When His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, announced in March 2007 that two of Dubai’s top five banks – Emirates Bank International and National Bank of Dubai – would merge, he set in motion the process of creating a regional champion.
One year on, the integrated entity’s Chief Executive Officer, Rick Pudner, told Emirates Business, in his first interview to a regional English-language newspaper, that much has been achieved in the merger process already. Detailed blueprints for every business unit of both banks are ready for rollout over the next few months, culminating in full systems integration by the end of 2009’s first quarter. The merger has not only created the region’s largest bank by assets but has also sparked a flurry of consolidation moves in an hitherto fragmented industry. Pudner believes Emirates NBD will definitely emerge as a one of the Gulf’s global superbanks. Excerpts:
How does it feel to be heading the largest Middle Eastern bank?
It is a fantastic opportunity. I joined Emirates Bank two years ago – on April 14, 2006 – and I saw that there was a lot of potential in the pipeline. Then, last year in March, Sheikh Mohammed gave his blessing to the merger and it has been a pretty hectic year. It is a fantastic opportunity for me to be able to play a part in a little slice of financial history of Dubai and the UAE.
What is the opportunity for the bank in the region and perhaps the world?
Looking at the UAE banking sector, you see that there are more than 50 banks. It is a pretty fragmented market. The top two or three players in the UAE are still way under the Western average in terms of market share. So, there is a need for consolidation and I think there is a need to get scale, which Emirates NBD has now achieved with a balance sheet of roughly $70 billion. Its capital position is strong. The scale gives it the ability to enter larger transactions from the corporate side and the project financing that is going on in the region. It gives the bank a lot of scope. We now have 110 branches – although that number changes quite often.
From the retail perspective in the UAE, there is no reason why new entrants coming into the market will need any bank except Emirates NBD. From a coverage perspective on the retail side, [our position] is excellent. From the corporate perspective the larger size gives us more ammunition in addressing corporate needs. Corporate clients from the UAE – particularly Dubai – are moving out into the world. This gives us major scope for an international banking financial institution to emerge from the Middle East and play a global role.
How does the market share of the largest bank in the UAE compare with the share that, for instance, the largest bank in the UK market or the US market would have?
I am not sure of the specifics but from an Emirates NBD perspective, our share is roughly 20 per cent depending on whether you are looking at the deposits side or the loans side, which is quite significant.
Have you set any market share targets?
Not specifically, no. We have targets for profitability and return on equity for our shareholders. Market share hopefully will come with that. Obviously, the bigger you are the harder it is to grow market share. Where we would like to expand, going forward, is to produce a lot more revenue outside the UAE. We have a branch operation in Saudi Arabia. That is a major market and very important to the future of Emirates NBD. But there are other regions. Last year, we bid for a bank in Turkey – unfortunately we were not very successful there. These markets continue to be very interesting.
Which do you consider the priority markets for expansion?
The GCC. We would like to balance our strategy and have further expansion in the Saudi market, from a retail perspective. We are still under-represented in Abu Dhabi. We need to expand our presence in Abu Dhabi.
Are there any specific numbers for expansions this year?
No specific numbers at this time. But our Islamic franchise, Emirates Islamic Bank, is in very aggressive expansion mode this year. Its growth record over the past three years has been significant, as has the growth in our conventional banking division. As a group we have been very lucky, I think, to have both arms expanding rapidly. The priorities for this year are to consolidate the merger, to do things properly. We have to make sure we get the culture fit right, systems aligned – there is a lot to do. But we are not taking our eye off the ball in terms of business as usual. We will be expanding our branch network – but in terms of specifics, I cannot tell you much.
What has been accomplished on the integration so far and what are the next steps?
