DubaiSTR
Dubai's government took control of troubled Islamic lender Dubai Bank on Monday to stave off a potential collapse that would undermine the emirate's banking sector.
Dubai, which is struggling to emerge from a debt crisis, said it will inject an unspecified amount of capital into the bank and its takeover would protect depositors interests. The central bank and finance ministry support the takeover.
"Options for the bank's future, whether to be run on a stand-alone basis or be potentially merged with another bank in which the government has ownership, are being assessed," the government said in a statement.
Ratings agency Fitch downgraded Dubai Bank in March citing its weakened financial flexibility and exposure to certain Dubai entities that are being restructured.
At the end of 2009, Dubai Bank had total assets of 17.4 billion dirhams ($4.74-billion U.S.) against total liabilities of 15.7 billion dirhams. It made a loss of 290.6 million dirhams. It has not yet reported its 2010 results.
Customers deposits stood at 14.9 billion dirhams at the end of 2009.
"The situation of Dubai Bank has been pretty weak and always questionable," said Mohammed Yasin, chief investment officer at CAPM Investments in Abu Dhabi.
"There have been questions raised about the sustainability and continuity of their operations for a while. The bank has some serious liabilities outstanding and those need to be addressed.
"In terms of credibility of the UAE banking system, it was very important that the bank did not default. A default by Dubai Bank would have raised worries about other local banks operating in the country."
Dubai Bank is wholly-owned by Dubai Banking Group. The latter is 70 per cent-owned by Dubai Holding, the private holding company of the Gulf Arab emirate's ruler, with the remaining 30 per cent owned by developer Emaar Properties.
"It's positive because it reduces any uncertainty around the future commitments that Emaar or Dubai Holdings would have to make to Dubai Bank," said Abdul Kadir Hussain, chief executive officer of Mashreq Capital.
"But the total economics are unclear. We don't know the size of the injection or how it will be financed."
The government said the current management team will not be affected by the takeover.
The bank reorganized its operations in 2010 and positioned itself as a retail bank for premium customers with merchant banking on the corporate side.
There was speculation last year that Emirates Islamic Bank, an affiliate of Emirates NBD, was in talks to buy Dubai Bank.