ENBD’s lending exposure to Dubai entities increases

Following the U.A.E. Central Bank’s regulation to limit GRE exposure, Emirates NBD pledged to trim this. But its latest financial statement shows that lending to sovereign entities has only increased.

As Dubai’s flagship bank, Emirates NBD’s lending is inevitably concentrated accordingly around the emirate’s government and its various entities. In times of crisis, as ENBD learned the hard way in previous years, that sizeable single-party exposure can have devastating consequences.

ENBD had some bitter pills to swallow in the aftermath of the global financial crisis which forced several Dubai-related entities into restructuring.

As a result of that experience, and following the U.A.E. Central Bank’s regulation to limit GRE exposure, ENBD’s Chief Executive Shayne Nelson at the start of this year pledged to trim the bank’s Dubai exposure.

The bank’s latest financial statement, however, shows that lending to sovereign entities, i.e. mostly Dubai, further increased by around AED7.5 billion to AED98.4 billion, from AED90.8 billion at the end of 2013. That equals around 43% of the bank’s AED227 billion loan book, a level that has sparked some concern in the past among analysts, including ratings agency Moody’s.

ENBD’s executives during a conference call Thursday shrugged off the increase in lending to Dubai, repeating they remain “comfortable” with the bank’s exposure.

“As Dubai’s biggest bank by far and the U.A.E.’s biggest bank by revenues by far, we would expect a significant exposure to Dubai and its economy,” said Mr. Nelson. The CEO, who took the reins of the bank last year, said ENBD is in talks with all stakeholders, including Dubai, as to how to reduce its exposure, declining to give further detail.

For now, the bank has the wind in its sails largely thanks to Dubai’s economic resurgence, which resulted in a 35% jump in second-quarter net profit. As domestic banks received a grace period of almost five years to comply with the central bank regulation, minimizing its sovereign exposure may not be the prime concern of ENBD’s management’s, yet.

“The bank needs to bring down its exposure in the next five years. If during that period it goes up for a few quarters, that doesn’t mean they’re not going to follow the compliance timeline,” said Shabbir Malik, a banking analyst at EFG Hermes.-WSJ