Easing problems with defaulting debtors helped Mashreq to post improved results for the first half of the year, but a stronger bottom line masked falling underlying income from its lending book.
Mashreq, Dubai's second biggest bank by assets, reported profits of 551.6 million for the first half of the year, an increase of 22 per cent on the same period a year earlier.
The bank did not provide quarterly earnings figures, but the figure reflects quarterly profits of Dh286.3m, or a 41.3 per cent increase on last year.
Abdul Aziz Al Ghurair, the bank's chief executive, said Mashreq had delivered a "robust" performance during the first six months of the year during a "slow but steady recovery".
In a sign of confidence that it could deal with bad debts on its books, money set aside for loan losses at Mashreq decreased by 29 per cent to Dh637m compared with the same time last year year, allowing it to post stronger net profits.
Mashreq, alongside other Dubai-based banks, have been forced to set aside large amounts of money to deal with bad debts as conglomerates such as Dubai World and Dubai Holding have sought to restructure their loans.
A recent report by Moody's Investors Service, the credit rating agency, indicated that levels of non-performing loans at Dubai's lenders were likely to peak this year at up to 14 per cent of loan books, compared with around 8 per cent at the end of last year.
The effect of higher provisioning has been to hobble banks' lending abilities and constrain their ability to grow.
Despite putting aside less money for bad debts, Mashreq reported double digit declines from its income from lending.
The bank did not disclose its total operating income, but net interest income and income from Islamic products decreased by 11.6 per cent to Dh1.03 billion.
The bank's assets of Dh85bn, which includes net lending, have barely budged since the end of 2010. The bank did not disclose the size of its loan book during the period, though it reported its advances to deposit ratio had fallen to 73 per cent.
Net fees, commissions and other income also decreased by 12 per cent to Dh556 million.