Blame it on the bankers

Mashreq chief Abdul Aziz Al Ghurair argues that the US & European banks are to blame for their own downfall.
By Tom Arnold
Sun 26 Apr 2009 04:00 AM

Abdul Aziz Al Ghurair, chief executive of Mashreq, the largest private bank in the UAE, argues that the US and European banks are to blame for their own downfall.

Beleaguered banking executives in the west hoping for some sympathy from their colleagues in the Gulf, need not turn to Abdul Aziz Al Ghurair. The outspoken CEO of Mashreq, the largest private bank in the UAE, is distinctly unimpressed by the culture of rewarding fat cats with hefty cash payouts, while their banks beg for taxpayer-funded government bailouts.

"It is not good," he argues, shaking his head gravely. "A bonus is good as long as it doesn't get out of control, but it should not provide an incentive to managers for short-term gain but long-term pain for the bank.

If you look at the potential for growth in the GCC, we have seen the markets touching the bottom. Since this is a region and industry that we understand, we can take advantage of the opportunities.
 

"Sometimes rapid growth comes at a certain price," Al Ghurair continues. "Unfortunately, most of these institutions run their banks from quarter to quarter and they want to keep the outside world happy by showing growth. The bonuses are made on the growth, and the more you grow, the bigger the bonus. That really has made banks suffer."

And the last few months have been filled with serious suffering in the US and Europe; not that it has stopped the under-fire chiefs of some struggling institutions from collecting record bonuses.

The Royal Bank of Scotland (RBS), the stricken banking giant into which the UK government has sunk some $29.4bn, last year shelled out $3.7bn in bonuses.

UBS, the European bank with the biggest writedowns and losses from the credit crisis, was ordered to reduce bonuses after the Swiss government gave the country's biggest bank a $59.2bn lifeline.

Perhaps most controversially, executives at American International Group (AIG), which has received more than $180bn in taxpayer bailout money in the US, were paid $165m in bonuses, earning an apoplectic rebuke from a White House which found its hands tied by legislative loopholes.

Only now has the West's banking industry been forced into action, slashing bonuses in the wake of losses that could reach $4 trillion from credit-related asset investments and lax lending, according to estimates from the International Monetary Fund last week.

According to Al Ghurair, however, compared to their Western counterparts, UAE banks have for the most part steered clear of exposure to risky assets.

"Generally, the UAE banking system has been smart enough and fortunate enough to not touch any of these toxic assets," the veteran banker insists.

It is a system that the billionaire businessman knows well. Over the last 30 years, Al Ghurair has amassed a $7.8bn fortune through a family business empire that spans everything from real estate to a controlling stake in drinks company Masafi. Mashreqis his passion, however, and his 19-year tenure as CEO has seen the bank grow to hold total assets of $15.2bn at the end of last year.

Yet despite Al Ghurair's confidence in the UAE banking system, Mashreqhas not escaped completely from the fallout of the financial crisis. The bank's full year profit for 2008 declined 14 percent on losses from investments, with net income falling to $446m. The firm has since slashed its staff by four percent, or 175 employees, blaming "lower market activity".

Last month, Mashreqwas one of the four UAE banks to have its long-term counterparty rating put on ‘credit watch' with negative implications by Standard & Poor's Ratings Services. Emirates Bank International, National Bank of Dubaiand Dubai Islamic Bankwere also downgraded.

S&P said the action reflected its growing concerns about the impact of the economic downturn on Dubai.

For his part, Al Ghurair contends: "There is a financial crisis across the world, but we are dealing with it. Nothing replaces good, fundamental banking."

Mashreq, in an effort to build on its own fundamentals and expand its business operations, last week signed a partnership agreement with China's national bank card association to allow visitors from the Asian country to use their cards at the firm's network in the UAE.

Under the deal, Mashreqbecomes the first national bank in the Middle East to recognise and accept China UnionPay (CUP) cards for cash withdrawals at ATM machines and for purchases by the bank's point of sales terminals.

Al Ghurair sees the relationship as a way of bolstering the bank's links with China, the world's third largest economy. And CUP is an innovator - it opened an overseas branch of its bank in Hong Kong over 30 years ago in the belief the territory would one day pass from under British to Chinese rule.

"All the big banks are shareholders with CUP," he says. "They can open doors to us and we can welcome them to the UAE."

Like its Chinese counterpart, Mashreqis also known for its pioneering bent, dating back to 1991 when it launched the first ATM and credit card in the UAE.

In that same ambitious spirit, and in a further expansion of its international presence, Mashreqlaunched its Egyptian retail operations earlier this month with 10 branches and a capital outlay of almost $100m. MashreqCapital, the bank's investment unit, has also announced it will set up an Islamic fund to invest in Sharia-compliant bonds, known as sukuks, which could offer yields of up to 15 percent.

