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Mon 23 Jan 2012 08:28 AM

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Emirates NBD sees bad loans rise as Dubai lending surges

Dubai lender still struggling with fallout from Dubai World, state-linked debt revamps

Emirates NBD sees bad loans rise as Dubai lending surges
Emirates NBD is Dubais largest bank by assets

Emirates NBD, the UAE bank that doubled lending to the Dubai
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

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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The additional 16 percent of its loan book comprising loans
to government-related entities was “on an arm’s-length basis,” the bank added.
A spokesman for the lender said Jan 19 he had no further comment.

Emirates NBD, the biggest bank by assets in the six-nation
Gulf Cooperation Council, which includes Saudi Arabia, has managed to maintain
Fitch’s fifth-best investment grade score of A+ and Moody’s seventh-highest
rating of A3.

Fitch, which said in October it may downgrade the bank one
or two notches after the annual results are published, said its ratings take
into account the “extremely high probability” that Emirates NBD would get
backing from Dubai and UAE authorities if needed.

Emirates NBD’s lending “includes a lot of different kinds of
financing for different entities,” Raj Madha, an analyst at Rasmala Investment
Bank, said by phone Jan 19. “So for there to be a problem for these loans in
general, there would have to be a very negative scenario in Dubai as a whole.”

After reporting no loan growth in the nine months through
September, Emirates NBD’s lending may rise as much as 4 percent this year, chief
executive officer Rick Pudner said in November.

With debt restructuring at Dubai World and units of state- owned
conglomerate Dubai Holding, it will take at least two more years for the bank
to sort through bad loans.

Emirates NBD’s ratio of non-performing loans to gross loans
rose to 12.9 percent at the end of September and the bank said this measure
could climb to between 13 percent and 14 percent in the fourth quarter, and
gain another percentage point annually until 2013.

Hurt by AED1.8bn of loan-loss charges, Emirates NBD is
likely to post a 93 percent slump in fourth-quarter profit to AED29m, according
to estimates of investment bank EFG-Hermes Holding.

“Concentration risk is probably the single-biggest concern
that banks in the region face because what you have in the UAE and other
countries in the GCC is an economy that is dominated by the government and
associated companies,” said Howladar of Moody’s.

“Here the government
effectively owns the real-estate companies, the power companies, the transport
ones so you have an undiversified economy where the biggest borrower is also
effectively the government.”

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