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Emirates NBD in breach of central bank rules for lending too much to Dubai Government

Posted on 23 October 2012 with no comments from readers

Emirates NBD, the UAE’s biggest bank by assets reported a tripling of net income to $174 million in the third quarter as the bank reduced over-heads with the closure of eight branches, 64 ATMs and loss of 750 staff, and cut its provisions for bad debts. Operating profits grew by 87 per cent year-on-year to $518 million.

Customer loans expanded by five per cent to $58 billion, while deposits jumped by 11 per cent to $58.4 billion. Capital adequacy of almost 20 per cent is outstanding by global standards.

Improving economy

CEO Rick Pudner said the bank had taken ‘advantage of gradually improving economic conditions” in the UAE to restructure after its acquisition of the loss-making Dubai Bank last October for Dhs10. The bank is left with 104 branches and 566 ATMs after the downsizing.

However, Emirates NBD is currently in breach of new limits imposed by the UAE Central Bank on the percentage of loans held by the Dubai Government. The bank increased loans to the Dubai Government by $1.7 billion in the third quarter, bringing the total outstanding to $19.7 billion. Emirates NBD is 55.6 per cent owned by state fund Investment Corporation of Dubai, so effectively under government control.

There was no word on how the bank plans to address the government loan issue, although in a conference call Mr. Pudner said it was ‘talking on a continual basis to the central bank’. Analysts say the UAE Central Bank is determined to avoid a repeat of the boom-to-bust cycle in Dubai seen in 2008-9 and $20 billion bailout by Abu Dhabi.

All the same such is the extent of government involvement in the Dubai economy that this ruling does appear onerous. Over time it should promote a shift towards the private sector which in theory at least ought to find it easier than the public sector to borrow money to expand.

World Bank advice

Some analysts would agree this a good thing. The World Bank argued in the early 2000s that Dubai should be operating with a much smaller public sector and this was ignored. The real estate crash of 2009 followed but only after five years of the highest economic growth in the world. Would this have been achieved without a highly proactive government?

Clearly work remains to be done in unwinding the Dubai debt mountain left over from the boom years. But the Dubai Government must be the envy of many in the world in being able to grow its way out of debt which makes debt rescheduling far more popular among bankers.

That said if the UAE Central Bank squeezes too hard it will impair this recovery. It is a delicate balancing act though again an enviable one to manage.

Posted on 23 October 2012 Categories: Banking & Finance, GCC Economics, GCC Stock Markets

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