Small re-financing deals will drive bank loan growth in short term

Emirates NBD is the largest bank in the GCC in terms of assets and the largest lender in the UAE on many more counts, including profit, loan book size, branch network and ATM presence. The bank is in the process of extending its branch presence in many new markets, including India and Singapore. But the biggest challenge before banks such as Emirates NBD, which has just concluded a merger, is in finding new businesses sufficient to justify its newly achieved size and scale.

Mohammad Kamran Wajid, General Manager, Institutional and International Banking and Debt Capital Markets, is optimistic about the business prospects of the bank though the world is still in recession. "The Gulf loan market is beginning to pick up some momentum after an uncertain start, and bankers are now seen discussing a 'deal pipeline' though with a guarded optimism," Wajid told Emirates Business during an interview.

He said though in the beginning of 2009, the loan market in the Gulf was mainly driven by refinancing transactions, it buoyed in April when news emerged that Abu Dhabi Government-owned International Petroleum Investment Company (Ipic) had mandated banks to arrange a new money loan of up to $5 billion (Dh18.35bn). "We hope to see activity picking up during the remainder of 2009," he said. Excerpts from the interview:


Emirates NBD has presence in several markets in the region, including Saudi Arabia. Which will be the new markets the bank may enter in the coming few years?

Emirates NBD has established strong relationships in diverse markets ranging from the GCC to Asia and Turkey to the CIS. We continue to closely monitor developments in these markets and remain poised to take advantage of viable opportunities, both in terms of asset deployment and the M&A space at an opportune moment. We are also pursuing the goal of prudently diversify our portfolio while adhering to defined exposure limits of industry segments and country risks.

How do you propose to enter the unrepresented GCC markets?

GCC countries will remain our natural geographical focus and the initial vehicle for our proposed expansion would be through joint mandates in partnership with local banks. Trade finance remains a key focus area for us, both in existing as well as new markets.

It is a fact that Emirates NBD had a strong presence in underwriting and participating in syndicated loan market in this region. But this segment of business is almost dead for some time now. How do you see the future of syndicated loan market in the next one year?

After several years of increasingly accommodative credit terms, the current financial crisis has caused an abrupt change in the risk appetite and has renewed focus on fundamental credit principles by underwriters. Institutions have been finding it harder to distribute syndicated loans since the second half of last year.

The subsequent tightening of credit underwriting standards – higher credit spreads, more financial covenants, less borrower leverage – is a response to investors' more thorough assessment of credit risk. The lessons learnt from the recent market turbulence will lead to more prudent underwriting standards.

In the short term, we expect activity in regional loan markets to pick up from smaller, relationship focused club style re-financing deals and gradually gain momentum towards full-blown syndications.

Do you foresee a strong pipeline emerging in the near term?

The Gulf loan market is beginning to pick up some momentum after an uncertain start and bankers are now seen discussing a deal pipeline though with a guarded optimism.

In the beginning of 2009, the loan market in the Gulf was mainly driven by refinancing transactions, but it buoyed in April when news emerged that Abu Dhabi Government-owned International Petroleum Investment Company (Ipic) had mandated banks to arrange a new money loan of up to $5bn. The potential issuers (sovereign and quasi-sovereign entities) and potential new deals will have to meet certain criteria to succeed in what is still a fragile market. We hope to see some activity picking up during the remainder of 2009.

What is your view on the local/regional debt capital markets?

I am optimistic about the growth of debt capital markets activity in the region. Debt securities comprise only three per cent of the Middle East and North Africa (Mena) capital markets and this compares poorly with the average 42 per cent that debt securities contribute to global capital markets.

The bond markets have been busy this year… in February, Dubai launched a $20bn bond programme and in April, Qatar and Abu Dhabi raised nearly $5bn in sovereign bonds within days of each other, while Bahrain picked banks for a $500 million Islamic bond. Abu Dhabi Government investment fund Mubadala Development Company also priced a $1.75bn bond in April and its real estate company Aldar raised $1.25bn during the same period.

The regional and local governments have started tapping the bond markets to meet their large capital spending programmes, and corporates may need to raise funds at a time when bank credit has all but dried up.

On the demand side, investors who have burnt their fingers from underperforming equity markets are buying into fixed-income instruments. RasGas' $2.3bn bond issue in mid-July was reported to have received offers for more than $15bn, and Mubadala had attracted more than $9bn worth of offers from investors for its $1.75bn bond in April.

The recent crisis has also reinforced the fact that a deep and efficient capital market is important for economic growth and stability. Overdependence on bank finance exposes the fragility of the financial system. On the other hand, a diversified financial system facilitates risk management and efficient allocation of resources. In my opinion, the continued development of a domestic monetary policy is necessary for long-term, local currency corporate bonds to be demanded domestically.

Will corporates come forward for bonds in place of loans? Do you foresee a shift?

