Abu Dhabi's biggest bank has repaid more than Dh5 billion of loans to the Government in a further sign that the UAE finance sector has recovered from the dark days of the credit crunch.
NBAD to repay Dh5.6bn loan ahead of schedule
Abu Dhabi's biggest bank yesterday revealed it will repay more than Dh5 billion of loans to the Government as the financial sector recovers from the dark days of the credit crunch.
The repayment in full, four years ahead of schedule, of the Dh5.6bn (US$1.52bn) of so-called Tier 2 funds lent to National Bank of Abu Dhabi in 2008 is the latest move by the sector to clear its federal debts.
The bank said it had already repaid Dh2.6bn last year and will pay back a further Dh3bn in the first half of this year.
When markets around the world crashed after the collapse of Lehman Brothers in 2008, the UAE federal Government made loans available to the banking sector to help oil the wheels of business.
"The bank sector has significantly strengthened itself from a capital, liquidity as well as from an asset quality point of view," said Jaap Meijer, the director of equity research at Arqaam Capital in Dubai.
In all, more than Dh23bn of a total Dh42bn lent to the banking sector to help it to get through the global financial crisis has been paid back, data from Arqaam Capital shows.
About half of this cash, some Dh19bn, was classified by the banks as Tier 1 capital. This is of a higher quality to so-called Tier 2 loans repaid by NBAD. None of the Tier 1 loans have yet been paid back.
The remaining Dh24.4bn of federal loans was classified as Tier 2, however, as it matures in 2016 and has an interest rate that increases over time to encourage the banks to pay it back promptly. In repaying Dh5.6bn of government funds, NBAD joins Abu Dhabi Commercial Bank, First Gulf Bank and RAKBank.
Dubai Islamic Bank still owes all of the Dh3.8bn it borrowed, while Union National Bank has paid back Dh1.5bn of the Dh3.23bn it borrowed.
The repayments mark a big step for the country's banks, which have recovered quicker from the crisis than many of their international counterparts.
Keeping the Tier 2 debt on their balance sheets was very costly for the banks, however.
"Because of the step-ups, the interest rates increasing over time, the loans were getting more expensive," Mr Meijer said. Such increasing terms also fall foul of the Basel III banking regulations that come into force next year.
"These instruments with step-ups are not compliant under Basel III," Mr Meijer added. "Essentially NBAD can replace these loans with loans from the private sector that would be much cheaper."
The interest rate attached to the NBAD Tier 2 loan this year was about 5 per cent, a spokesman for the bank said.
The last US dollar loan raised by NBAD in the private market last August had an interest rate of about 3 per cent, he added.
"Now spreads have narrowed further, meaning a loan in the private market would cost you about half as much as we were paying for the federal loan."
The market reacted favourably to the NBAD move. Banking shares led Abu Dhabi's index higher yesterday. NBAD stock rose 3.7 per cent to close at Dh11.
Shares of Abu Dhabi Commercial Bank, the country's third biggest lender, advanced 1.4 per cent to Dh4.14. First Gulf Bank jumped 4.5 per cent to Dh13.75.
Michael Tomalin, the NBAD chief executive praised the Government for helping the sector through the downturn. "NBAD is most appreciative and thankful to the UAE Government's support to the banking sector, which allowed the country to remain strong and avert the most severe conditions of the global recession."