Dubai: Emirates NBD, the UAE's largest bank by assets, could take over Islamic property finance company Amlak next year. This along with the recent takeover of Dubai bank will adversely impact the bank's profitability and capitalisation levels, HC Securities, a brokerage firm, said yesterday.
The acquisition of Dubai Bank, according to the brokerage, lowered the shareholder value slightly and has a negative impact of one percentage point on Tier 1 capital. The report said there is a chance of Emirates NBD buying Amlak.
"We think an Emirates NBD acquisition of Amlak has become more likely and believe the bank may also have to absorb some of the refinancing needs of government-owned entities in 2012, particularly if European and US banks reduce their exposure to the region. This may impact asset yields and potentially provisioning needs as well," wrote Jaap Meijer, head of financials team, and Kareem Gali, analyst at HC Securities.
Trading in shares of Amlak was suspended in November 2008 after the global credit crisis blocked their access to borrowing. A government committee has been considering various options to restructure the company's balance sheet. Earlier this month Rick Pudner, Emirates NBD's CEO, offered no comments when asked about a potential deal with Amlak.
Emirates NBD's share price estimate was cut to Dh3.9 from Dh4.9 to reflect the bank's relatively poor earnings outlook, a potential increase in the concentration risk of its loan portfolios, the negative impact of the Dubai Bank acquisition, and a potential acquisition of Amlak," HC analysts said. The recommendation on the shares was lowered to "neutral" from "overweight".
ENBD is targeting non-performing loans (NPLs) of 13 per cent to 14 per cent by the end of the year and expects this to increase one per cent per annum to 15 per cent — 16 per cent by 2013, driven by lower loan growth and a more conservative approach regarding impaired loans.
The impaired loan guidance includes the renegotiation of all loans to Dubai Holding (for which ENBD provided in the third quarter of 2011), the terms of which have not yet been finalised and could therefore differ slightly from Emirates NBD's expectations, however. The increase in NPLs also includes some loans to smaller entities within Dubai World (for example Dubai Drydocks World) that are still being renegotiated separately, and the expected outcome of these negotiations is factored into the bank's current NPL guidance, the brokerage said.
"We reduce our forecasts 30.4 per cent for 2011, 25.5 per cent for 2012, 20.7 per cent for 2013, and 8.5 per cent for 2014, due mostly to increased impairments… It should take until 2014 for the bank to cover its cost of capital as provisions eat away 53 per cent to 76 per cent of its operating profit," HC analysts said.