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Sharjah Islamic Bank Returns to Market With Debut Benchmark ATI Capital Boosting Mudaraba Sukuk With Lowest Yield in the Region since 2015

Sharjah Islamic Bank (SIB) returned to the market with its latest benchmark Sukuk issuance in the international market at the end of June 2019. The US$500 million 5.00% Perpetual Mudaraba Sukuk is SIB’s debut Additional Tier 1 (AT1) capital-boosting and Basel III-compliant Sukuk, issued through its wholly-owned special purpose vehicle, SIB Tier 1 Sukuk Company.

The Sukuk is a non-call 6 years Perpetual Instrument, which will reset to 6 years’ Treasuries in 2025. The transaction was priced at a coupon rate of 5 per cent and is listed on the Abu Dhabi Securities Exchange (ADX). According to SIB, the bank’s AT1 Sukuk yield is the lowest in the region, down from 5.25 per cent in 2015.

The transaction was turned around in a matter of a fortnight following SIB’s appointment of Citi, HSBC, and Standard Chartered Bank in mid-June as joint global coordinators to the transaction. Their mandate was to arrange investor road shows in Singapore, Hong Kong and London.

In addition, Abu Dhabi Islamic Bank, Bank ABC, Deutsche Bank, Dubai Islamic Bank, Emirates NBD Capital, First Abu Dhabi Bank and KFH Capital joined the above three institutions as joint lead managers and joint bookrunners to the transaction. The Sukuk was priced following a book building process and meetings with international investors which include fund managers, financial institutions, private banks and others, according to the bank.

The transaction, said SIB in a statement, was very well received by the market, and was over-subscribed by 10 times, attracting an order book of US$4.8b billion, including some 210 individual orders from investors in Asia, the Gulf Cooperation Council (GCC) region and Europe.

“We received strong demand on this transaction since the beginning of the roadshow” SIB added.

“With this issuance, we seek to strengthen our capitalisation ratios, particularly the bank’s Tier 1 core capital, to spur the growth of the bank through the benchmark fixed-rate resettable USD Regulation S Additional Tier 1 perpetual non-call six-year unrated Sukuk,” explained Ahmed Saad, Deputy CEO of Sharjah Islamic Bank in a statement.

According to the offer documents, the proceeds from the issue will be used by SIB to enhance its tier 1 capital as well as for general corporate purposes, all in accordance with the investment plan set out in the Mudaraba Agreement.

SIB is a regular repeat issuer of Sukuk. It has three benchmark international Sukuk issuances listed on the Nasdaq Dubai issued in 2015, 2016 and May 2018. This latest Sukuk will similarly be listed on Nasdaq Dubai.

The listing, according to the Bourse “supports the continuing expansion of SIB’s Sharia’a-compliant financial activities through its networks across the country including personal and corporate banking as well as Investment banking and international services, on behalf of individual and institutional clients.”

Mohammed Abdulla, CEO of SIB, stressed in a statement that the bank’s “balance sheet reflects the bank’s strong performance and sound financial position, and we remain an important instrument in the growth of Sharjah’s economy and supporter of the emirate’s medium-term development strategy. We are optimistic about expanding our business and services from micro-consumer level to multinational corporations because we have the necessary skills, technology and capacity.”

During the first quarter of 2019, SIB increased its net profit year-on-year by 6 per cent to AED151.7 million, compared to AED143.1 million in the same quarter in 2018.

Both Standard & Poor’s Global Rating Inc and Moody’s Investors Service either upgraded or affirmed SIB’s ratings in June 2019.

S&P has upgraded SIB’s credit long-term rating to A- from BBB+ with a stable outlook, based on SIB’s significant position as a market player in the UAE’s Islamic banking sector, as well as its increased market share. Moreover, the bank’s capitalisation was a key driver in boosting the rating, in addition to its strong asset quality and the low cost of risk.

Moody’s affirmed the local and foreign currency long-term and short-term issuer ratings of SIB at A3/P-2. In addition, the bank’s baseline credit assessment (BCA) and adjusted BCA were affirmed at baa3. The outlook on the bank’s long-term issuer ratings, however, was changed to negative from stable.

Moody’s affirmation reflects SIB’s satisfactory liquidity profile and continued expectation of a very high probability of support from the United Arab Emirates (UAE) government (Aa2, stable outlook).

The change in outlook to negative from stable, however, reflected ongoing downward pressure on the solvency profile of the bank. This, said Moody’s, reflected weakening core capital buffers, the bank’s relatively weak asset risk profile, which is increasingly exposed to higher risk, and modest profitability due to margin pressure, low efficiency and volatile core earnings.

SIB is one of the largest Islamic and oldest banks in the UAE with a history going back to 1975.

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