Dubai Seen Driving Year of Islamic Perpetual Bond Sales

By Arif Sharif and Daria Solovieva  

Photographer: Charles Pertwee/ Bloomberg

To sustain Dubai Islamic’s growth, there will be capital requirements “and we have a... Read More

Dubai Islamic Bank PJSC (DIB) may kickstart a year of perpetual sukuk sales in the Gulf Cooperation Council as lenders seek to boost capital ratios amid rising loan growth and low borrowing costs.
The United Arab Emirates’ biggest Shariah-compliant lender concludes investor meetings today as it seeks a benchmark-sized sale of Islamic bonds that never mature. It’ll probably be the first of several such securities from banks in the region, according to Standard Chartered Plc. U.A.E. loans grew 10 percent in 2014 through November, poised for the fastest annual pace since 2008, government data show.
“The rise in loan growth and risk-weighted assets warrant more capital,” Ahsan Ali, the Dubai-based head of Islamic origination at Standard Chartered, said in an e-mail on Jan. 7. “The current low rate environment should spur the issuers to lock in good rates by issuing during the year, and especially during the first half.”
With U.S. interest rates near zero, the five-year midswap rate, which
is used as a benchmark to price sukuk, was almost the lowest since December 2013 last week. Perpetual debt can be treated as equity, allowing companies to increase capital outside stock markets. Borrowers pay higher yields to compensate for the risk of holding debt with no pre-determined maturity. Dubai Islamic’s perpetual sukuk would be the first in the region since Al Hilal Bank’s sale in June.

‘Challenging Times’

Islamic bond sales in the six-nation GCC last year slumped 30 percent to $14.8 billion, according to data compiled by Bloomberg, as oil plunged 48 percent to the lowest in more than five years. Brent has fallen another 15 percent this year. GCC governments rely on income from crude sales to fund their budgets and maintain economic growth.
“Some of the regional banks may be reviewing new perpetual bonds in anticipation of more challenging times,” Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, said by telephone Jan. 6. “These instruments offer higher yields than conventional bonds and therefore attract good demand from investors.”
Dubai Islamic’s loan growth accelerated to 27 percent in the first nine months of last year from less than 1 percent in the same period in 2013, while its Tier 1 capital ratio declined to about 15 percent in the third quarter, a two-year low.

Loan Growth

To sustain Dubai Islamic’s growth, there will be capital requirements “and we have a variety of options available to us,” Chief Executive Officer Adnan Chilwan said in an earnings call in October. The lender’s spokesman didn’t immediately respond to e-mailed questions yesterday.
The bank last sold perpetual sukuk in March 2013. The yield has declined six basis points this year to 6.5 percent at 2:22 p.m. in Dubai.
Even as loans increase, most banks in the region don’t need the equity boost, Bantis said. A lot of banks are “strongly capitalized and they don’t necessarily require this additional source of capital at this stage,” he said.
Islamic financial assets worldwide are poised to more than double by 2017 to $2.6 trillion, according to PricewaterhouseCoopers LLP estimates.
In the current environment, with plunging oil prices pushing almost all the region’s biggest stocks indexes into bear markets, selling a perpetual sukuk is the “cheapest” option for Dubai Islamic to raise capital, Doug Bitcon, a Dubai-based fund manager at Rasmala Investment Bank Ltd., said by e-mail.
Since Nov. 30, at least six stock gauges, including those in Saudi Arabia and the U.A.E., dropped more than 20 percent from their most recent peaks amid oil’s decline.
“With Dubai Islamic’s share price 15 percent lower than the peak a couple of months ago, it’s less attractive to issue equity,” Bitcon said yesterday. “But the difference in the overall cost of funding between the two choices is a far bigger driver.”