x Abu Dhabi, UAEThursday 27 July 2017

NBAD to convert deposits

The National Bank of Abu Dhabi will convert Dh5.6 billion of government deposits into a loan to bolster its balance sheet.

The National Bank of Abu Dhabi will convert Dh5.6 billion (US$1.52bn) of government deposits into a loan to bolster its balance sheet, the bank said today at its annual general meeting. The bank, the country's second largest by assets, is the second so far to exercise an option offered by the Ministry of Finance to convert long-term deposits injected into local banks into debt.

The capital will improve the bank's ability to withstand losses by improving its capital adequacy ratio, a key measurement of a bank's strength. The deposits, once converted, will qualify as Tier 2 capital on the bank's balance sheet. "We think it is an attractive offer," said Michael Tomalin, the bank's chief executive. Other banks would also be likely to convert the deposits into capital, given the attractive terms, he said.

The subordinated debt will pay the Federal Government 4.5 per cent interest for seven years. "The shareholders have approved the application for us to convert the deposits into Tier 2 capital." Last month, NBAD also received Dh4bn of Tier 1 capital from the Abu Dhabi Government, along with several other banks based in the capital. After both capital injections of funds, NBAD's Tier 1 capital ratio will rise from 12.6 per cent to 16 per cent, whereas the bank's total capital adequacy ratio will rise from 15.4 per cent to 23.5 per cent, Mr Tomalin said.

Last week, Emirates NBD also announced it would convert Dh6.3bn of deposits from the Ministry of Finance into Tier 2 capital. "We at Fitch were not necessarily expecting the banks to take this step as they remain adequately capitalised, however now that the two biggest banks have done so, it is likely that the others will follow suit," said Robert Thursfield, the director of financial institutions at Fitch Ratings.

"Abu Dhabi-based banks have less need to do this given the recent announcement of an injection of Tier 1 capital by the Abu Dhabi Government." So far, the Ministry of Finance has injected Dh50bn into local banks, in two Dh25bn tranches distributed in October and November. Emirates NBD received a total of Dh12.6bn from the Government, although it has opted to convert only the first tranche, or Dh6.3bn, into capital.

Mr Tomalin said NBAD would convert both tranches. The Ministry of Finance has told banks that if they fall two percentage points below the Central Bank's minimum capital adequacy ratio for two consecutive quarters, the Government will be able to convert its deposits into equity, he said. The Central Bank has stipulated the banks will have to boost their capital adequacy to 11 per cent this year, and 12 per cent by next year. @Email:tpantin@thenational.ae uharnischfeger@thenational.ae