Greater money supply is the need of the hour

The UAE Central Bank would never let any national bank fall, say top officials from the National Bank of Ras Al Khaimah (RAKBank).

"I do not think people are concerned that the banks are at risk," General Manager Graham Honeybill told Emirates Business in an exclusive interview. "But certainly the Dh120-billion facility from the Central Bank and the Ministry of Finance, as well as the blanket guarantee on deposits, underpinned confidence in the banking system. We have an ample track record of Central Bank support.

"Even before these [measures] we were confident that the Central Bank would never let any UAE national bank fall."

But that doesn't mean that the country is exempt from the growing pain of the liquidity squeeze.

RAKBank Business Advisor David Martin said: "The only thing that is constraining or restricting our lending is liquidity. At RAKBank we could lend three times more per month than we are currently lending if we had enough deposits. Currently there is a shortage of customer deposits."

And what will make the supply of money go up? "More of it," the two former Standard Chartered executives said in unison.

Honeybill added: "We require a substantial amount of customer liquidity, not inter-bank liquidity, to get this going because we have a disconnect between libor rates, eibor rates and customer interest rates."

In times like this it all boils down to the quality of a bank's assets, and RAKBank is confident that it has a good portfolio thanks to its "conservative policies".

"We are old men and old men like to sleep well at night," said Honeybill. "We have a few rules – we only deal what we understand. If we don't understand it, we do not do it."

You recently launched the 'Business as Usual' campaign to inform customers that RAKBank is still offering a wide range of loans. That's interesting considering many banks have tightened their lending policies.

Honeybill: A lot of customers came to us and ask, 'Why have you stopped lending?' And we say we have not. There is a liquidity shortage, it is common knowledge. What has happened in many cases is that the liquidity issue has become critical and banks are rationing lending. We have taken a view that this is our business, we cannot just stop lending. We will continue to lend.

But has your bank slowed down your lending?

Honeybill: If there is liquidity crisis you have to slow down. The Central Bank has a one-to-one policy, that is one dirham deposit to one dirham lend. You have to stay within that. We are very compliant. Yes we have slowed down, the whole market has slowed down, but we have not stopped.

Have you increased your interest rates or fees?

Martin: The credit cards are free for life. The fees say for late payments have not changed. The interest rates have been raised slightly by 15 basis points per month, just over one-and-a-half per cent per annum. But we are still lower than our peers. We are not the lowest as there are some banks that offer credit cards for their customers only, for example Lloyds Bank. We have non-banking customers in our credit card portfolio.

How is the lending business in RAKBank doing nowadays?

Martin: The only thing that is constraining or restricting our lending is liquidity. At RAKBank, we could lend three times more per month than we are currently lending if we had enough deposits.

Are you chasing deposits?

Martin: Yes we are, just like other banks, we are doing the same. We have increased deposit rates depending on the size of the deposit. Deposit rates vary between five and 7.5 per cent per annum depending on the size and the length or tenor of the deposit.

What is your deposit to loan ratio or advance to deposit ratio?

Martin: We are at 92 per cent. So we lent 92 per cent of our available deposits, which is within the Central Bank guideline of one-to-one or 100 per cent. Some banks are reported in the papers as being as high as 148 per cent.

Is it because of your conservative strategies that you are in the position you are now?

Honeybill: We are old men and old men like to sleep well at night. We have a few rules, we only deal what we understand. If we do not understand it, we do not do it. If it has got words like derivatives, if you cannot explain it on one-and-a-half sheets of A4 in 15 minutes, we do not do it. We did not go crazy lending against shares where multiples of one to 20 have been given, we withdrew from civil engineering in 2006 because we did not like the risk/reward, we never went to large high rises because again we did not like the risk/reward and we do not lend to get people into trouble. So yes we are conservative, this has been our niche market for the past eight to nine years and we are sticking to it.

When I spoke to you last year you said your goal was to be the top retail bank by the end of 2008. Did you achieve that?

Martin: We were in the top three and at the moment we are in the top two. We now have 330,000 retail customers in this country, up from 250,000 in 2007. We are number one in service quality, size of loan asset portfolio we are generally number one or two. As we look at our competition, HSBC, Mashreq and ourselves are in the top three. Our deposits are over Dh8bn from Dh5bn in 2007, loans are over Dh11bn from Dh8bn, we have 2,500 employees including sales people, contract labour and bank staff. There are 1,400 bank staff alone. We had 40 nationalities at the end of last year. We have 23 branches with three more opening, so that's going to be 26 by the end of this year. The new branches will be in Mussafah, Mirdif and the Jebel Ali Free Zone. We have 74 ATMs, up from 53 last year.

