Dubai Islamic Bank perpetual sukuk may yield 7% annually

Dubai Islamic Bank 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 are seeking to build their Tier-1 capital ratios as they attract deposits and extend loans to support state investment programs and retail demand. DIB said on March 5 its shareholders approved raising as much as US$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 $1bn of the world's first hybrid perpetual Tier-1 sukuk, which can be treated as equity and thus used to supplement capital. DIB was placed on ratings watch at Moody's Investors Service in December because loan quality "remains very weak compared to peers" and it has not 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 yesterday, according to data compiled by Bloomberg.

HSBC, 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.

* Bloomberg News