The year 2007 was, indeed, a great year for the country’s financial institutions, with most banks recording healthy profit growth. Commercial Bank of Dubai (CBD) returned headline-grabbing 56 per cent growth over its 2006 profits. Moreover, CBD had an extremely healthy 1.4 per cent non-performing loan ratio. Emirates Business speaks to Peter Baltussen, the dynamic Dutch CEO of the bank, to find out more about where the bank is headed to in 2008 and beyond.
The UAE banking sector, including CBD, has made good profits in the past years. Does that make your bank a good M&A target?
In the UAE, there are nearly 50 banks but what is more important is the market share of the top three banks in the country. Here, it is around 45 to 50 per cent including Emirates NBD. In many markets you’ll see the share will be around 60 to 70 per cent, so indeed there is room for consolidation – there’s no doubt about that.
Having said that, consolidation is usually triggered by certain events. Firstly, if the returns to shareholders are not good enough and there is limited scope for growth. In the UAE, the returns are generally good and the shareholders are not complaining, while the economy is displaying healthy growth. The other consideration for consolidation is when banks in the region want to become bigger to compete. This is a fair consideration and you may see consolidation going forward after the success of Emirates NBD.
Talking about CBD, I think we have a very clearly defined space in the market. We are a bank for family-owned business and for the owners and employees of such businesses. Our returns have been one of the highest in the market and shareholders are happy with that, so there is no real pressure to go down the M&A road. Moreover, I would like to emphasise that we want to be in charge of our own destiny. But just like any CEO would probably do, I look at opportunities and scan markets continuously, but as of now, there is nothing specific on the table.
Do you think local banks are over-exposed to the real estate sector right now with mortgage lending growing? We’ve seen what happened in the US and analysts feel the UAE market in particular is over-priced and there is a bubble somewhere which may burst?
The situation here is different from what was the case is in the US. In the States, people in the so-called sub-prime market did not have high salaries. Three to four years ago when the interest rates were low, banks agreed to give up to 100 per cent finance and kept the installments really low for the first two years. But the trend did not continue, the interest rates went up, the monthly installments of people increased and they were unable to re-pay the loans. People had put little equity in their property and the easy option was to move out to a rented house and this affected the property market further.
Here the situation is different. The mortgage market started only recently at a time when rates were already at a much higher level. Overall, in the UAE, the total mortgage to GDP ratio is still far below most developed countries. In the past, some consumers even bought houses with short-term consumer loans. Now they stretch it out to 20-25 years, which eases out their debt service.
There may be a correction in the property market in 2009 or some time after that, and we have already started seeing prices stabilising in some particular projects. I’m not sure whether there will be a strong correction but even if there is, people have put equity on their houses here and would not want to lose money like the way it happened in the US.
But some banks and finance agencies in the UAE are offering to lend as much as 95, even 97 per cent of the property prices of certain projects…
Yes, there are companies that are offering that kind of finance. We don’t do that, and I’d say loans should be offered depending on the debt-service capacity of a client and the value of the underlying property. As you can imagine, a two-bedroom apartment will probably not correct as much as a very expensive villa, for there wouldn’t be as much demand for it in case of a correction. Giving 95 per cent loan to people especially with low salaries and a very high debt service is not responsible here or anywhere else.
Do you believe the US example will serve as a deterrent for such lenders and make them scale back and ask for more equity by the clients?
That might happen. One should not provide loans based on collateral only but look at the debt-service capacity. Collateral should just be a way out in case of default. The real challenge as a bank is to have proper risk-management systems in place to evaluate the debt-service potential of your clients.
I’m more concerned about consumer loans. They should be offered taking into consideration the purpose of the loan. If someone wants to finance his holidays and asks for a three-year repayment, that does not make sense. It should not be more than 12 months, as the person who has taken the loan will want to go on vacation next year too.
Do you see inflation taking its toll on the local demand?
Inflation remains a major issue to be tackled in the UAE and we have to do something about it. The administration understands this and the rent cap was a welcome move. House prices in the UAE were very low five years ago compared with international standards and even today, they are still cheaper than in some other developed countries, but I don’t see them going up at the same rate as in the last few years.
Should we look at a dollar revaluation?
Arguments are clear on both sides and it does not make sense for us to base our monetary policy on a country’s monetary policy that is sliding into a recession. But the dollar is not the only reason for inflation; there is a lot of local demand that is pushing up prices. I believe the UAE should move in tandem with other GCC countries for a revaluation of the dollar.
Recession has more or less kicked-in in the US and we recently saw stock markets crash globally. What impact will all this have on the banking sector?
We are indeed heading for a recession scenario in the US. The interest rates have come down by 75 percentage points and we expect interest rates to come down by another 50 in the course of 2008.
When US President Bush announced an economic aid package of $140 billion (Dh514bn), everybody realised that something drastic has to be done. People are aware that if nothing structurally happens, we’ll slide into a recession. We might bottom out quickly and avoid a severe recession if the administration takes heed of the situation and slashes the interest rates further.
International banks are estimated to come out with losses of $400bn to $600bn as a result of the sub-prime crises and it’s said that more than 50 per cent of it is still not accounted for. And the losses made by the insurance companies and pension funds have not been included here.
What impact will the recession have on the local banking sector?
We do not expect to see anything major happening here apart from a few banks that may have had direct or indirect exposure. We had so many opportunities here that local banks did not have the need to look at the US market, and that has saved us from any major impact now.
