Dubai: Banks in the UAE had stopped lending almost completely in 2008-2012 as they shifted their focus to cleaning up their balance sheets and improving their funding profiles. During this period, compound average nominal growth in credit to residents was a meagre 2.3 per cent annually, well below the 13.2 per cent average nominal yearly GDP growth rate during that period.
Last year, there were visible signs of a revival in UAE banks' loan portfolios. According to central bank data, in the first nine months of 2013, gross system loans increased by 7.5 per cent and the amount of personal loans had risen by 9.3 per cent.
Emirates NBD, the biggest bank by assets reported a net profit of Dh3.3 billion with the bank's net interest income for the year up by 18 per cent to Dh8.13 billion, largely driven by across the board loan growth.Shayne Nelson, the new Group CEO of Emirates NBD spoke to Gulf News on the outlook for the bank and the banking sector in the country in the context of improving economic fundamentals.
Gulf News: Facing a number of challenges in the operating environment, Emirates NBD reported strong results with substantial growth in core banking activities that helped it boost its interest income and profits, do you expect to see better growth this year as the economy is looking up and there is positive vibes all around?
Shayne Nelson: There is clearly a tremendous improvement in the operating environment. We see the real gross domestic product (GDP) growth for the UAE at 4.5 per cent. If you look at the GDP growth of 2013, a lot of that has come on the back of higher oil production, obviously, mainly from Abu Dhabi. We should see a different trend in 2014 where the contribution to the GDP is going to be more from non-oil sector. We are likely to see a pretty flat oil production this year. But the good news is that the underlying non-oil economy is very strong. We see Dubai's growth at 4.7 per cent in 2014. Significant contribution to the GDP is obviously going to come from sectors such as tourism, manufacturing, transportation and ports. We are also seeing some good underlying growth in the property sector coming back quiet strongly. While inflation is seen increasing, we expect it to go up from about per cent in 2013 to about 3 per cent for 2014. On the back of good positive GDP growth, we would expect to grow, at least in tandem with the nominal GDP growth.
You have come on board at the UAE's biggest banking group's top job mid-way through a balance sheet repair process. There are still asset quality issues pending with some of the legacy assets causing provisions to remain at high levels. Do you think the bank's provision cycle has peaked and the non-performing loans (NPLs) are on decline on a sustainable basis?
I am very pleased to be with Emirates NBD which is the pre-eminent bank in the UAE and in the region. You may say that I have come at a difficult time, but my view is that my timing is excellent. We are in the Middle of a strong recovery and growth. A lot of the problems we had historically are not such big problems any more. Most of them were interlinked to the property sector which is recovering fast and that makes my job much easier. The non-performing loan coverage ratio is close to 60 per cent and we do want it to be above 80 per cent. Of course, that is not going to happen tomorrow, it is going to take some time, but we are clearly moving in that direction. It is going to take two things, one is topping the provisions, secondly, the quicker you can work with the problem loans, the coverage is going to be better. However if I restructure a loan today and the client keeps paying me, it takes 12 months for me to treat it as a performing loan. So, there is a lag effect when doing a restructuring and making sure that the client can pay the loan. Our medium term target is to bring down the NPL ratio to 12 per cent form the current 14 per cent.
Do you expect to translate the supportive operating environment into good profit margins?
We have already given guidance on margins for the year ahead with slight contraction for 2014. That's because of a combination of factors, some are structural because we had taken some interest rate hedges last year and we also see lot more competition in the market, especially in the corporate business. We see also a lot of loan pricing coming off highs and compressing the margins on that. In the consumer banking business, the margins are still robust and we expect strong loan growth in 2014. Last year, we did 9 per cent of loan growth and 12 per cent of deposit growth. Of course that is way above our average. In fact our corporate banking book experienced slower growth last year. We are predicting that this year we will grow our balance sheet by about 7 to 8 per cent.
In 2013, the retail business has been a sweet spot for the bank with double digit growth in assets. And on the liability front too, deposits surged on strong CASA [current and savings account] growth. What is your outlook for the retail business in 2014?
Retail business is certainly an area that offers higher return on risk capital for us and all banks in the UAE. Last year, was indeed a great year for our retail business with significant asset growth for our SME [Small and Medium Enterprises] business. What I like about the SME business is that not only is this a good business for the banks, it is a very good business for the country. Additionally it is a good feeling to be in the SME business because it fulfills a lot of obligations that a bank has to the society. In credit cards, we have a very good markets share and continue to grow, especially in the premium end. Another interesting fact about our retail banking business is that there is phenomenal growth in net banking and phone banking business. Last year our branch transactions grew by about 10 per cent but our internet transactions grew by 50 per cent. We continue to invest heavily into the digital platform. We continue to invest in technology with emphasis on mobile banking.
Are the new central bank regulations relating to exposure limits to government and government related entities (GREs) going to be an impediment for the bank to participate in some of the new government and GRE projects? Do you think you can meet the regulatory requirements and participate in some of the new loan deals that are coming up?