We have done quite a lot – I am very pleased with where we are. Since October 16, 2007, when the Emirates NBD share was launched on the Dubai Financial Market, we began the detailed integration planning for each business unit and support unit. We have got detailed blueprints for the integration of each of these units over the next 12 months. The target completion date for systems integration is the end of the first quarter of 2009. I think this is an aggressive timetable but it is still do-able. What have we achieved so far? We have set a new management team at the top level. We have got down to what we call the N-minus-3 level – N being me. It is cascading down. We will have that completed by the end of next month. Everybody will know the positions they hold in the new bank. We have co-located, for example, the retail businesses of both banks. We are now moving the physical locations of the corporate banking teams. That will be completed shortly. It is rather like musical chairs among the properties that the banks operate from, but that is going well. We have achieved a number of quick wins with, for example, a shared ATM network for both sets of clients – the ATMs have become free to use for both banks’ customers. We have consolidated our view on funding from the Treasury perspective of both banks – looking at the historic EMTN [euro medium term note borrowings] programme of both banks – and the commercial paper and deposit-raising programmes are now strongly co-ordinated. We are achieving efficiencies there in terms of funding costs – not duplicating anything.
We have taken significant steps in identifying the future business model and business strategy. We have got a very clear vision statement of where the bank wants to go; we have got a clear mission statement, if you like, on how we are going to get there. So, in four or five months, we have made huge progress. I know the competition out there is hoping we slip on a banana skin somewhere, but it is going very well. Staff at all levels of the bank are very, very committed in terms of the new entity.
What is the view on staff layoffs?
Both chairmen had made it clear that this would not be the case. It is not about adding 2,000 plus 2,000 and then moving out a thousand [people]. This is very much a growth story. I think that is the beauty of the timing [of the merger]. Both banks are coming from a position of very strong growth. So, we need everybody we can get. You know how the labour market is in this region. Attracting talent is a challenge; retaining talent is a challenge. Obviously, there have been elements of restructuring and repositioning – but that is inevitable.
With the scale that the merger has created, how does Emirates NBD stand in terms of global and regional growth prospects?
We already have an international network. We have branches in London and Jersey [Channel Islands]. We have a branch in Saudi. We have a representative office in Singapore that we are upgrading to a branch in the very near future. We have a representative office in India. We are looking at India and we are looking at other areas in the Middle East for organic as well as inorganic expansion opportunities. Potentially the degree of growth that is achievable by a financial institution based in the GCC is significantly greater than one from Europe or the US. In terms of relativities, it is very possible, if we get our strategies right and nail it in terms of implementation, we could be a very strong global contender in the foreseeable future. We rank, I think, at the moment about 198th in the world in terms of profitability and the target is to get into the top 100.
How will the scale that you’ve achieved help you deal with the foreign competition expected to come into the UAE?
There is obviously going to be more and more foreign competition coming in. We have seen it in investment banking. But we have seen in the past few months that the mega banks have had problems. There is a balancing act from the size perspective to be able to absorb the shocks in the global financial markets.
And how is Emirates NBD poised to deal with that?
I think we are very well placed. Our position is very sound in terms of exposure to sub-prime [mortgages] and the degree of exposure to general investments is also extremely manageable in terms of the size of the investment portfolio against the balance sheet. The lending book is very sound. There has been minimal provisioning on the corporate side and provisioning on the retail side is also very sound. Emirates NBD’s ratio of non-performing loans at the end of 2007 was 1.1 per cent compared to 2.5 per cent five years ago. We also have a healthy coverage ratio of 114 per cent. Going into 2008, we expect these ratios to continue to remain at healthy levels. We do see some provisioning come through given the current market environment. However, these will be relatively marginal in relation to the group’s balance sheet.
What is your guidance for the first quarter of this year?
The core business has been performing very well, reflecting the sound economic performance of the UAE and the GCC. Core growth has been excellent. I think it has been a good quarter. I said at the beginning of the year that we are looking at 2008 growth as cautiously optimistic, given what has happened in the financial markets. There have been pressures on all banks – like higher borrowing costs. Interest rates have come down and will continue to come down, putting pressure on net interest income. So, there are a lot of external pressures that will make 2008 a more challenging year than 2007.
