Emirates NBD yesterday warned that bad loans could continue to mount before peaking next year, as customers continue to default on loans. The UAE's largest bank by assets saw second-quarter net profit fall 41 per cent and said non-performing loans could rise to 2 per cent of its overall loan book at the end of this year before peaking at about 2.5 per cent next year. "We are taking a cautious view. The pressure will remain on non-performing loans," said Rick Pudner, the chief executive of Emirates NBD. "We expect non-performing loans to peak in 2010. This has been on our planning radar in recent months."
Non-performing loans now account for 1.56 per cent of Emirates NBD's overall loan book, the bank said, up from 0.95 per cent at the end of last year. "We expected impairment charges to go up, we should not be surprised," said Robert Thursfield, the director of financial institutions at Fitch Ratings. "After years of unprecedented growth in lending, it was inevitable for bad loans to come through and for non-performing loans to return to more normal levels."
Net income in the June quarter fell to Dh852.1 million (US$231.9m) from Dh1.45 billion in the second quarter last year. The bank has booked Dh1.6bn in provisions for the first half of the year. Despite the rising number of non-performing loans, Mr Pudner said consumer default levels were much lower in the UAE than in the US and Europe. According to the latest data from the IMF, 14 per cent of consumer debt in the US will turn sour, while 7 per cent of consumer loans in Europe will not be repaid.
"Uncertainties remain in the global and regional environment. We remain cautious and take measures to offset possible affects from that," said Mr Pudner. Emirates NBD continued to take a "prudent stance" on credit, he said. However, the bank warned it may be unable to fulfil its earlier pledge to surpass or at least match last year's full-year profit of Dh3.7bn. Banks make provisions to protect themselves against customers failing to repay loans. Without putting the money aside, Emirates NBD would have boosted its operating profit by 26 per cent, it said.
The bank said it had exposure to Saad and Al Gosaibi, the troubled Saudi family groups that are undergoing debt restructuring, but the amount was not material "in regard to our balance sheet". The bank reported a 4 per cent increase in lending since the end of last year and a 5 per cent rise in customer deposits. Tight credit, sharp declines in property values and the rising number of defaults have hurt local bank earnings this year. Most banks have reported lower second-quarter earnings because of higher provisions.
Dubai Islamic Bank, the country's biggest Islamic lender, said its second-quarter net profit declined 40 per cent compared with the same period last year, while Abu Dhabi Commercial Bank reported a 51 per cent decline in the same period after increasing bad loan provisions three-fold in the past six months. According to the Central Bank, overall provisioning by banks rose 11 per cent between May and June, its largest month-on-month rise on record. Overall provisioning now stands at Dh33.5bn, up 30 per cent from last August.