Realty and retail lending likely to hurt ENBD profit

Emirates NBD (ENBD), the largest bank by assets in the region, is likely to report higher real estate related and retail lending impairments in the second half of this year, affecting the profitability of the UAE-based bank, said Fitch Ratings.

Profitability at Emirates NBD declined in 2008 as a result of significantly higher impairment charges arising on the bank's investment portfolio in Q4 2008.

While 2009 has started well with net income of Dh1.3 billion in Q1 2009, significant challenges to profitability for the remainder of the year persist with higher retail lending impairments appearing in Q2 2009 and higher retail estate related and other corporate impairments likely to negatively impact the bank in the second half of 2009, it said.

ENBD Chief Financial Officer Sanjay Uppal said on Monday that the bank's earnings would come under pressure from non-performing loans. "As we go through the year, we will see the materialisation of non-performing loans," he said.

ENBD has a significant domestic franchise giving it a high profit generating capacity that means it should be able to absorb higher charges, although Fitch said it would closely monitor impairment levels for the rest of 2009. Fitch also affirmed Dubai-based Emirates Bank International's (EBI), which is wholly-owned by ENBD, Long-term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook.

Fitch has simultaneously affirmed EBI's Short-term IDR at 'F1+', Individual Rating at 'C', Support Rating at '1' and Support Rating Floor at 'AA-'.

EBI's IDRs and Support Rating reflect the extremely high probability of support for the bank from the UAE authorities, if needed.

Fitch's opinion of likely support is based upon EBI's size, significant domestic franchise, its ultimate majority ownership by the government of Dubai and the long history of support in the UAE.

Recent events have shown that liquidity support will be provided by the UAE authorities and that solvency support will initially be provided by each bank's emirate and ultimately by the UAE authorities.

Fitch said downside pressure on the Individual Rating would arise if the bank sees a significant decline in profitability from higher impaired loans, particularly related to lending to the Dubai real estate and retail sectors. Fitch expects impairments to rise during the remainder of 2009.

Liquidity pressures have eased for the UAE banking system since Q4 2008, although ENBD's loan-to-deposit ratio remains among the highest in its peer group at about 126 per cent at end-Q1 2009.

Keep up with the latest business news from the region with the daily Emirates Business 24|7 newsletter. To subscribe to the newsletter, please click here.