Abu Dhabi: National Bank of Abu Dhabi (NBAD), the UAE's second largest lender by assets, Monday said its fourth quarter profits fell 13 per cent to Dh429 million, well below analysts' expectations, due to increased costs and provisioning.

Three local analysts surveyed by Gulf News averaged projected profit of Dh956 million after provisions of Dh284 million. NBAD set aside Dh623 million in provisions in the fourth quarter despite a slight rise in non-performing loans (NPL), compared to Dh785 million through the first nine months of the year.

The bank's provisions rose sharply in the fourth quarter as they included Dh316 million of collective provisions, or money set aside to cover possible future losses.

The bank had targeted its collective provisions to reach 1.25 per cent of credit risk weighted assets, a regulation expected to be introduced soon by the Central Bank, said Michael Tomalin, NBAD's chief executive.

"We understand the Central Bank is considering something similar bank wide," Tomalin said in a phone interview. "So we thought it would be a good opportunity to take those provisions now."

Tomalin said the Central Bank changed asset weights for several classes in November, including public sector businesses, which forced NBAD to raise its provisions in order to meet the goal it set in mid-2008. The ratio of the bank's collective provisions to risk weighted assets then registered just 0.4 per cent, he added.

"If we are being over-bearish in terms of taking these provisions, we will, over time, release them back into profit," Tomalin said.

NBAD could be one of the few banks in UAE to meet the new provisioning rule expected to be instituted by the Central Bank this year, said Dheeraj Lakhwani, banking analyst at Prime Emirates.

"The good thing about NBAD is that they are now prepared," said Lakhwani.

Asset growth

Full year profit remained flat at Dh3 billion, compared to 2008, despite a 27 per cent jump in interest income to Dh4.6 billion.

A 27 per cent annual rise in costs to Dh1.9 billion to fund the bank's expansion has also affected its bottom line, Lakhwani said. NBAD now operates 100 branches in the UAE including 15 that were opened in 2009.

Despite lower profitability, NBAD's assets grew by almost 20 per cent to Dh197 billion. The bank's loan book grew by 18 per cent on the year to Dh132 billion, compared to the sector average of 2.4 per cent.

NBAD has not made any provisions against Dubai World debt, down to $239 million (Dh879 million) from $345 million (Dh1.3 billion) as of the end of November, Tomalin said.

"Dubai World is performing," Tomalin said. "We see no reason to provide for Dubai World specifically."

Fourth quarter provisions for lenders have accounted for 36 per cent of the Dh18.3 billion set aside for the entire year, according to Central Bank data.

Deepak Tolani, interim head of research at Al Mal Capital, said the increase in provisioning could also signal the bank's expectation of a further rise in NPLs, an issue he expects to continue shadowing results throughout 2010.

"We believe [NBAD] is preparing for weakness in asset quality coming through in 2010," said Deepak Tolani, interim head of research at Al Mal Capital. "It seems like a lot of banks are throwing the kitchen sink at the fourth quarter so hopefully they can start next year off cleaner," Tolani said.