Nov 13 - More banks in the United Arab Emirates are likely to issue Basel III-compliant bonds after the launch of the world’s first hybrid Tier 1 sukuk from Abu Dhabi Islamic Bank, Fitch Ratings says. We expect increasing Tier 1 issuance in 2013 by UAE and other GCC banks - both conventional and sharia compliant - to support further growth. In our view, relatively high levels of capital are necessary for GCC banks due to the difficult operating environment and the concentration of single names and sectors, particularly of real estate and government-related entities, in the loan portfolios. Any pick-up in loan growth by the banks would need to be supported by additional capital. We also believe that more banks in the GCC will issue hybrid Tier 1 instruments as these are a cost-effective means of accessing a wider investor base (essentially Asia, Middle East and Europe) than common shareholders. Diversification of funding sources is important for a sector where deposit and investor concentrations are common. The broadening of the investor base, without diluting shareholders, helps preserve ownership structures where governments, government-related entities and members of ruling families often hold substantial stakes. ADIB’s new sharia-compliant instruments will help ease pressure on its capitalisation, which we believe has been weaker than that of many UAE peers. Although the bank generates solid revenue, relatively high dividend payouts (around 50%) limit its internal capital generation. ADIB expects its new issue to raise its Tier 1 ratio to 19% from 13.7% at end-September 2012. The USD1bn perpetual non-call instruments are classified as equity under Basel III and therefore do not include principal loss absorption or equity conversion features. Periodic distributions are fully discretionary and non-cumulative. The bond is unrated, but will be included in Fitch-eligible capital with a 50% equity credit.