Dubai debt drags ENBD profits down again

Dubai’s biggest bank by market value, Emirates NBD, posted its fourth straight drop in quarterly profits on Monday as yet more provisions linked to state-linked entities weighed and its shares fell on expectations of more to come.

The lender, 55.6-percent owned by state fund Investment Corporation of Dubai, has played a central role in the emirate’s struggle to restructure its debt in the past three years, often acting as a lender of last resort to local firms.

ENBD reported second-quarter net profit of 647 million dirhams ($176.1 million) in the three months to June 30, down 13 percent from a year ago, and narrowly beating analysts’ average forecast for 632.2 million dirhams of profit.

Further debt impairments from Dubai Holding, the personal investment vehicle of Dubai’s ruler, and rising costs from ENBD’s absorption of Dubai Bank, the lender it was ordered to merge with by decree last year, also weighed.

Costs rose 8 percent in the quarter compared with the same period in 2011, although excluding Dubai Bank they would have fallen 4 percent.
ENBD shares closed down 3 percent, while the Dubai index fell 1.5 percent.

Offsetting impairments

Regional broker Global Investment House said ENBD’s profits would have been less than half the reported figure if not for the use of built-up general provisions from previous quarters to offset specific impairments in the second quarter.

“During the quarter, we observed it ploughing into its excessive general provisions base (and transferring them to specific provisions) to smoothen earnings for Q2 12,” Naveed Ahmed, senior financial analyst at Global, told Reuters.

“We could see the same repeating in the future, although this notion has not been confirmed by the bank, as yet.”

Surya Subramanian, chief financial officer at ENBD, said the bank had been building up general provisions since the first quarter last year to meet central bank guidelines and to deal with exposure to big local restructurings.

Impairments were down 3 percent compared to the second quarter last year, standing at 954 million dirhams. It was the second straight quarterly fall after provisioning pounded the bank’s top line in the last six months of 2011.

ENBD made a further 370 million dirhams provision for Dubai Holding, Ben Franz-Marwick, head of investor relations, said on a conference call to discuss the results. This took its overall provisioning for the entity to 32 percent of its 4.6 billion dirhams exposure.

Debt restructurings could continue to weigh on ENBD, Deutsche Bank said in a client note, citing a recent Moody’s report which said $16.6 billion of corporate debt still needed to be restructured in the United Arab Emirates.

While Dubai state-linked entities have undertaken a number of successful restructurings, including the $25 billion Dubai World debt reorganization, others remain unresolved, notably the $10 billion restructuring of Dubai Group.

Operating profit for the first six months of the year climbed 52 percent, fuelled by a 22 percent jump in non-interest income over the period. ENBD credited the rise to higher banking fee income, a pickup in trade finance activity and increased foreign exchange and rates income.

Non-interest income climbed by 2 percent in the second quarter, year-on-year although second quarter operating profit fell 15 percent to 651 million dirhams, due to declining net interest income on the back of falling yields.

Loans and advances rose 2 percent from Dec. 31, 2011, in the wake of a flat first quarter, at a time when lending in the wider UAE banking system grew only 0.3 percent in the first five months of the year, the country’s central bank said.

Deposit growth was flat in the second-quarter, having grown 8 percent in the first three months of the year.