Business | Banking
Banks 'will have to get smarter'
NBAD chief talks about his organisation's role in the UAE's growing economy.
- By Ahmed A. Elewa, Senior Reporter
- Published: 01:22 February 22, 2008
- Michael Tomalin believes the UAE is building very fit institutions capable of competing with the world's best.
- Image Credit: Ravindranath/Gulf News
Abu Dhabi: National Bank of Abu Dhabi is celebrating its 40th anniversary this year.
The second largest bank in the UAE in terms of assets has reported Dh2.5 billion in net profit for 2007, reflecting minimal impact of the crisis facing financial institutions exposed to the US subprime mortgage market.
Gulf News spoke to Michael Tomalin, NBAD's chief executive officer, about the bank's role in the development of Abu Dhabi and the impact of the recent developments in the international financial arena on the bank's acitivities.
Excerpts:
Gulf News: How does the subprime crisis affect liquidity, especially in relation to inter-bank lending and, accordingly, the credit market in the UAE?
Michael Tomalin: The sub-prime [crisis] and the massive write-downs witnessed in the last quarter of 2007 and the recently reported addition write-downs have contributed to a major re-pricing of credit risk.
This has impacted the funding cost of many institutions and will eventually impact their ability to re-lend to other financial institutions and customers.
Banks that are adequately capitalised and maintain solid balance sheets will continue to be open for business and profitability.
However, banks that relied on a model of aggressive leveraging will be forced to pay higher borrowing costs, which will impact their profitability.
NBAD continues to evaluate its funding structure on a dynamic basis and we adjust our funding needs based on the business growth and longer-term commitments.
Despite challenging markets, NBAD has recently launched a second convertible in dirhams for Dh2 billion aimed at international investors. This will help build the bank's capital base and improve dirham liquidity.
In the absence of a credit bureau in the UAE, does the accelerating and ever expanding retail credit sector face the dangers of massive default cases?
As part of present practice, all exposure of banks greater than Dh250,000 (total exposure) needs to be reported to the Central Bank of the UAE data base.
Also, there is a separate database maintained with the Central Bank, wherein the bank has to report any customer whose cheques are returned more than four times a year.
The negative list of borrowers is also maintained by the Central Bank with inputs from respective banks. Hence, the information infrastructure for total exposures greater than Dh250,000 is elaborate.
Having said this, default rates are not a function of credit information but a function of the policies and procedures a bank follows. While a retail credit bureau would be helpful, it won't stop bad lending decisions being made, and vice versa.
What is NBAD's merger and acquisition plan, given that the bank said last year that it is weighing its options?
We, at NBAD, have answered this question so many times and are crystal-clear on this sensitive and vital subject but some tend to mix up views with news to make headlines!
So far, we are not a part in any negotiations or talks with any bank in the UAE for merger or acquisition.
Yet we think consolidation in the UAE banking sector is very important, as we need to grow in order to meet the demands of our growing economy and the challenges posed by regional and international financial institutions.
What is the importance of M&As at this stage for the UAE banking industry?
We need more consolidation to meet the demands of the UAE's growing economy. Take Singapore's economy, which is more or less the same size of the UAE's, as an example - the biggest bank there is three or four times the size of the largest bank here.
The top three banks in the UAE have around 30 per cent of market share and the top five banks nearly 45 per cent.
If you take the top three banks in markets such as France, Singapore, Malaysia, or Australia, you will find the big banks there have much bigger market shares and therefore much more dominant positions in their home bases.
How do the record losses by leading international financial institutions affect the UAE - especially in relation to foreign issues such as dollar- or euro-denominated Medium Term Notes (MTNs).
Due to the sizable write downs reported by many international institutions and [the] on-going impact of credit tightening, we witnessed a dramatic shift in investors' appetite and large widening in credit spreads.
These are not optimal conditions for issuance of debt. However, they offer good opportunities for liquid institutions like NBAD to invest.
When evaluating debt issuance, NBAD always bear in mind four points: Cost: to evaluate effectiveness versus our available local sources; duration: to allow us to extend the average duration of our liabilities; diversification: to introduce new lenders and investors to NBAD; and innovation, as we strive to remain the leader in introducing new financing fields.
We have a $2.5 billion EMTN programme through which we tapped the market twice, once in US dollars and the second in sterling. Both these transactions achieved longer term funding for NBAD at low levels and achieved the four points mentioned earlier.
The dirham/dollar peg has served the country well for many years, and the banking industry is not an exception.
Most of the UAE trade is denominated in dollars. However, inflation in the UAE is out of line with inflation in the US and it is difficult to have a monetary policy here to suit UAE circumstances and keep the dollar/dirham peg.
Many argue that current inflation rates in the UAE relate principally to shortages in supply, particularly in the real estate sector.
However, there is considerable wage inflation as well, flowing from the strength of the economy, the competition for talent and the need for expatriate salaries to rise, as in many cases the dirham has devalued against the expatriates' home currency.
Changing the peg is a once-and-for-all decision. It is, therefore, an important and strategic decision for the UAE, which needs to be taken with a great deal of care.
What role does NBAD play in project financing in the context of Abu Dhabi's strategy for development?
NBAD is well positioned to take advantage of the huge growth opportunities in Abu Dhabi and has a firm commitment to continue its significant role in the economic development of the UAE.
Our Corporate Banking Group has been very active in financing diverse deals such as power and water, aviation, real estate, manufacturing industries, oil and gas, trading, and hospitality.
Adhering to NBAD's vision of being deeply engaged in project financing in the context of Abu Dhabi's strategy for development, our Project Finance and Syndications (UAE) department has been instrumental in significant involvement in IWPPs, PPPs, infrastructure deals like Taweelah B, Fujairah 1, Abu Dhabi Ports Company, UAE University (PPP), Al Raha Infrastructure Co (Al Dar), etc.
In these deals, NBAD has performed multiple roles such as Mandated Lead Arranger, Underwriter, Facility Agent, and Security Agent for prominent syndicated loans.
With the growing number of banks, such as the newly established Noor Bank, in Dubai, and the upcoming launch of Crescent (Al Hilal) in Abu Dhabi, how does that affect competition in the sector, and does the UAE market have the space for accommodating new players, given the high per capita figure?
I expect to see continued fast relative growth in the Islamic banking market all over the world and NBAD has positioned itself to take advantage of the growing trend in the region as our fully owned Islamic subsidiary - Abu Dhabi National Islamic Finance will be operational in the 1st quarter of 2008.
The share of the market accounted for by Islamic banks will continue to rise, but the conventional share will continue to dominate.
Now, 15-20 per cent of the business in the country is Islamic and 80-85 per cent is conventional. That might move to one-third/two-thirds over the next five years or so.
As far as the ability of UAE market ability to accommodate new players, I agree the UAE banking sector is one of most competitive sectors in the region, with over 50 banks operating here.
This is very good news for customers as competition helps keep prices tight. Credit spreads are much narrower here than some other GCC markets which are more protected.
Of course it makes life very tough for the banks themselves, but we do not object because we are building very fit institutions capable of competing with the world's best on even terms.
What are the opportunities and challenges offered or posed by the GCC common market, the ongoing negotiations for Free Trade Agreements, in particular the challenges of liberalising the services sector?
This is a huge question. Increased globalisation means banks have to get bigger and smarter to grow and survive.
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