Dubai’s decision to bail out one of its smaller commercial banks was cheered by investors this week, who saw the move as confirmation that the emirate was still willing, and able, to rescue troubled state-linked companies.

On Tuesday, the first day of trading after Dubai Bank was taken over by the government to protect depositors, the local market gained 1 per cent, followed by a more modest 0.7 per cent gain on Wednesday.

“Investors are happy because it wasn’t news that the bank was in trouble, and it signalled that Dubai wouldn’t let a bank fail,” says Fadi al-Said, head of equities at ING Investment Management Middle East.

Even Emaar Properties – whose 30 per cent shareholding of Dubai Bank, valued at Dh172m ($47m), will be wiped out – has rallied more than 3 per cent since the government announced that it would take over the Islamic lender.

Though Emaar will have to write down the value of its investment in Dubai Bank completely, investors were relieved that the property developer would not have to contribute – directly at least – to the bail-out.

Dubai Bank’s problems stemmed largely from overexposure to the government’s raft of state-controlled companies – particularly Dubai Holding, which until the bail-out owned 70 per cent of the bank.

In Dubai Bank’s 2009 annual report, the last available, it reported a Dh291m loss, and added that 47 per cent of its entire Dh14.1bn loan book
was exposed to its top five
borrowers.

Raj Madha, a senior banking analyst at Rasmala Investment Bank in Dubai, speculates that “a large chunk” of this was to the Dubai Holding conglomerate, parts of which are restructuring their debts.

“As soon as concerns were raised about rescheduling Dubai Holding debt back in early 2010, we expected problems could manifest themselves at Dubai Bank,” he says.

“People were already aware of the problems, so it’s much better to get to grips with it rather than ignore it and hope it would go away.”

The rescue is a reminder that Dubai’s banks are still coming to terms with a pile of soured debts, but investor sentiment towards the financial sector appears to be shifting.

The shares of Emirates-NBD, the largest lender in the United Arab Emirates, have slipped more than 6 per cent this month – largely due to weak global markets and the recent oil price correction – but have still gained a robust 37 per cent this year.

Emirates-NBD previously indicated that it expected 14-15 per cent of its loan book to be impaired by the end of 2011, but in its first-quarter results lowered its guidance to 13-14 per cent.

Though only a modest improvement, it was one of the first times a UAE bank had decreased its impaired loan ratio guidance since the financial crisis erupted.

“Things are looking more stable for the banking sector, but from a very low base,” Mr Madha points out.

“The banks now see the bottom, at least, while before they kept guiding to more and more impaired loans.”

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