Michael Tomalin, CEO of National Bank of Abu Dhabi, says UAE banks’ profitability in 2008 will be even better than in 2007. He believes that as long as the UAE maintains its current growth rate, banks in the country will continue to sustain their current profitability. Even as far as the property market goes, Tomalin says the growth in the sector is sustainable.
How was 2007 for your bank and what do you foresee for 2008?
Obviously, we cannot talk about the [final] 2007 results right now. However, as of the third quarter of 2007, the bank has been enjoying modest and positive growth over the year before. I expect 2008 to be better than 2007.
For how long will the double-digit growth rates for the country’s banks be sustainable?
As long as the economy is growing at the speed it is, I think double-digit growth rates for the banks are sustainable. Obviously, one should not expect straight-line growth in profits, but over the economic cycle, it should be possible for banks to achieve compound growth rates of between 20 and 25 per cent, given the strength and vitality of the UAE.
What impact has the falling dollar had on the UAE’s banking sector and do you expect a revaluation or depegging anytime soon?
With a certain parity between dollar and dirham, banks were able to move between these currencies interchangeably. With the possibility of a realignment of the dirham in the UAE, banks need to keep their position square, or probably dirham-long, given that if there is a realignment, the likelihood would be a revaluation.
This has had an impact on the banking system as many customers want to borrow in dollars and invest in dirhams and institutions do not wish to be left with long dollar positions of their own. This, therefore, has created a tightness in the dollar market in the UAE and liquidity in the dirham market.
With the country flush with liquidity, how healthy do you believe it is to remain tied to the cash-starved US’ monetary policy and keep reducing interest rates in tandem with the Fed?
The dirham/dollar peg has served the country well for many years. Most of the UAE trade is denominated in dollars. However, inflation in the UAE is out of line with inflation in the US and it is difficult to have a monetary policy here to suit UAE circumstances and keep the dollar/dirham peg.
Many argue that current inflation rates in the UAE relate principally to shortages in supply, particularly in the real estate sector. However, there is considerable wage inflation as well, given the strength of the economy, the competition for talent and the need for expatriate salaries to rise, as in many cases the dirham has devalued against the expatriates’ home currency.
Changing the peg is a once-and-for-all decision. It is, therefore, an important and strategic decision for the UAE, which needs to be taken with a great deal of care.
Do you see further consolidation among the country’s banks in 2008 and beyond?
I do see further consolidation among the country’s banks in the face of increasing global competition. The process, however, may well take some time.
Bank incomes from IPOs and stock markets are still not up to the levels seen in 2005. Do you see that income going up substantially again in 2008?
Personally I would be surprised to see the same sort of profits earned from IPOs in future years. The market has changed.
However, rising stock markets will help banks in at least three ways.
First, in their asset management businesses, second, their brokerage businesses, and third, their lending businesses. Therefore, we will see a correlation between rising stock markets and rising bank profits and vice-versa.
There are concerns about a property bubble in the UAE market. How do you expect that to impact the bottom lines of banks here in 2008?
The demand for property in the UAE is real and sustainable. Many new people are coming to live here and many businesses are seeking to relocate themselves here. It is of course possible that there will be some correction in property values but if one compares values in the UAE with values elsewhere in the world, one often finds that capital values are still lower than those, for instance, in Europe, although higher than in some of the depressed regions of the US.
On the other hand, rents have become very high in the UAE by international comparison, reflecting the demand and the shortage of supply.
Some of the new supply will come through in the next two years or so, relieving pressure on rents. A modest correction to property values will not seriously impact bank profitability overall, although a sharp downward correction might have an impact, and, of course, different banks in the UAE will be affected in different ways.
Islamic banking is emerging as one of the fastest growth areas. What are your expectations for this segment of the market in 2008?
I expect to see continued fast relative growth in the Islamic banking market all over the world and NBAD itself has positioned itself to take advantage of the growing trend in the region.
Do you see the need for better regulation of the country’s banking industry?
We are lucky in the UAE to enjoy a strong regulatory framework, which will, I am sure, be improved and refined as the years go by.
Are the country’s banks prepared for a common GCC currency by 2010?
If the GCC members decide on a common currency by 2010, I am sure the banks will be able to prepare themselves for it.
NBAD, The Bank
Michael Tomalin is credited with NBAD’s expansion and fast growth.
The bank was established in 1968 in Abu Dhabi as a commercial bank, but has since expanded its operations in a big way, both in terms of geographic coverage and scope of activities.
In 1999 the bank’s management implemented a strategy to expand into retail banking which in turn allowed the bank’s net interest margins to expand as its retail loan base expanded.
NBAD is today regarded highly as a lead arranger in project finance deals among all banks in the UAE as well as the largest 10 banks in the GCC.
With 58 branches across the UAE and 120 ATMs, the bank has the largest branch network.
NBAD has an extensive regional and international network across the world operating a subsidiary company, Abu Dhabi International Bank, with 12 branches in Egypt as well as branches in Bahrain, Oman, Sudan, France, the UK and the US.