On the other hand, business is robust in the region, so we are well positioned to maintain 30 per cent to 35 per cent profit growth this year. The 2005-to-2007 period has been a strong one for banks in the UAE. You will probably see banks growing at a slower rate this year than they did last year – but 25 per cent to 30 per cent growth is still spectacular compared to banks in Western Europe.
Has a situation of high liquidity coupled with lowered lending levels in the difficult financial conditions globally created any problems for you?
In the UAE, demand for loans is still very robust and maintains the pace of last year’s off-take. It is not like Europe, which is suddenly clamping down – making it harder for people to get mortgages. The deposit growth for Emirates NBD is still pretty robust. Maybe there is an element of putting money in the bank, while the global financial markets settle down, but we are very satisfied with the degree of growth on both the deposit and lending sides. We see no slowdown in lending opportunities.
We are working with a neutral stance. We recognise that there is likely to be a recession in the US and we believe the credit crunch still has a quite a way to run. But we do not see anything that is not manageable. We still see a pretty good year ahead. We are monitoring the degree of fallout that will come back to the UAE in terms of oil price effects. But given the UAE’s robust infrastructure-building economy, and a budget that factors in $45-50 per barrel for oil, the only effects we foresee are inflation in living costs and a possibly higher payout on staff acquisition and retention.
Have you found it difficult to structure finance for local corporate clients from outside the UAE?
I think the pricing has changed. The margins have changed. If you look at our own examples of financing under our EMTN programmes – the price at which you could raise five-year money a year ago compared to now – it is a significant difference. The credit spreads have widened considerably. It’s become more expensive. But from our point of view, the appetite is still there. The Middle East and the UAE in particular is viewed as a positive area compared to the US or Europe.
Would you say banking regulation in the UAE is strong and comprehensive enough to support the continued growth plans of the country’s banks?
I think the UAE Central Bank has made great progress over the past few years. We are all working towards Basel II – making the changes to implement the standardised approach this year. Once that comes in, UAE banks will be in a good position.
Any plans to raise cash this year – through share or bond issues?
We have got our EMTN programmes that will roll. We will pay off chunks and borrow other chunks. But no plans for bond issues. And we are always looking to diversify our investor base. So, we are looking at Tier 2 capital as an option. But it is expensive and we are keeping our eyes on the markets.
What challenges do UAE banks face in their drive to become world-class entities?
Scale is one [challenge]. Consolidation has started with the Emirates NBD integration. To get scale is important because it is going to become a very competitive marketplace. There is room for one or two banks from the GCC to emerge as major players. One of them will definitely be Emirates NBD. An Abu Dhabi entity could be another. Talent is another. The challenge is to not price ourselves out of the market. The inflation is putting pressure on the cost base. I think the picture is very positive but there are challenges along the way.
PROFILE: Rick Pudner, CEO of Emirates NBD
Rick Pudner joined Emirates Bank as Chief Executive in early 2006 after spending 24 years with HSBC in a number of senior roles that placed him in more than 11 different geographic regions. These roles included CEO of HSBC South Korea and the Head of Corporate Banking, HSBC Middle East. He also held the positions of Chairman for the Foreign Investors Advisory Council for the Mayor of Seoul, Chairman of European Union Banking Committee in Korea, and Vice-Chairman of Foreign Bankers Group in Korea. Pudner currently holds board positions for Emirates Investment Service, the Economic Development Council, Emirates Fund Managers (Jersey) and Emirates Financial Services.
Emirates NBD strategy
- Pursue profitable growth in retail banking
- Establish a distinctive wealth management offering
- Consolidate and enhance market position in corporate banking
- Develop a leading regional investment banking franchise
- Expand Islamic banking
- Pursue expansion in the GCC and other key strategic markets
- Integrate organisational resources to build a scalable platform
(Source: Emirates NBD investor presentation, March 2008)
Emirates NBD set to emerge as a global player