Your performance in the third quarter of 2008 was quite good. Do you expect that kind of upward trend to continue?

Honeybill: We have to take note of what is happening in the economy around us and the performance of any bank will depend heavily on how the economy behaves. We know we have started off with a very good base. We cannot give you the 2008 figures because they are still being audited but last year was the best in the bank's history. But are we going to see the same percentage growth as we saw in the past? No, I do not think so in this kind of environment.

A number of analysts are convinced that a flood of redundancies will inevitably lead to a sharp rise in defaults. Do you foresee this happening at RAKBank?

Honeybill: If you are looking at an economic downturn you are going to get more defaults. The question is: What is the quality of your portfolio? And we are very comfortable with ours. We have been very careful, we have good credit underwriting and our collections are very good. We have a very good record on recoveries. It is like a computer – rubbish in, rubbish out. If you get the wrong type in the front end you get it wrong at the back end. We've been very careful on that.

Are the levels of your bad loans marginal?

Martin: Our loans loss provisions in 2008 were less than one per cent of the aggregate of our total loan portfolio, which is an excellent result in these times. In the regional retail banking context, the average is between one and three per cent.

Could the scenario be the same this year?

Honeybill: We couldn't speculate on that, it's too early to say.

How did the Dh120bn package from the Central Bank and federal government affect you?

Honeybill: First of all you have to look at the order that it came out. First came the Dh50bn emergency liquidity from the Central Bank. That was not just giving out Dh50bn on a plate, there are conditions attached to. You have to apply for it. We did not take up that facility because of its nature and the terms and conditions and we still have not taken it up. We did not take it up because we did not need to access the facility at that point in time plus it was described as emergency liquidity, which had a slightly negative connotation or stigma attached to it. Subsequently the Ministry of Finance introduced a Dh70bn support facility that also had terms and conditions attached, but it was what the market really needed. It came out in two tranches – the first tranche is for three years, the second tranche is for five. This money is meant to boost lending and get the economy moving again. Our view is that we require a substantial amount of customer liquidity, not inter-bank liquidity, to get this going because we have a disconnect between the libor rates, the eibor rates and customer interest rates. What that means is if the Central Bank directs a one-to-one advance to deposit ratio, interbank is not counted as a customer or as a bank. No one is going to take an overnight or one-week interbank deposit and lend it on a term loan. We must somehow get significantly larger customer deposits into the market and if they do not come we will continue to have very high interest rates.

Did the blanket guarantee actually help? Was there a positive impact on depositors?

Honeybill: I don't think people are concerned that the banks are at risk but certainly it underpinned confidence in the banking system.

We were confident even before that as we know the Central Bank would never let any national bank fall. We have an ample track record of Central Bank support. We have never had a crisis like this in this country before, so it is a question of how much is really needed.

Were you affected when the hot speculative money was withdrawn?

Honeybill: Not directly, but we were affected indirectly by the fact that other banks who faced it, especially those that used the hot money to fund long-term projects, started having liquidity problems and as a result the market interest rates increased.

Martin:We have to pay more now for deposits as a result of the hot money flying out of the country.

Did customers respond positively when you increased your deposit rates?

Honeybill: It is the basic law of supply and demand. There is a shortage of supply, there is a shortage of customer deposits.

What will make the supply go up?

Honeybill: More of it.

Martin: More money supply.

What about confidence?

Honeybill: We here in the UAE are in a very good place. We as a bank have confidence in this country. But there are issues such as job security and now consumers do not have the confidence to consume. Today customers simply did not want to borrow. What drives borrowing in this market is confidence and when you fear that you are going to lose your job then you are not going to borrow. We must be able to get consumer confidence back and we as banks must be able to finance them. It is consumer confidence that will kick-start this economy.

Is it not like a chicken and egg thing – banks say consumers must begin to spend and consumers say banks must begin to lend? What in the end will kick-start consumer confidence?

Honeybill: The market has to grow again and for that to happen we need an external stimulus. That means, again, a greater supply of money.


PROFILE: Graham Honeybill General Manager, RAKBank

RAKBank has catapulted itself into the premier league of UAE retail banking by reinventing its brand franchise and delivery network.

The management team, led by Honeybill for more than 10 years, presented a strategic plan to reposition and expand the bank's retail banking franchise to its board of directors in January 2000.


PROFILE: David Martin Business Advisor, RAKBank

Honeybill's advisor David Martin, a fellow ex-Standard Chartered senior executive and full-time business consultant to RAKBank, is no stranger to strategy formulation and implementation initiatives in international retail banking.

He spent three decades at Standard Chartered, managing businesses in locations as varied as Spain, Denmark, Brunei, Bahrain, the UAE and Qatar.

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