x Abu Dhabi, UAEThursday 27 July 2017

Dubai Islamic left to face hidden dangers

Dubai Islamic Bank is expected to see a sharp rise in provisions for bad debts when it reports earnings this week, analysts warn.

Dubai Islamic Bank is expected to see a sharp rise in provisions for bad debts when it reports earnings this week, analysts warn.
Dubai Islamic Bank is expected to see a sharp rise in provisions for bad debts when it reports earnings this week, analysts warn.

Dubai Islamic Bank's (DIB) earnings are in focus after Emirates NBD, its larger rival, posted sharply decreased profits for the quarter.

But while Emirates NBD took precautionary measures to insulate against turbulence from the euro-zone debt crisis and provide for its exposure to Dubai Holding, DIB has more severe troubles to worry investors.

"DIB has got other issues that we're looking at," said Mahin Dissanayake, a financial analyst at Fitch Ratings. "They do have an exposure to Dubai government-related entities, but I suspect provisions will come from retail [lending] and commercial real estate."

Fitch assigns an "A" credit rating with a "stable" outlook to DIBbecause of strong anticipated government support.

Including Tamweel, the Islamic mortgage lender, property exposure accounts for almost half of DIB's loan book, Mr Dissanayake said.

That means a sharp downturn in the global economy will bring bad news for DIB. External headwinds on world markets are likely to "keep the real estate sector in the doldrums", according to a recent report from Bank of America Merrill Lynch.

The bank's share price has fallen 10.5 per cent since the start of the year to Dh1.95, outperforming Dubai's index during the period. But equity analysts believe that further dangers could be lurking. DIB may be affected by "very substantial hidden losses", largely tied to its stake in Tamweel, Jaap Meijer, a financial analyst at AlembicHC, said in a research report.

"DIB has revalued its subsidiary Tamweel above Tamweel's own book value, which has increased DIB's book value Dh276 million," he said. "If we used Tamweel's market valuation, the discrepancy would be even larger."

Mr Meijer said the bank's exposure to commercial property gave rise to "substantial asset quality concerns".

Not only that, the bank's profitability lags its sector, he said.

The bank, the UAE's biggest Islamic lender, is expected to report earnings on Thursday.

 

ghunter@thenational.ae