Simon Penney, CEO of RBS, Middle East and Africa, believes the Basel III regulations are going to have implications for the liquidity situation in the banking sector. Image Credit: Arshad Ali/Gulf News

Dubai: On October 1, Royal Bank of Scotland (RBS) will transfer its retail banking operations in the UAE to Abu Dhabi Commercial Bank (ADCB). Ahead of the full handover, Simon Penney, CEO of RBS, Middle East and Africa, spoke to Gulf News about the new focus of the bank in the region, the prospects for the capital markets and the supply, demand dynamics of funding in the UAE and the region in the context of the financial crisis.

Gulf News: In June, you announced the deal to sell your retail business to ADCB. Once that deal is completed what will be left of your business in the region?

Simon Penney: The process of transferring the retail business to ADCB is moving ahead on schedule. That process should be complete by the first of October. All the necessary approvals from the UAE central bank have been obtained. Now it is just a matter of few days before segment of the business will be with ADCB as previously agreed.

The key element of this transaction for RBS is that even after the completion of the transaction we will continue to keep the UAE banking licence in three emirates. This is very important for us to continue to have our dirham-denominated businesses in the country. This transaction involved a transfer of our retail assets and liabilities to ADCB. We will keep the banking licence and continue to operate two branches namely Abu Dhabi and Dubai. The operations from the branches will now change from predominantly retail to support our corporate and wholesale banking businesses.

What will happen to your data centre in Dubai after the completion of the sale of your retail business to ADCB?

Yes, we have a big outsourcing centre at the Dubai Outsourcing Zone (DOZ). There we have got around 1,000 people. A vast majority of them will be transferred to ADCB. That data centre effectively goes with this transaction. RBS will retail a small space to continue to provide operations support to the corporate and wholesale business we are retaining here.

Going forward what will be your identity in the UAE? Are you going to be an investment bank?

We will be both a wholesale and investment bank. There is going to be much greater focus on building the investment banking business in the UAE and the region.

We will continue to offer wholesale banking services to corporate clients in areas such as treasury support, cash management and trade finance. We have a fairly large client base of important multinational and regional corporate clients, who we will continue to support.

We will build on our trade finance portfolio and wealth management business involving institutions and ultra high net worth individuals while the predominantly non-resident Indian (NRI) business will be transferred to ADCB.

You just said there is going to be greater focus on building investment banking capabilities. What are the focus areas going to be?

We see huge potential for all types of investment banking activities in the UAE and the Africa Middle East region. Our principal activities will include corporate finance, funding, capital market activities involving both debt and equity financing, mergers and acquisitions, advisory services, risk management and forex services.

Is your regional operation going to be headed out of the UAE?

Yes, the UAE will continue to be the hub for our regional operations. We will have about 200 people in the region and about 90 per cent of the people will be located here. That's fairly a large number for the regional operations of an international bank.

So our sale of retail business shouldn't in any way viewed as an exit from the region. Instead we are going to have a much stronger presence in the UAE and the region in our core businesses.

There are regional centres such as Abu Dhabi, Qatar, Kuwait and Bahrain that are showing huge potential for investment banking. Do you have plans to expand your presence in these locations?

Part of my strategy is to create a sustainable Middle East business out of here not only a Dubai focused business. As you know we are heavily invested in the UAE. If we look at our exposure to the UAE is roughly distributed equally between Dubai and Abu Dhabi. These together add up to a significant percentage of our Middle Eastern business. Going forward we seed good potential for expanding business in countries such as Qatar, Bahrain, Kuwait and Lebanon.

On the equity markets business you have been talking about a significant expansion. What are these plans?

We have a tie-up with Rasmala that focuses principally on equity research and that is moving ahead full steam. The team is covering 15 regional stocks already.

The plan is to expand the coverage to about 35 companies by the end of the year and adding more stocks next year. Going into 2011, we expect to cover nearly 50 regional stocks. The modus operandi for that joint venture will be that Rasmala generates research with the support of RBS and then RBS distributes that research globally.

So what we are providing to Rasmala is a conduit to distribute local research to global investors through the RBS platform. That forms and important part of our strategy get international investors interested in the regional equity.

The debt capital markets have been virtually stagnant in the first half of the year. With the lone exception of Dewa's $1 billion issue there have been hardly any high profile debt issues in the region. What is your outlook?

As for us the debt capital market opportunities in the region looks much healthy now compared to the past 18 months. It is true the first six months of this year has been very slow.

Dewa was indeed a very successful transaction which we lead managed, considering the uncertainty surrounding the Dubai World debt at that point of time. Qatari Diar issue was another successful bond issue. Although the deal flow has been very slow the demand had been very significant.

We certainly anticipate an up-tick in issuance in the deal flows in the next two and a half months going in to December probably exceeding what we saw during the first eight months of the year.

We can confirm that we have got six live transactions on our hand and I have strong reasons to believe that a vast majority of them could lead to very significant bond issues this year.

Are there going to be some major corporate issues or these are sovereign issues?

These are predominantly sovereign or sovereign linked issues. I think these sovereign issues need to unlock the market for corporates before any major corporate issue hits the market. That is not a Dubai only story and is applicable the whole region.

As far as corporate issues are concerned there will be lot more scrutiny on factors such as name, rating and quality of credit. It is still going to be challenging for low rated companies to issue bonds, although it is not totally impossible.

Do you expect liquidity in the syndication market to improve in the near future?

The liquidity in the bank market is not the same as what was it a couple of years ago. The prospects aren't looking good either. Basel III capital regulations are going to have implications.

Prior to the financial crisis banks would lend money for long term projects at today's pricing. That was fine as long as banks could fund themselves in the short term market. But the credit crisis has taught everyone that can't be sustained.

I think the syndication market is not going to be the same again any time soon as it use to be a few years ago. So the most obvious place to look for funds for long term projects is going to be debt capital markets.

There are long term investors like the pension funds who have the appetite for these long term instruments. In the bank market, term financing is going to be of shorter tenure.

If that is the case what is going to happen refinancing of existing obligations?

Except in cases of distress, refinancing will be available on new terms. In cases where the borrower remains solvent and business continue to generate healthy cash flows funding could be available in the banking market.

We will see many larger firms with better ratings going to the capital markets to meet their funding needs. Those debts that are in distress will have to be eventually restructured.

Dubai World debt restructuring is one of the first such cases the region. Are you happy with the final outcome?

I think we have come a long way from the immediate shock following the announcement of the standstill in November last year.

There have been global media reports that banks will have to write of billions in bad debt. I think the process has been managed particularly well.

There is a general criticism about the way the standstill was announced, but the government has been a constructive counterparty.

We should keep in mind that there were 96 banks involved and to get 95 banks to agree to a proposal, it has to indeed a constructive one. Having worked with the government closely over the past nine months we feel it is a acceptable outcome.

Has the Dubai World debt deal improved comfort levels of banks in Dubai and in the regional debt market?

I think it certainly has. The best litmus test has been how the government bonds have performed following the deal. Since the deal the five year credit default swaps (CDS) have tightened 60 basis points. The credit markets have reacted positively to the news and the capital markets are also giving it a thumbs up.