First Gulf Bank profits decline

First Gulf Bank’s defaulting loans are beginning to subside.

First Gulf Bank has reported lacklustre earnings for the third quarter but earnings data showed the worst of the bank's problems with defaulting debtors seem to be subsiding.

The fourth-largest bank in the UAE by assets reported a 8.7 per cent decline in net profits to Dh849 million (US$231.1m) compared with the same quarter last year, but bad debts levelled off from the previous quarter.

First Gulf Bank, however, was alone among Abu Dhabi's banks in disclosing a decrease in net profits for the third quarter, after reports of increased profits at National Bank of Abu Dhabi and Abu Dhabi Commercial Bank on Tuesday.

Naresh Bilandani, an analyst at JPMorgan Cazenove, said with defaulting loans under control, profits should soon return.

"Broadly speaking, these guys seem to be on a sound footing," Mr Bilandani said, adding the bank showed "strong underlying trends", such as getting its asset quality "under control".

Bad debts, which account for 2.5 per cent of First Gulf's loan book, showed no change from the previous quarter, although they are up from 1.6 per cent at the start of the year.

"Once asset quality pressure starts easing off the industry starts focusing on new loans," Mr Bilandani said.

Sofia el Boury, a banking analyst at Shuaa Capital, said the bank had managed to achieve "perfect stability" of bad debts from the previous three months, which may indicate its problems with defaulting loans have peaked.

"The strong positive was that the bank was able to stabilise its asset quality. Indicators like the non-performing loans ratio were maintained at a similar level to the second quarter," Ms el Boury said.

"Liquidity is still improving and there's still lending but [it is] very cautious."

Total provisions for bad debts decreased 1.2 per cent to Dh406m, their lowest since bad debts from the troubled property sector peaked in the final months of last year.

Tarik el Mejjad, an analyst at Nomura, said markets would breathe a sigh of relief on that point: "I think everyone was assuming that provisions would start to slow."

Andre Sayegh, the bank's chief executive, said it was looking healthy.

"First Gulf Bank is in a very strong financial position and will maintain its primary objective of maximising value for all its stakeholders," Mr Sayegh said.

"The bank strategy of targeting its ratios resulted in building a solid balance sheet position over the years. We are very proud to state that this combination of ratios is unmatched in the UAE banking industry."

First Gulf built up cash reserves over the past few months, increasing its capital adequacy ratio to 23.4 per cent, the highest of Abu Dhabi's top three banks.

But fears remain about the amount of bad debts across the sector.

"There's still a debt overhang that banks need to grapple with," said Ahmad Alanani, an analyst at Exotix.

Mr Alanani added the booming profits seen before the global downturn began, driven largely by loan growth, were unlikely to return. "The fact of the matter is that lending conditions are tough, and I don't see a catalyst for banks to start lending," he said.

"Non-performing loans are not going to get worse, but I don't think they're going to get better any time soon."

Analysts' median estimate was for expected profits of Dh789.5m for the third quarter, according to data from Bloomberg.