Mounting debt costs to haunt Emirates NBD

Analysts warn that Emirates NBD faces a further three years of provisioning to cover for the cost of defaulting loans.

Investors have moved away from Emirates NBD since the bank was ordered in October to acquire Dubai Bank. Duncan Chard / Bloomberg News

The cost of covering mounting debt is expected to eat into profits at Emirates NBD for years to come, analysts warned as they slashed estimates for the UAE's biggest bank.

HC Securities lowered its target price by 20.4 per cent to Dh3.90 yesterday after warnings from the bank's management that higher provisions for bad debts may be necessary.

"It should take until 2014 for the bank to cover its cost of capital as provisions eat away 53 per cent to 76 per cent of its operating profit," analysts from the brokerage wrote in a research report.

Financial woes in the euro zone are also expected to increase pressure on banks based in Dubai attempting to shoulder the weight of the emirate's state-owned holding companies seeking to meet their debt repayments, the report added.

"Emirates NBD may also have to absorb some of the refinancing needs of government-owned entities in 2012, particularly if European and US banks reduce their exposure to the region."

Easy access to credit fed Dubai's boom in the years before the financial crisis, but banks have been hamstrung by mounting provisions for bad debts ever since.

The report echoes warnings from Goldman Sachs that the emirate's debt hangover will continue to depress earnings at Emirates NBD.

"Looking at the guidance provided on asset quality trends, we calculate a provisioning range of Dh6 billion (US$1.63bn) to Dh8bn is required between the fourth quarter this year and the fourth quarter of 2013," analysts from the American investment bank wrote in a research note earlier this month.

Goldman also cut its target price for the bank by 9 per cent to Dh4.38.

Investors have moved away from Emirates NBD since the bank was ordered in October to acquire Dubai Bank, a failed Islamic lender, after it was taken over by the Dubai Government in an effort to protect depositors.

Since then, the bank's shares have fallen 16.5 per cent to Dh3.17 each. The shares were unchanged after the release of HC's report.

The bank is set to reveal the cost of acquiring Dubai Bank when it announces its full-year results, having previously stated the takeover will result in no increase to bad debts.

HC's lower price target also reflects the possibility that Emirates NBD may be forced to absorb Amlak Finance, the Islamic mortgage lender, HC's report added.

Shares in Amlak have been frozen since 2008, following an aborted merger with Tamweel.

Emirates NBD booked Dh1.5bn in impairments on financial assets in the third quarter, setting aside enough funds to cover in full for the cost of bad debts at Dubai World and Dubai Holding, the most since the financial crisis began.

Provisioning is expected to increase across the UAE financial services sector as problems at government-linked holding companies resurface, according to Fitch Ratings.

"The significant increase in the renegotiated private-sector loans hides the true extent of the banks' asset quality problems," the ratings agency warned in a recent research report. "While fundamental credit issues in the operating environment remain unresolved, some of these loans may re-emerge as non-performing loans."