Emirates NBD, Dubai's largest bank, will see its quarterly results hit again by its exposure to state-linked companies, in the latest sign of the toll taken by its status of the emirate's lender of last resort.

The bank, formed at the behest of Dubai's ruler in 2007 through the merger of Emirates Bank and National Bank of Dubai, reports fourth-quarter results on Wednesday.

Its exposure to government-related entities (GREs) -- which accounted for 24 percent of total assets as of September 30, up from 17 percent at the end of 2009, according to Moody's -- has raised concerns in the market.

"ENBD is a large and systemically important bank, but it can't be the lender of last resort for Dubai GREs," said Mahin Dissanayake, director, Middle East financial institutions at Fitch Ratings.

"We already have concerns about ENBD's high concentration risks and further mergers or asset acquisitions could weigh negatively on future asset quality."

Its October takeover of Dubai Bank, again by order of the ruler, is among issues causing unease among market players. Dubai Bank was rescued by the government earlier in 2011.

ENBD has said the takeover will not have a negative impact on profits or impairments but has given little other information on how the Islamic lender would be integrated. It has promised more clarity in its fourth-quarter results.

"The Dubai Bank transaction was considered ratings neutral at the time, because it was enabled by substantial Dubai government support," Dissanayake said. "However, the bank has further increased its exposure to GREs and therefore potential new debt restructuring."

ENBD warned in October that quarterly earnings would see a similar impairment impact as in the third quarter when its 1.76 billion dirham ($479.2 million) operating profit was all but wiped out by provisions.

Two analysts forecast fourth-quarter net profit of 114 million dirhams and 230.3 million dirhams respectively, down from 406.5 million dirhams in the same quarter in 2010.

Adding to its provisioning burden is Dubai Group, part of Dubai ruler Sheikh Mohammed bin Rashid Al-Maktoum's personal investment vehicle, Dubai Holding, and which is renegotiating $6 billion in bank debt. The latter is part of a wider $10 billion debt restructuring at Dubai Group.

Dubai Bank had a 4.1 billion dirhams exposure to Dubai Group, according to the lender's last available results in 2009.

Meanwhile, ENBD provisioned its Dubai Group debt at 20 percent in the third quarter, meaning the 950 million dirham impairment it took would equate to a holding of 4.75 billion dirhams.

The two stakes combined make up about 40 percent of Dubai Group's $6 billion total bank debt. If ENBD has to also provision for Dubai Bank's exposure, it would add a further 820 million dirhams at the same 20 percent rate.

Two sources on Dubai Group's restructuring said ENBD should be provisioning much higher than 20 percent.

"That 20 percent provision looks light. I'd expect in different regimes, they would be higher, significantly higher," one of them said. "They should be well over 50 percent if banks are being honest about the state of Dubai Group's assets."

In November, a source told Reuters the value of Dubai Group's assets had fallen to around $2.5 billion to $3 billion. Dubai's government walked away from debt talks, dashing hopes for a state-backed rescue, sources said this month.

ENBD is not alone in grappling with impairments at Dubai state-linked firms. Other UAE banks, including Abu Dhabi's Union National Bank, have provisioned against Dubai Group, although the percentage is not known.

But its central position in the emirate's economy -- and the government's 55.6 percent stake -- mean it is required to absorb much of the burden when a market-based solution is required.

"The bank is making a ton of money but they just keep having to use it for ringfencing," an analyst at one international bank said, speaking on condition of anonymity. - Reuters