Dubai: Dubai Islamic Bank (DIB), the United Arab Emirates biggest Sharia-compliant lender, may pay a profit rate of about 7 per cent on a perpetual Islamic bond it plans to sell, said two bankers familiar with the matter. The profit rate per year is payable semi-annually in arrear until the first call date in 2019, said the bankers, asking not to be identified because the matter is private. The rate will be reset on the first call date and every six years thereafter to a new fixed rate, they said.
Banks in the six-nation Gulf Cooperation Council (GCC) are seeking to build their Tier-1 capital ratios as they attract deposits and extend loans to support state investment programmes and retail demand. Dubai Islamic said on March 5 its shareholders approved raising as much as $1 billion to boost its Tier-1 capital, which includes common stock, retained earnings, and perpetual preferred stock and debt.
Abu Dhabi Islamic Bank in November sold $1 billion of the world's first hybrid perpetual Tier-1 sukuk, which can be treated as equity and thus used to supplement capital. Dubai Islamic was placed on ratings watch at Moody's Investors Service in December because loan quality 'remains very weak compared to peers' and it hasn't set aside enough money to cover losses. Tier-1 capital is used to cushion lenders against this.
The bank, which is taking over mortgage lender Tamweel, last issued sukuk in May, when it raised $500 million from the sale of five-year securities at a coupon of 4.752 per cent. The yield on those notes has since fallen to 3.45 per cent on Monday, according to data. HSBC Holdings, Standard Chartered, Emirates NBD Capital, National Bank of Abu Dhabi and Dubai Islamic Bank itself are joint lead managers of the perpetual sukuk sale. Islamic bonds comply with the religion's ban on interest and instead pay profit rates. The yield on Dubai's 6.396 per cent sukuk due November 2014 declined 344 basis points in 2012, data shows.
The premium investors demand to hold Dubai's sukuk over Malaysia's 3.928 per cent notes due June 2015 has narrowed more than 150 basis points in the past year to 82, data shows.