Mashreq, Dubai's second-largest lender by market value, reported a 7 per cent rise in net profit for the first six months of the year as it set aside less cash to soak up bad loans.
The bank posted a net profit of Dh591 million (US$160.8m) for the first half compared with a profit of Dh551m for the same period last year, it said yesterday.
"The second quarter has seen a marked progress in performance," said Abdul Aziz Al Ghurair, the chief executive of Mashreq.
"Revenue and net interest income have both recorded an improvement over the first quarter, which reflects the increasing level of confidence in the UAE and regional economies."
Mashreq's "repositioning" of its balance sheet led to a decline in provisions for bad loans by 45 per cent to Dh352m from Dh637m in the first half of last year, it said.
UAE banks have been gradually recovering from a decade of easy lending that came to a halt with the global financial crisis of 2009.
Loans and advances by Mashreq swelled by 5.1 per cent in the first six months of this year to Dh39.6 billion, up from Dh37.7bn at the end of last year. But the bank's assets fell to Dh76.4bn, dropping 3.5 per cent from Dh79.2bn at the end of last year.
Mashreq blamed its aim of cutting its holding of high-cost deposits on the 3.8 per cent fall in total deposits. At the end of last month, total customer deposits stood at Dh43.7bn.
But loan growth and the shedding of high-cost deposits moved its loan-to-deposit ratio up from 83 per cent last December to 91 per cent at the end of last month.
UAE Central Bank officials have previously said they would like to see loan-to-deposit ratios for local banks at about 85 per cent. Excessive lending meant such ratios climbed to a peak of 114 per cent in 2007.
"This report demonstrates an increase of 18 per cent in net profit as compared to the first quarter, which is a healthy sign and reflects on the bank's rigorous commitment to the path to growth," said Mr Al Ghurair.