The UAE's biggest bank has set aside another Dh1.5 billion (US$408 million) to cover bad debts, depressing profits to their worst in three years and pushing shares to a six-month low.
Emirates NBD, based in Dubai, reported a 58.7 per cent drop in profits for the third quarter to Dh174.8m after write-offs for defaulting debtors soared to their highest level since the emirate's property bubble burst.
Emirates NBD's earnings were the lowest since December 2008 and fell far short of analysts' expectations of Dh781m. The bank's stock lost 4.5 per cent in trading on the Dubai Financial Market yesterday to Dh3.54 per share, its lowest in six months.
Rick Pudner, the bank's chief executive, said the lower profits were a result of efforts taken by the bank to protect itself against financial headwinds, as he sounded a warning signal on the worsening global economy,
"While the outlook has become more cautious and uncertain, our strong levels of capitalisation and liquidity offer both resilience and flexibility for the future and an ability to take advantage of selected growth opportunities," he said.
Many analysts had hoped that this quarter would see a turnaround in earnings for UAE lenders as banks boosted lending and scaled back provisions for bad loans made at the height of Dubai's property boom.
But non-performing loans spiralled upwards to account for 12.9 per cent of Emirates NBD's loan book, totalling Dh26.9bn, from 9.3 per cent three months earlier.
The bank raised its forecasts for bad debts, warning that impaired loans could peak at 16 per cent of total lending by 2013 as global economic growth stutters.
Emirates NBD reported a 26.5 per cent increase in net impairments on financial assets to Dh1.57bn as it took a "more conservative stance on recognition of impaired loans and provisioning to ensure Emirates NBD is strongly positioned for the future".
Emirates NBD has now fully provided for the estimated impact of Dubai Holding, a conglomerate owned by Dubai's ruler which is restructuring its debts, the bank said.
The bank put aside Dh950m to provide for debts of "an entity in the Dubai Holding stable", said Ben Franz-Marwick, the bank's head of investor relations. Problems at Dubai World and Dubai Holding are "now behind us", he said. The results do not include the takeover of Dubai Bank, announced earlier this month, which will be completed by the end of this year.
But an increase in bad debts at Emirates NBD was a significant worry, said Naveed Ahmed, a financial analyst at Global Investment House.
"We remain concerned over the bank's asset quality and the performance of its bottom line, which may prompt us to revise our forecast downwards after a detailed review of the financials and a meeting with the management," Mr Ahmed said.
"The bank witnessed a robust rise in its top line (due to improvement in spreads on easing Eibor), the performance of non-interest income seems dismal on account of loss of income from Network International."
Although the euro zone's sovereign debt crisis was a concern for all banks, bigger international lenders facing debt repayments this year and next were facing headwinds, said Mahin Dissanayake, a ratings analyst at Fitch Ratings.
"The real concern for us is how it will affect banks' ability to raise long-term dollar funding externally," he said. "At risk are those who are reliant on international debt capital market funding," mostly big lenders with international operations, Mr Dissanayake said.
Elsewhere in the banking sector, First Gulf Bank, Abu Dhabi's second-biggest lender by market capitalisation, reported an 8 per cent increase in profits to Dh920m. Its non-performing loans fell to Dh379.3m during the quarter, a 7 per cent decline from a year earlier, driving its profits higher as lending increased.