Mashreq reports an improved bottom line for the quarter, but the bank's loan book is shrinking and profits from lending are drying up.
Fewer bad loans boost Mashreq
Easing problems with defaulting debtors helped Mashreq to post better results for the second quarter of the year.
But the stronger bottom line masked a decline in lending and a stagnation of underlying income.
Mashreq, Dubai's second-biggest bank by assets, reported profits of Dh286.2 million (US$77.9m) for the second quarter, an increase of 41.3 per cent over the same period last year.
Abdul Aziz Al Ghurair, the bank's chief executive, said Mashreq had experienced a "slow but steady recovery" during the first half of the year, as the bank recorded its 11th straight quarter of contraction in its loan book.
Mashreq, alongside other banks based in Dubai, has been forced to set aside large amounts of money as conglomerates such as Dubai World and Dubai Holding have sought to restructure their loans.
Earlier this week, Emirates NBD, the UAE's biggest bank by assets, also showed a 0.6 per cent decline in net loans and advances during the second quarter to Dh193.1 billion.
During the same period, net loans and advances across the banking sector increased by 0.7 per cent to Dh1.05bn, according to Central Bank data.
A recent report by Moody's Investors Service, the credit rating agency, indicated levels of non-performing loans at Dubai's lenders were likely to peak this year at up to 14 per cent of loan books, compared with about 8 per cent at the end of last year.
The effect of higher provisioning has been to hobble banks' profitability and constrain their ability to lend.
In a sign of confidence it could deal with bad debts on its books, money set aside for loan losses at Mashreq decreased by 23.5 per cent during the second quarter to Dh312m, compared with the same time last year, allowing it to post stronger net profits.
Net loans, advances and Islamic financing products fell 4.8 per cent to Dh38.09bn during the quarter.
Amid a drying up of new lending during the quarter, Mashreq recorded double-digit losses in net interest income, declining 17.4 per cent to Dh477.4m compared with the same period last year.
The bank's lack of revenue growth was a result of efforts to reduce levels of risk on its loan book, said Mahin Dissanayake, a financial analyst at Fitch Ratings.
"The bottom line has gone up, but they've only got that because provisions have come down," he said.
During the first half of the year, the bank distributed a dividend of Dh338.1m on its shares, 82.27 per cent of which are held by members of the Al Ghurair family, and an increase in senior management remuneration of Dh53m, up 47.2 per cent on the same period last year.