* Q3 net profit 1.66 bln dhs vs 1.67 bln dhs yr-ago
* Analysts' forecast - 1.88 bln dhs
* Net interest income dips 2 pct, non-interest income up 5 pct (Adds official Q3 calaculation, detail, context)
By Tom Arnold
DUBAI, Oct 17 (Reuters) - Dubai's largest lender, Emirates NBD (ENBD), reported a slightly lower-than-expected third-quarter net profit as net interest income slipped and costs rose.
The quarter marked an end to 16 straight quarters of a rise in earnings for the bank, as net profit dropped 1 percent, signaling the fallout from a growth slowdown in Dubai's economy.
The lender's earnings also took a hit from additional provisions set aside for Emirates Islamic, its sharia-compliant arm, to cover bad loans in the small- and medium-sized enterprise sector.
The bank made a net profit of 1.66 billion dirhams ($452 million) in the three months to Sept. 30, compared with 1.67 billion dirhams a year earlier, according to financial statements.
Three analysts on average forecast the bank would make a net profit of 1.88 billion dirhams for the quarter.
Net interest income fell 2 percent in the third quarter from a year earlier due to higher cost of fixed deposits and wholesale funding, the bank said.
Costs rose 8 percent in the quarter as the bank invested more in its businesses late last year in anticipation of higher volumes, the lender said in an investor presentation. However, it said the growth had since been "contained" in light of the "new economic reality."
The bank, which has close ties to the Dubai government, has experienced an improvement in its asset quality since a debt crisis and property crash in Dubai at the end of the last decade.
That trend continued during the quarter as its non-performing loans ratio, which reached a peak of 14.3 percent in 2012, fell to 6.4 percent during the third quarter.
Performance was also boosted by a 5 percent climb in non-interest income due to higher core fee income and a 11 percent drop in provisions, helped by further writebacks and recoveries on bad debt, it said.
The bank, 55.6-percent owned by state fund Investment Corp of Dubai, reported a net profit of 5.38 billion dirhams for the first nine months of 2016, up from 4.99 billion dirhams in the same period a year earlier.
The bank and its subsidiaries have adjusted to slower growth in the local economy. Emirates Islamic has laid off around 300 people this year and made around 100 people redundant from another subsidiary. ($1 = 3.6726 UAE dirham) (Editing by William Maclean and Amrutha Gayathri)