What’s new: Dubai Islamic Bank said today that it would seek shareholders’ approval for a capital increase plan at its next AGM, which will be held on March 01, 2016. Management is seeking approval to potentially raise common equity through a rights issue (maximum of 988 million new shares to be issued). In addition, it is seeking approval to potentially raise capital by USD750 million through a non-convertible hybrid Tier 1 sukuk. The increase of USD750 million will take total tier 1 capital to USD2.75 billion, while the rights issue would increase the bank’s shares to 4.9 billion from 3.9 billion at present.   Potential capital increase of AED6.5 billion: DIB would be looking to increase common equity capital and additional capital in a series of issuances which will be contingent upon market conditions, in our view.  If approved we believe DIB can raise AED3.5 billion through a rights issue (assuming that it is fully subscribed at a 40% discount to today’s closing price of AED5.98/share) and AED2.8 billion via Tier 1 sukuk for a total capital increase of AED6.3 billion. In 2015, ADIB priced its rights issue at a 43% discount to market price. We estimate that these issuances will increase DIB’s common-equity ratio (CET1 ratio) to 12.0% from 9.6% as of 2015 and Tier 1 ratio to 20.6% from 15.7% as of 2015.   Our view: DIB’s high equity leverage has been an concern for us (DIB: c13.0x versus UAE: c10.0x), and a rights issue should partially address this concern. That said, DIB’s excess liquidity buffer has diminished – LDR rose to 88% in 2015 from 80% in 2014 and the bank’s spreads have started to tighten. We expect further compression in 2016 as the cost of funding rises on deposit mobilisation. DIB trades at 2016e P/BV of 1.9x. We have a Neutral rating on the stock. (Shabbir Malik, Company)