Emirates NBD gives cause for concern

Emirates NBD's recent acquisition of Dubai Bank could well be the least of worries for shareholders.

Emirates NBD has been the golden boy of Dubai's banking sector for much of the year. But its recent acquisition of Dubai Bank has unsettled some investors.

The UAE's biggest bank by assets is well-managed and transparent, and its shares have risen 34 per cent since January to Dh3.70.

But since the Dubai Government announced that Emirates NBD was to take control of Dubai Bank, it has faced some selling pressure on concerns that the bigger bank would be laden with bad debts, with shares falling 2.6 per cent.

Even accounting for the sell-off after the acquisition of Dubai Bank was announced, Emirates NBD has still made an impressive return in a largely becalmed UAE banking sector.

But Dubai Bank may be the least of Emirates NBD's worries, despite the large volume of bad debts expected, analysts from Moody's Investors Service wrote in a research note.

"Despite the extensive impairments on Dubai Bank's books, [its] balance sheet is relatively small compared with that of ENBD," the credit ratings agency said.

But Moody's retained the "negative" outlook on Emirates NBD's "A3" credit rating, because of its exposure to Dubai Government-linked holding companies that are restructuring their debts.

That is not the only complication. Capital ratios are expected to come under pressure as the bank prepares for Basel III regulations due to come into effect by 2019, according to AlembicHC.

And Emirates NBD's ability to lend is expected to be "essentially flat" this year compared with modest growth elsewhere in the sector, according to Arqaam Capital, which initiated coverage of the stock with a "hold" rating yesterday.

"The combination of limited lending growth and asset quality concerns leaves little room for significant upside at current price levels," Ankur Shah, an Arqaam analyst, wrote in a research note.

For those hoping for a surprise in the bank's financials - which will not reflect the unknown costs of the Dubai Bank acquisition - it might be worth the risk. Other investors should take solace in the fact that it was a good run while it lasted.