The Dubai Government has taken control of Dubai Bank and plans to inject cash into the Islamic lender in preparation for a possible merger.
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The takeover was "designed to ensure that Dubai Bank's business continues uninterrupted while options for the bank's future, whether to be run on a stand-alone basis or be potentially merged with another bank in which the Government has ownership, are being assessed", the Dubai Media Office said.
The Government decided to "act swiftly" in taking over the bank to protect the interests of depositors, the office said. The Central Bank and the Ministry of Finance supported the move, it added.
"It shows that banks in general in the UAE are not yet out of the woods," said Tarik el Mejjad, a financial analyst at Nomura in Dubai.
Lenders across the country have grappled for two years with a rise in loan defaults and exposures to large corporate debt restructurings. Despite billions of dirhams poured into the banking system at the onset of the financial crisis by the Central Bank and the Ministry of Finance, provisions for bad loans in the banking system have increased from Dh19.7 billion (US$5.36bn) at the end of 2008 to Dh46.6bn at the end of last March.
Before the takeover, Dubai Bank was 70 per cent owned by Dubai Banking Group, a division of Dubai Holding.
The remaining 30 per cent, valued at Dh172 million, was owned by Emaar Properties, the Dubai developer behind the Burj Khalifa.
The Government did not say how much money it was injecting into Dubai Bank.
The bank is not publicly listed but it disclosed on its website that it lost Dh290.6m in 2009, the most recent year for which financial data are available. The losses were due to about Dh545m of impairment charges on Islamic loans and investments.
"A possible scenario would be a takeover by Emirates NBD," the UAE's largest bank, said Jaap Meijer, a banking analyst at Alembic HC Securities in Dubai.
Injecting fresh funds into Dubai Bank could be a precursor to such a takeover by the government-owned banking giant, which Mr Meijer said "always stressed it would only do an acquisition on commercial terms, which is only possible after a capital injection and proper cleansing of Dubai Bank's loan book, in our view".
Dubai Bank's declining financial performance prompted Fitch Ratings, one of the world's biggest credit ratings agencies, to downgrade its individual rating in March to "D/E".
A "D" rating indicates concerns about a bank's profitability, balance sheet, management and operating environment, according to a description on the agency's website. An "E" rating is applied to a bank "with very serious problems, which either requires or is likely to require external support".
The main worry with Dubai Bank, Fitch said in March, was its large exposure to its parent, Dubai Holding.
Several divisions of Dubai Holding are in discussions to extend repayment of debt, and estimates of the group's total borrowings range as high as $20bn.
Fitch said its downgrade "reflects [Dubai Bank's] weakened financial flexibility, and Fitch's expectations that [2010] results will be negatively affected by its significant exposure to certain Dubai entities that are being restructured. As a result, Fitch believes that DB's financial risk profile could be weakened".
Mahin Dissanayake, a Fitch analyst who covers the bank, declined to comment on the takeover by the Government. The other two major ratings agencies do not cover the bank.
Reports surfaced last year that discussions had begun over a possible merger involving Dubai Bank, Noor Islamic Bank and Amlak Finance, the Islamic home finance company.
Noor is owned by the Government and Dubai Holding, and Emaar owns a large chunk of Amlak. The status of those talks is unclear.
Dubai's government-owned banks are all held by the Investment Corporation of Dubai (ICD), which, unlike Dubai Holding, is considered an integral part of the state.
ICD has significant stakes in or outright ownership of Dubai Islamic Bank, Commercial Bank of Dubai, Noor Islamic Bank and Emirates NBD.
Dubai Bank recently said it would not charge accumulated profits - the Sharia-compliant equivalent of interest - on loans taken out for purchases of property where projects have suffered construction delays.
afitch@thenational.ae