Emirates NBD sees bad loans rise as Dubai lending surges

Emirates NBD, the UAE bank that doubled lending to the Dubai government in the past four years, may report climbing loan-loss charges hurt its fourth-quarter earnings.

Loans to the Gulf emirate’s government and its departments comprised 32 percent of Emirates NBD’s total lending at the end of September, compared with 16 percent at the close of 2007, bank data show. The lender, which is 56 percent owned by the state, will report a 58 percent plunge in fourth-quarter income to AED172m ($47m), according to the median of four estimates compiled by Bloomberg.

Emirates NBD expects bad loans will rise until 2013 as it contends with exposure to debt restructuring by state-owned companies including Dubai World, which shook global markets in 2009 with its request to delay payments on $25bn in loans. The emirate accumulated $129.3bn in debt as it sought to build a trade, tourism and financial services hub, estimates of Bank of America Corp’s Merrill Lynch unit show.

“One big borrower having problems can create a problem for the whole bank,” Khalid Howladar, a Dubai-based vice president at Moody’s Investors Service, said in a phone interview Jan 18. Moody’s has a negative outlook on Emirates NBD due to “concerns surrounding the increasing concentrations, the related-party lending and the restructuring of the exposures to government- related issuers in their loan book,” he said.

Banks in the UAE, the second-largest Arab economy, are starting to recover from a slowdown in credit expansion after the global debt crisis triggered a real-estate slump in Dubai and investment banking revenue plunged.

Growth in bank lending slowed to between 1 percent and 3 percent in 2009 and 2010 from more than 30 percent a year in the four years to 2008. In the first 11 months of 2011, credit growth was 4.2 percent, central bank data show.

Emirates NBD, formed in 2007 after Dubai’s ruler ordered Emirates Bank International and National Bank of Dubai to merge, has increased overall lending to state-related entities in every quarter since at least 2009. This includes credit extended to the civil aviation department, roads and transport authority and the Dubai Electricity and Water Authority.

There are “increasing concerns that Emirates NBD is taking on a role as the primary lender to the Dubai government,” Mahin Dissanayake, the Dubai-based Middle East financial institutions director at Fitch Ratings, said in a Jan 19 phone interview.

Like Moody’s, Fitch put Emirates NBD on negative watch “partly because of a weaker asset quality outlook and partly due to increased risk concentrations, specifically its rising exposure to the Dubai government and its related entities,” he said.

Emirates NBD has defended its lending to the government, stating in a quarterly results report that such loans “do not involve more than a normal amount of risk.” Lending to the government is on “substantially the same terms” as those applied to third parties, it said.

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