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Dubai Islamic Bank's successful capital increase through a recent Dh3.2 billion rights issue is credit positive as it replenishes reserves and enhances loss-absorption buffers of the UAE's' largest Islamic bank, ratings agency Moody's said.
The rights issue, which closed on Monday, helped boost bank's share capital to Dh4.9 billion from Dh3.9 billion as of March 2016 and raised cash liquidity by DhD2.2 billion.
Moodys' said the move would improve the bank's liquidity after a period of decline. "The approximately 988 million new shares had a face value of Dh1 per new share and a premium of Dh2.2 per share, raising the issue price to Dh3.2 per new share. As a result of this rights issue, we estimate that DIB's consolidated tangible common equity to risk-weighed-assets ratio will improve to around 12.3 per cent from 9.8 per cent as of March 2016," the global ratings agency said.
"Concurrently, the new capital will also increase the bank's reported Tier 1 capital ratio to 18.1 per cent from 15.6 per cent as of the same date. An 18.1 per cent Tier 1 capital ratio significantly exceeds the eight per cent regulatory minimum, which includes hybrid additional Tier 1 sukuk instruments that constituted around 4.5 per cent of total assets as of March 2016," Moody's said in a report.
The report said the additional capital would support the bank's solvency in the context of continued balance sheet expansion. The bank's financing growth increased at a compound annual growth rate of 21 per cent during 2012-15, well above the UAE average of approximately eight per cent, and had begun eroding DIB's capital metrics, leading to a drop of almost five per cent since 2013. "We expect credit growth to decline to 10 per cent to 15 per cent in 2016 from around 30 per cent in 2015. This slowdown in growth, when combined with the capital increase, will support strong and stable capital buffers over the next 12-18 months, which will provide the bank a considerably stronger buffer to absorb unexpected losses," the report said.
Moody's argued that beyond strengthening its capital base, the rights issue will improve DIB's liquidity, which has been weakening since 2013 as a result of its higher-than-average credit growth.
The bank's stock of liquid assets declined to 20 per cent of total assets as of December 2015 from 35 per cent as of December 2013. The share premium from the rights issue will add Dh2.2 billion cash to the balance sheet that in turn, will push up liquid assets to around 21.3 per cent based on year-end 2015 numbers and reverse the decline in liquid assets.
"In addition, credit growth has slowed to 5.6 per cent during first-quarter 2016, down from 9.8 per cent a year earlier. This trend, when combined with the higher deposit growth of 12 per cent over the same period, will further improve liquidity going forward," Moody's report said.
DIB is the latest bank in the Gulf region to raise its capital ratios, either through a rights issue or the sale of capital-boosting bonds or sukuk, to replenish reserves after a period of strong lending growth and to meet incoming global banking standards. - issacjohn@khaleejtimes.com
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