Emirates NBD paid just Dh10 to acquire Dubai Bank, the Islamic lender that was rescued by the Government last year.
As part of the deal, the nation's largest bank received Dh2.8bn (US$762.2 million) of funds from the Ministry of Finance and a blanket guarantee from the Dubai Government for losses resulting from the acquisition for the next seven years.
Details of the deal were revealed alongside a 62 per cent fall in net profit for the fourth quarter to Dh152m, which fell short of analysts' estimates. Earnings for the full year rose 6 per cent to Dh2.48bn.
The fourth-quarter profit suffered from a Dh1bn provisioning for bad debt, but Rick Pudner, the chief executive, said Emirates NBD was weathering turbulent market conditions well.
"During 2011 we have delivered a robust set of financial results, with net profits for the year up 6 per cent, despite an extremely challenging and volatile external environment and after adopting a significantly more conservative approach to de-risking the balance sheet," he said.
The bank reported Dh543m of fair value gains on the Dh2.8bn deposit from the federal Ministry of Finance, at an interest rate below market rates, during the next eight years.
Dubai Bank was rescued from collapse by the Government last May, and Emirates NBD was ordered to acquire it in October.
With the acquisition completed, Emirates NBD now has a clearer direction for the year ahead, said Surya Subramanian, the bank's chief financial officer.
"We're pleased to state that we had the support of the Dubai and Abu Dhabi governments in achieving this outcome," he said.
The transaction was conducted at "arm's-length" and reflected the "fair value" of the bank, Mr Subramanian added.
The bank's shares have fallen 19.7 per cent to Dh3 since the announcement that it would acquire Dubai Bank. The shares were unchanged in trading yesterday after the release of earnings.
The bank announced a 20 per cent cash dividend to shareholders.
Dubai Bank has now been consolidated with Emirates NBD, although how it sits alongside the bank's existing Islamic subsidiary, Emirates Islamic Bank, is being reviewed.
Emirates NBD has formed a "synergy committee" to explore the future of the two Islamic banks, Mr Pudner said, stopping short of saying whether they would eventually merge.
"We're still working through the potential synergies which … we see as very positive step to give us more scale in the Islamic banking arena," he said. Emirates NBD took a Dh93m cost for the consolidation of Dubai Bank in the fourth quarter.
Dubai Bank reported a Dh35m loss for the year.
But at a negligible valuation, the Dubai Bank acquisition was a good deal for Emirates NBD, said Raj Madha, a financial analyst at Rasmala Investment Bank.
"At the end of the day, customer relations and 22 branches are more positive than a small amount of short-term losses," he said.
The involvement of the federal Ministry of Finance, rather than Dubai's Department of Finance, was an important element of the funding deal, Mr Madha added.
"It's good to see that Abu Dhabi is taking an active interest in the health of the Dubai banking system," he said.
The acquisition of Dubai Bank grants Emirates NBD a 24.8 per cent stake in BankIslami Pakistan.
Emirates NBD wrote down by Dh750m its 47.5 per cent stake in Union Properties, a loss-making Dubai developer, citing the "underperformance of this asset during the year".
Last month, the bank agreed a Dh3.8bn debt deal, rescheduling payments and transferring stakes in several of Union's flagship property developments, including the Index Tower and Limestone House, home to the Ritz-Carlton DIFC.
Emirates NBD's lending rose by 5.3 per cent during the year to Dh216bn, after the addition of Dh8bn of Islamic loans from Dubai Bank.
The bank's loans to the Dubai Government swelled 10 per cent to Dh59.4bn during the year, accounting for about one third of the bank's total lending.
But deposits fell even with the addition of Dubai Bank's customers, with total deposits down 3.5 per cent to Dh193bn.