I feel loans and bonds will generally coexist in the capital structure (the debt part) of modern corporate borrowers. As bond markets develop and mature in the region and as borrowers become aware of the benefits of bond market issuances, specifically the potential to raise more efficient longer- term funding from a much more diversified investor base, we expect activity to gradually shift towards the latter. However, in the short-term context, we expect loan markets to remain an important source of funding for regional corporates.

When is the project finance market expected to revive?

Project financing in the Gulf is also picking up. Dolphin Energy's successful $3bn loan in particular attracted strong interest in the market, but that alone cannot be used as a yardstick to suggest a market-wide recovery. In other words, the huge oversubscription in Dolphin does not mean that all Gulf project financing will benefit… projects are still being financed on a deal-by-deal basis. Dolphin benefited from the highest rating of any Gulf project financing. The $1.6bn financing for the Al Dur independent water and power plant (IWPP) in Bahrain was the first major new project financing to close in the Gulf in 2009.

The deal attracted support from a mix of international, regional and Islamic banks and export credit agencies (ECAs). I believe in project financing, if it is a good deal, then the probability of success is higher.

How do you see the UAE economy faring in the coming few quarters?

I am confident of the prospects of UAE economy in the coming quarters and believe that the country's economy has overcome the worst phase of the global economic crisis.

I see the economy clearly exhibiting trends of recovery in line with the global economic recovery. Over the years, the UAE has invested heavily to create an investment- and business friendly infrastructure comparable to any other in the world, making it an attractive destination for businesses. With such a strong base already established, I think it is only a matter of time before economic activity in the country builds up once again.

Moreover, the government is making continued efforts to create an even more investment-friendly environment, including steps such as scrapping capital requirements for start-up firms. I feel that such efforts will further boost the level of economic activity in the country.

My confidence in the prospects of the UAE economy stems from its strong fundamentals and its impressive past performance. Within a relatively short span of time, the UAE has managed to establish itself on the world economic map, with levels of growth and prosperity which are second to none. No matter what sceptics may say, I feel economic fundamentals of the UAE and the vision of its leaders will ensure growth and prosperity in the coming years.

Can the banks still expect to show growth in profits?

It is important to point out that despite the unprecedented market conditions during 2009, the operating performance and bottom-line of the UAE banking system remain positive. Although the first half 2009 results of the UAE banks depicted a trend of decline in net profits, it is reassuring to note that the country's banks are still comfortably in profit. It is even more comforting to note that the operating performance of the country's banks remains robust (with rising margins and growth in fee income) and that the decline in profits is primarily on account of higher provisioning rather than shrinkage in banks franchises.

We feel that this reflects a proactive and prudent approach being followed by the country's banks rather than chasing fancy numbers.

Prudent provisioning is crucial for the continued stability of any banking system in challenging market conditions, and UAE banks have displayed a clear cognisance of the need for such prudence.

We expect the UAE banking sector results in the coming quarters to be in line with the above trend and expect earnings growth to pick up in line with the country's broader economic recovery.

The new fraud (Saad and Algosaibi) has really shaken the region's banking system, needless to mention that of the UAE. What new strategies are banks likely to pursue in this context?

Although the high-profile cases in Saudi Arabia have brought the standards of "corporate governance" and "enforcement risks" into question, we strongly believe it is important to recognise that these are isolated cases and should not form the basis of generalisation with regards to the family-owned businesses.

I am confident that Saudi being the largest economy in the region with large potential for growth and investment, the authorities concerned there are aware of the broader ramifications of these high-profile cases if left unresolved. They must be working on devising some sort of solution for these cases.

I am sure the lesson banks will take from these cases is the absolute need to maintain constant and close interaction with clients in order to be able to identify problems and issues in a much more timely manner.

Which will be the new growth areas for the banks in the region and the UAE?

I feel that given the developments during the past year and a half, regional banks will be inclined to be more focused on concentrating on their core businesses in their core markets until such time that a broader regional economic recovery has manifested itself.

Banks will undoubtedly return towards their drive for diversification into new markets and businesses once confidence in core markets is sufficiently restored and resources currently allocated towards "housekeeping activities" are free to be diverted towards business diversification efforts.

In the new market scenario, what do you think is the biggest challenge for the UAE banks?

We feel the biggest challenge for the UAE banks in the current market scenario lies in realising the need to identify "viable customers" and "viable businesses" facing genuine problems, and continue working with such customers and businesses to come up with solutions that prevent value destruction for all stakeholders.

Banks must realise that while it is very easy to revert to knee-jerk reactions, more importantly, it is to the benefit of all stakeholders to find mutually beneficial solutions to genuine problems.

Other main challenges faced by the country's banks include maintenance of portfolio quality, adequate provisioning, maintaining earnings momentum and funding future asset growth

Do you see further scope for consolidation or restructuring in the UAE's banking system?

Emirates NBD itself is the best example of how consolidation in the country's financial sector can foster synergies and strength. We believe that there is potential for, and benefit in, further consolidation of the banking sector in the country, especially given the current economic scenario.

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