Do you see Middle East banks and sovereign wealth funds going shopping to the US since we are currently flush with money?
Definitely. And it is happening as we speak, but I feel we should wait for a while for the prices to get even more attractive than they are today. The price earnings ratios are already very low – between seven and nine for some banks – and I expect them to fall even further. So, it may make sense to wait till the market bottoms out to buy a stake in these entities.
CBD is not perceived to be an aggressive bank. Why?
We are not an easy bank to approve credit. We have a social responsibility and we will not give credit when we are unsure of the repayment capabilities, but once you are in, we will not take away the umbrella when it starts to rain. We really want to hold on to our relationships and build them. We are very much part of the community – a large part of our clients are UAE nationals and other Arabs.
We’ve been here for 38 years and have helped our clients become big, so you can also call us their partners. Yes, we are not aggressive in approving credit, but our approach is aggressive when it comes to taking our share of the customer’s business. I think that’s a healthy approach and numbers have proven that.
With record profits of Dh936 million posted in 2007, what do you project for 2008?
Proper products and the right service quality have enabled us to push our balance sheet more than 60 per cent, which has been a huge jump. We were the first ones to publish our results, but I believe that compared to the top 10 banks in the UAE, we have done well in terms of net profit growth and have taken on additional market share.
The year 2007 was a very good one for us for a couple of reasons. Apart from a booming economy that all banks and other companies are benefiting from, we restructured the bank about a year-and-a-half ago. Historically, we have serviced companies; however, we found it natural to start offering wealth management services to owners and senior managers of firms that we were already supporting from a financial perspective.
So we added wealth management to our portfolio of services through Al Dana Wealth Management services that we introduced last year. We are also offering consumer banking but catering mainly to the high-end customers. Mass retail is not our game.
Having established the distinct client segments, we have extensively researched client needs by segment. If you look at what we’ve done on the commercial banking side, we have 10 units throughout the country that are servicing this segment. We’re still very close to the clients. Those are not the clients that will ask for the most complex products – those are clients that want to have very good day-to-day service of the vanilla products. So, we have made sure those 10 centres are more focused and have a large number of properly educated relationship managers. We’ve also done something different – we now have a central treasury sales desk that is supporting those units – this is something that we didn’t have before. We also have a cash management unit and a debt capital markets unit set up for the upper mid-sized companies and large companies.
For large corporates, we have centralised the large corporate RMs in our Dubai Head Office and in Abu Dhabi. It is centrally managed and sits next to the product group heads and works in a client service team concept to offer our best possible service to such clients.
Indeed, we saw a big jump in our 2007 profits due to the new product and services we introduced. Going forward, for 2008, I’m confident we will see the underlying curve of GDP growth in the UAE of at least 7.5 per cent. I don’t foresee oil prices coming down much from the current levels so there will be still a lot of liquidity in the market.
There will be a continued demand from companies for expansion of new projects while consumers credit is also expected to grow. From the mortgage side alone, there is a huge demand that hasn’t been satisfied so far. So I’m pretty optimistic about 2008.
In the banking sector, two elements will prevail. One, the loans-to-deposit ratio of banks in general has been increasing – in other words, the competition for deposits has increased which will affect the pricing.
On the other hand, there will be a continuing increment of demand for large facilities and due to the sub-prime issues, international banks, as well as local banks have put higher requirements in terms of margins for such transactions. Whether that will fully balance out the relative increase in cost of funds remains to be seen.
So, do you foresee the same growth rate in 2008 as CBD witnessed in 2007?
No, I don’t think so. It will definitely be another good year for the bank, we will see good, solid growth but probably not at the same rate as it was in 2007.
Are you Basel II compliant and how will WTO implications impact the sector?
All banks in the UAE have been mandated by the Central Bank to start reporting based on the standardised approach of Basel II as per January 1, 2008. CBD is ready for it and I assume so are many other banks in the country. By 2011 all banks are required to have fully implemented the advanced Basel II approach, and we are working hard to meet that deadline.
The new Basel Accord framework comprises three pillars. Pillar one of the new standard sets out the minimum capital requirements firms will be required to meet for credit, market and operational risk. Under pillar two, firms and supervisors have to take a view on whether a firm should hold additional capital against risks – reputation risk, liquidity risks, etc. – not covered in pillar one and must take action accordingly.
The aim of pillar three is to improve market discipline by requiring firms to publish certain details of their risks, capital and risk management. Basel II will increase the risk management capabilities of all banks and for me, this is the main objective, but it will also have a negative impact on capital adequacy.
Are there any plans to increase the capital base of CBD?
We finalised the last tranche of our rights issue only last March – not even a year ago. We did it, of course, with a view to expand, and we have indeed expanded very fast. Our capital adequacy ratio is very healthy, and we want to be as efficient with our capital as possible. So I don’t think that raising any more Tier I capital is necessary for the time being. But I could imagine that perhaps on the Tier II side, we could be looking at something in the second half of 2008.
Peter Baltussen, CEO of Commercial Bank of Dubai
Peter Baltussen joined Commercial Bank of Dubai as its CEO in July 2006.
Baltussen was with ABN Amro Bank for more than 18 years in a number of senior managerial positions, the last one being Managing Director and CEO of Banque de Neuflize-Paris.
As the head of the French private banking organisation of ABN AMRO, he oversaw the wealth management and asset management activities in France.
Baltussen has a wealth of banking experience ranging from corporate and retail banking to capital markets, credit and treasury.
CBD boss: primed against sub-prime