We have already disclosed that we have Dh91 billion exposures to Dubai. Bringing down this is as per the central bank guidelines is a five-year programme. We are confident that we can meet the central bank guidelines. As a bank we want to by fully compliant and we are sure that we will achieve the requirement. At the same time we will participate in a number of loan underwritings. While we may not take a lot on to our balance sheet we will be involved in the sales and distribution. We are here to support Dubai and the UAE's growth. As Dubai's biggest bank, we have got the biggest balance sheet in the UAE and it is only natural to have a concentration of exposure to Dubai and we shouldn't forget the fact that Dubai is a big part of the UAE economy. An important thing to remember about the central bank rule is that if (the borrower is rated) it doesn't need to be included in the exposure limits. This will be an incentive for companies to get rated, which is good for the market and will help these companies to go to the market directly for fund raising. Overall, the regulation is a positive development for the industry. This incentivises companies to raise money from the market.
The reality around GREs is that the capital markets are going to be far more efficient for them than the bank (debt) market. As we move forward banks need to achieve reduced exposure to GREs and government and so we will see the market will move to the debt capital market and the sukuk market. Dubai Investment Park (DIP) did a five year deal a few days ago that was 12 times oversubscribed and at a very good spread for a BB rated paper. Could they have got that kind of pricing in the syndicated market with that rating, I doubt it. Increasingly I expect such funding requirements will be met in the capital markets.
While most banks are projecting double digit credit growth for themselves and many analysts including credit rating agencies are expecting credit growth in the country to be in the range 10 to 12 per cent, ENBD has projected a modest 7 to 8 per cent overall credit growth for itself. Is there any specific reason for this?
My view on loan growth is that if you look at loans historically corporate lending is not a great return on risk capital. That doesn't mean we are not going to underwrite loans. We will be there, but our involvement will be more active in distribution. If you look at the syndicate loan market last year we are the number one book runner, we were number 3 globally for US dollar sukuk. Now if we look at the objective of the government to develop the sukuk market and fully develop the capital market — for bonds and sukuk, we see great opportunity for us. So the short answer to your question is that we will be very much a part of supporting the funding requirements of the UAE, but what we hold on our books will not necessarily a big share of that. What we are looking for is to deliver the best of return on risk capital to our shareholders.
As the new opportunities grow, you also must be looking at funding options. In the past you were looking at the Malaysian ringgit market and you have a euro medium term note programme. Are you looking at raising funds from the market in the near future?
We will continue to look at opportunities for raising capital from the market. On a continued basis we look at opportunities to raise cost effective funding. In fact we look at it on a monthly basis. The asset and liability management committee looks at it every month to see opportunities to raise medium to long term capital or quasi capital. If we see a window that we think is cost effective we will go for it. The market conditions and price is going to the deciding factor. We should also appreciate the fact that there is lots of liquidity in the market. Our liquidity is growing very strongly and we have lot of spare liquidity at the moment.
If there is spare liquidity available in the market why not pay back the money deposited by the Ministry of Finance?
I think a part of the answer to that question lies in when is the right time to return that money. For us it is the structural liquidity. We have already paid back a significant portion of that already. We are looking at opportunities to pay it back. If we can raise the same amount at a better price, the timing will be right.
The UAE banks including Emirates NBD benefitted from lower cost of funds in the international markets and decline in Emirates interbank offered rates (EIBOR) which gave a boost to the interest margins. With the US decision to go ahead with tapering, is this advantage going to vanish and banks are going to face a margin squeeze?
Our forecast on margins reflects a slight contraction which is largely driven by this factor. There are other factors also involved in the margin compression we are expecting. In fact we are investing a lot into our consumer franchise. Over all we expect the margins to remain pretty stable. We have seen Emirates NBD exiting some of its non-core business, especially the property related assets.
Emirates Islamic, the Islamic Bank belonging to the group is fully owned by ENBD. The merger and integration of Dubai Bank with Emirates Islamic and its rebranding has incurred substantial costs to the Group. Is there any plan to unlock the values by selling shares of the bank to the public or a strategic investors?
Emirates Islamic is one of our core assets and it fits perfectly into what we are good at. In my previous organisation I was the chairman of the Islamic banking business. I simply can't imagine Emirates NBD, the leading bank in the region operating here without an Islamic banking franchise. There is so much potential for Islamic banking in the region especially in Saudi Arabia and other Gulf markets.
Your Egyptian acquisition has already started to contribute to the Group's net profits. Are you looking at similar acquisitions in the Middle East or Asia in the near future?
I am told it took five years to finalise the Egyptian acquisition to meet our price targets. What you want won't come along very often. The great thing about that acquisition was that it was a very clean bank and secondly we got it a very attractive price. We paid 1.4 times the book value, which is a great price in Egypt and more than everything Egypt is a good market. We are seeing some road humps along the way this year as the political situation evolves. Looking forward, 2015 is the year from which Egypt is going to recover positively. With nearly 70 branches it is a good platform. Our current priority is to fully integrate the Egyptian operations. We don't expect to finish it until the mid-next year. This is the first overseas acquisition of the group, our view at the moment is that we need to get integrated properly and then look at other opportunities