The UAE’s largest bank by assets saw its net profits and total income plummet in 2010, as impairments on investments and bad loans took their toll. However, CEO Rick Pudner is in a bullish mood as he insists the bank has rallied strongly in the wake of the credit crisis and “uncertainty” in the UAE banking sector.
“Two years on from the crisis we have a strong capital base and liquidity,” he says. “Our Basel rates, loans-to-deposit ratio, liquid assets have risen appreciably during the same period, and we have improved our income generating ability as well as our efficiency as an organisation.”
Emirates NBD, which was formed as the result of a 2007-announced merger between Emirates Bank Group and National Bank of Dubai (NBD), revealed on Thursday that it recorded a 30% slump in net profits for 2010, to Dhs2.34bn from Dhs3.34bn in 2009. While Q4 profit was Dhs403m in the three months to December 31, up from Dhs178m in the prior-year period, the figure still missed some analysts’ forecasts for the quarter.
“We are positioning ourselves for the opportunities ahead,” insists Surya Subramanian, CFO at Emirates NBD. “Overall, we have reported healthy results notwithstanding the difficult times and the provisions we’ve taken.”
The bank reported total income for 2010 of Dhs9.72bn, down 10% compared to 2009’s figure of Dhs10.79bn. It said it provisioned fully for its exposure to debt-laden Dubai World, and that the bank’s exposure had been included in its figure for impaired loans, which declined 4% in 2010 to Dhs3.19bn, compared to Dhs3.32bn in 2009. The bank also said it added Dhs335m to portfolio impairment allowances during 2010, taking the total to Dhs2.2bn – or 1.4% of unclassified credit risk weighted assets.
The bank’s investments in associates in 2010 failed to help its cause, amounting to negative Dhs1.02bn compared to a negative contribution of Dhs477m during 2009. This was due in principle, the bank said, to losses incurred by Dubai-based real estate company Union Properties, in which the bank holds a 48% stake, and for which the bank booked an impairment of Dhs360m in 2010.
Nevertheless, operating costs at the bank did drop 14% from 2009 levels and the 2010 cost-to-income ratio decreased to 31.4% from 32.9% in 2009. Deposits grew by 10% as loans declined 8% in 2010, and the loan-to deposit ratio stood at 99% at end-2010 compared to 118% at end-2009 – a liquidity boost which the banks argues will stand it in good stead moving forward.
“Our loans-to-deposit ratio is now below 100% for the first time since 2005,” notes Ben Franz-Marwick, Head of Investor Relations at the bank. “There are some negatives and some positives, but we’ve generated a profit of Dhs2.3bn and delivered a return on equity of more than 10%, in a year with significant headwinds.
“We’ve also significantly improved the liquidity position of the bank, as net liquid assets on the balance sheet improved by about Dhs35bn during the year, which now puts us in an extremely comfortable liquidity position.”
At the same time the bank has been working to de-risk its balance sheet, raising its impaired loans ratio from 1.6% in 2008 to 10% in 2010, and reducing impairments in both investment securities and associates. Central to its growth strategy, too, is the capital that the bank should raise through its proposed sale of a stake in payment arm Network International (NI) to private equity giant Abraaj Capital. While the transaction is still subject to regulatory approval, Pudner reveals that Emirates NBD expects the $545m transaction, which was announced in December last year, to be concluded in Q1 2011.
“We’ve been de-risking the balance sheet, and in the past year we have strengthened it significantly,” he says. “We’ve taken a conservative approach to assets, and we’re also happy that our sale of a 49% stake in NI will allow us to realise value, and generate capital for further investments as well.”
According to the bank net interest income reached Dhs6.79bn for the full year and Dhs1.62bn for Q4 2010, a decrease of 8% and 16% respectively on the comparable periods in 2009. It said that this was driven by an 8% contraction in the loan book and a decline in the 2010 net interest margin, to 2.52% from 2.81% in 2009. The bank attributed this margin decline to a contraction of spreads generated from interbank funding, increased deposit funding costs and the impact of an improved funding profile – although this was partly offset by increased asset spreads across both its corporate and retail businesses.
Meanwhile, non-interest income declined by 13% year-on-year, reaching Dhs2.93bn in 2010, which the bank said was largely driven by a decline in income from investments, and lower fees relating to trade finance and brokerage and asset management operations.
Looking forward Pudner highlights the growing strength of the Emirates NBD brand, and says that the bank’s strategic imperatives are evolving as it transitions from a period of crisis management in 2008, to strengthening through 2009 and 2010, and then growth acceleration in 2011 and 2012.
“We’ve become far more visible around the marketplace over the last 12 to 18 months, and I think the brand is really establishing itself well,” he says. “In February 2011 it’s valued at $1.2bn by The Banker, an increase of 41% over the previous year. That’s the number one ranking in the UAE, and number 132 worldwide.
“We think we’ve done a lot of good work here and got the bank in to a very strong position, but now we need to capitalise on that strength and look at growth opportunities, so instead of enhancing profitability, it’s now about driving profitability,” continues Pudner.
“The bank has boosted its distribution network significantly, increasing the number of branches from 120 in 2008 to 135 now, so we certainly haven’t been neglecting our investments in the future. But we also want to increase lending activities in certain areas such as SME lending and cards, and we will make measured investments in platforms for growth both domestically and abroad.”
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