* 2014 profit seen up 8-10 pct vs 6-8 pct previously
* Cost growth seen at 10-12 pct vs 12-15 pct before
* Q2 net profit 1.42 bln dhs vs 1.3 bln forecast
* Beats estimates on higher non-interest income (Adds executive, analyst comments, detail, background)
By Stanley Carvalho and David French
ABU DHABI, July 22 (Reuters) - National Bank of Abu Dhabi (NBAD) raised its 2014 profit forecast as a buoyant economy and a surge in fee-based income helped it to beat second-quarter expectations and rein in projected provisions to cover bad loans.
The upbeat message from the largest lender in the United Arab Emirates (UAE) followed similarly strong results from its main rivals in Abu Dhabi on Tuesday.
Economists forecast the UAE economy will grow by 4.3 percent this year, boosting demand for banking services.
Just three months ago, NBAD, which is almost 70 percent owned by Abu Dhabi’s government, struck a cautious tone, saying profitability was being squeezed by fierce competition in UAE banking and low global interest rates.
But the bank said on Tuesday it was benefiting from its shift away from lending - traditionally the main profit driver for Gulf Arab banks - towards banking services such as broking and investments, as well as lower than expected costs.
Finance chief James Burdett told reporters on a conference call the bank now expected net profit growth of 8-10 percent this year compared with 6-8 percent previously. It made net earnings of 4.73 billion dirhams ($1.29 billion) last year.
“The product areas we’ve invested in twelve months ago in line with our strategy has begun to come through, so we recalibrated that,” Burdett said of the profit target.
NBAD raised questions over the profitability of lending for banks in the UAE in April, as competition pushed down the interest rate they could charge customers.
While its net interest margin - a calculation of how much the bank earns for lending over its original cost of funds - increased 13 basis points in the second quarter from the first, it was still down 9 basis points on the middle of 2013.
“Margin pressure is a key concern for the bank, nevertheless we remain neutral to positive on the current results,” said Naveed Ahmed, senior manager at Global Investment House.
NBAD’s shift away from lending was seen in a 1.1 percent drop in total loans since the start of 2014 to stand at 181.7 billion dirhams. By comparison, First Gulf Bank grew its lending 4 percent between April 1 and June 30 alone.
Chief Executive Alex Thursby said NBAD was being more selective in its lending, with the focus on customers who could provide the bank with fee-paying business in the future.
He added the bank was still growing lending in chosen areas, such as retail and commercial banking.
Meanwhile, non-interest income was a big contributor to the bank’s profits in the second quarter, rising 20.1 percent year-on-year to 830 million dirhams, with fees and commissions up 26.8 percent.
That helped NBAD make a net profit of 1.42 billion dirhams in the three months to June 30, up 17.5 percent over the prior year period and exceeding analysts’ average forecast of 1.3 billion dirhams.
Burdett said the bank expected expenses growth of 10-12 percent this year, compared with 12-15 percent previously, while the improving economic picture would mean provisions for bad loans would likely to be less than 1 billion dirhams this year, lower than expected.
$1 = 3.6730 United Arab Emirates Dirhams Editing by Nadia Saleem, Andrew Torchia and Mark Potter