Provisions, accounting norms eat into profits

Massive increases in bad loans provisions, stock market losses, and changes in accounting practices led to a 25 per cent decline in the net profits of the top 25 listed companies in the UAE, Emirates Business research revealed.

The combined profits of the top 25 listed companies (by market capitalisation) declined from Dh41.2 billion in 2008 to Dh30.99bn in 2009, a contraction of Dh10.21bn, or 24.78 per cent.

The decline was led by Abu Dhabi Islamic Bank, whose bottom line saw substantial erosion (90.83 per cent) for 2009 thanks to provisions of Dh1.4bn – more than thrice the Dh460mn the bank provisioned in 2008.

Specific impairment provisions for loans and advances were up almost 73.5 per cent in the 12-month period ended January 2010 for the UAE banking sector, according to latest Central Bank statistics. Besides higher provisioning, the banks' woes were compounded in 2009 due to fair value changes on investment properties.

Some analysts believe with a bulk of firms on local bourses representing the banking and real estate sectors – the ones most hit by the crisis – rising non-performing loans and declining property values in the country could mean 2010 may not see substantially better numbers although expert opinion remains divided. According to the fair value accounting model, investment property (held by a firm to earn rentals or capital appreciation or both) is re-measured at fair value, which is the market value of the property, and gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises.

The twin forces of demand and supply hit real estate firms in the UAE, with a further blow coming from changes in accounting policies. A number of property companies in the country are now switching their accounting methods in accordance with International Financial Reporting Standards, which favours the completed contract method of revenue recognition as opposed to the percentage completion method that companies earlier followed.

In the case of the completed contract method of revenue recognition, the revenue and related profit for a project sold are recognised when the project is handed over to customers, while the previous model allowed for pro-rata profit booking on the basis of part-completion of the project.

In total, six of the UAE top 25 saw their bottom lines get slashed by more than half. The others in the unenviable club included Taqa (-89.99 per cent), Emaar properties (-89.30 per cent), Sorouh (-74.02 per cent), Aldar Properties (-70.79 per cent) and Abu Dhabi Commercial Bank (-58.53 per cent).

At the other end of the spectrum, while National bank of Fujairah managed to turn net losses of Dh50.27m in 2008 into net profits of Dh104.30m in 2009, Aabar Investments topped the list of gainers, with the ADX-listed company witnessing its net profits more than double to Dh1.68bn in 2009, a growth of 132.80 per cent over the Dh721.59m profits it registered in 2008.

The only sector to have turned in a positive performance is the services sector, represented by etisalat, Abu Dhabi National Hotels and Air Arabia. Combined net profits of the trio were up 2.68 per cent for the year, growing from Dh9.47bn in 2008 to Dh9.72bn in 2009.

The worst hit sector among the top 25 list – no surprises here – is the real estate sector, with net profits of the three firms representing the sector declining by a massive 78.27 per cent, from Dh8.36bn in 2008 to Dh1.82bn in 2009. None of the three property companies in the top 25 – Emaar, Aldar and Sorouh – shed less than 70 per cent of their bottom line in 2009.

Net profits of the two financial services firms on the list – Oman Insurance and Dubai Investments – fell by Dh680.67m, or more than 37 per cent in 2009 from those registered in 2008. Net profits of the industrials sector, represented by Taqa, Aabar and Dana Gas, fell by 26.86 per cent. The 14 banks in the top 25 listing made collective profits of Dh16.35bn in 2009, a decline of more than Dh2.52bn or 13.37 per cent over their 2008 profits.

A recent report by Kuwaiti investment bank Markaz reckons that the total profits of about two-thirds of firms in the UAE slumped 77 per cent quarter-on-quarter in Q4 compared to Q3, 2009.

Nevertheless, experts believe that companies in some of the other sectors will benefit from the overall economic stability witnessed in the past few months, with telecom, petrochemicals and aviation firms among the primary beneficiaries of the country's underlying economic strength.

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