ADCB are doing in Japan and Malaysia, is one of three main sources of financing for banks. The others are deposits from customers and borrowings from other banks, although neither of those is considered as stable or long-lasting.
Banks make money mainly from the difference between the interest rates they pay to investors and depositors and the rates they charge customers on loans. The cost of raising money therefore plays an important role in profits. With investor appetite stronger in Asia than in the Gulf, banks are naturally gravitating eastwards to get lower interest rates. "I think a big part of the reason for doing this is the cost of raising the money," said Murad Ansari, a banking analyst at EFG-Hermes. "This is also because banks have extended longer-duration loans and need to match them with similar maturity-profile funding.
"As banks are finding it increasingly expensive to raise money through the same sources, they are looking at alternate channels." Other banks in the UAE, including First Gulf Bank, are thought to be considering raising money from foreign sources. But some banks may try to raise money in the Gulf this year even if interest rates are higher than the 4.75 per cent rate NBAD is paying on its Malaysian sukuk, or the 5.2 per cent ADCB is paying.
Banks with strong government ties are seen to be in an especially good position to borrow more cheaply despite relatively stale investor appetite in the region. "A few banks in the region are still able to draw investors' appetite, especially thanks to their low-risk profile and strong government support," Ms el Boury said. @Email:email@example.com