The fund hopes to raise up to $100m over the next 18 months, following comments made by Al Ghurair himself at the height of the financial crisis in January, that the UAE's sovereign wealth fund may get a higher return by investing in local markets rather than investing overseas.

Does he still advise this approach with the Dubai Financial Market General Index down around 75 percent from a year ago?

It’s tough at the topThe largest private bank in the UAE, Mashreqhas enjoyed significant success since its founding in 1967 as Bank of Oman.

Like many financial institutions, however, it fared less well in the second half of 2008, and has endured a difficult start to the year.

Mashreq's full year profit for 2008 declined 14 percent on losses from investments, and net income fell to $446m. The UAE's fourth-biggest bank by assets reported a AED335m ($91m) loss from investments in 2008, compared with a profit of AED488m ($133m) in the previous year.

As a consequence, the bank slashed its workforce in February by four percent, or 175 employees, because of "lower market activity".

"These steps are part of a strategy to maintain our strong levels of performance and profitability and remain focused on gearing the business around the needs and activities of customers," the Dubai-based bank said in a statement to the media.

Mashreqhas since seen its long-term counterparty credit ratings put on ‘credit watch' with negative implications at Standard & Poor's Ratings Services.

"This action reflects our growing concerns regarding the impact on the banking sector of the economic downturn in Dubai," S&P said in a statement. "The outlook for Dubai's economy, in our view, has worsened relative to last year; the global economic downturn has been hurting some of Dubai's key economic sectors including trade, tourism, and commerce."


"If you look at the potential for growth in the GCC, we have seen the markets touching the bottom," Al Ghurair notes. "Since this is a region and industry that we understand, we can take advantage of the opportunities."

Concerns about customers defaulting on loans and mortgages in the UAE, combined with a fall in property prices and widespread job losses, have left many banks reluctant to extend their lending facilities. However, Al Ghurair is confident about the recovery of the UAE's banking sector, which he believes will take place before the end of 2010.

"Banks have become more comfortable and our worst time is behind us," he says. "From what I can see from the banking perspective, there has been commerce starting to happen in the last one or two months here in the banking system."

Our performance will hold. Our size and profit will hold, maybe the same or maybe it will improve over the last year.

Mashreq has started lending to new customers again, according to Al Ghurair. "We will entertain requests now and are looking and examining customers for new credit," he says. "We have always supported our existing clients but the test is when you start doing banking with a new customer."

And while Al Ghurair does not see much room for growth in the firm's performance in 2009 compared to 2008, he does not foresee a repeat of the heavy losses reported in the third quarter of last year when banks post their first quarter results.

"Our performance will hold," he says. "Our size and profit will hold, maybe the same or maybe it will improve over the last year.

"I don't see any shocks, but some adjustments in the banking sector," he continues. "Some banks will do better, and some banks may not do as well as last year. Some will even show growth."

As the conversation turns to Mashreq's $68m rebranding two years ago, which encompassed a new logo and a name change (from Mashreqbank), Al Ghurair's passion for the subject is apparent.

"Customer surveys have shown they like our rebranding; they find it open, friendly, and accessible," he says enthusiastically.

"But you can't start putting lipstick on a gorilla and expect it to look great - you have to really approach the whole process holistically," he adds with a grin. "We have also given proper training to our staff in the bank and changed our policies and products to really respond to clients' needs."

Al Ghurair admits the real estate arm of his business empire has been hardest hit by the global financial slowdown, with the sagging property market taking its toll on his holdings. On the other hand, the family's interests in industry, which include cement and petrochemicals, are "doing fine", he reports.

But it seems it will always be Mashreqthat is Al Ghurair's prime business concern.

"When we are conducting our business we are focused. We will only do business we understand," he says.

"Business we don't understand we walk away from, and that has really helped us through the last two years."

It's an approach, perhaps, that other banks across the globe might wish they'd adopted sooner.

China calling Mashreqlast week signed a partnership agreement with leading Chinese financial institution China UnionPay (CUP), to enable visitors from Asia to use their cards throughout Mashreq's extensive network in the UAE.

CUP was founded in 2002 and is an association for China's banking card industry. It is also the only interbank network in China, linking the ATMs of all major state banks and 196 member banks. By the end of 2008, 196 CUP domestic member banks had collectively issued more than 1.8 billion cards.

With the partnership, Mashreqbecame the first national bank in the GCC to recognise and accept CUP cards for cash withdrawals at ATM machines, and for purchases by Mashreqpoint-of-sales terminals.

"The launch of the CUP card acceptance with UAE merchants is a significant milestone for the international business of CUP," said Xu Luode, president of CUP.

Mashreqaims to attract business from the million-plus Chinese tourists a year who either visit or transit through the UAE. It also hopes that the partnership will encourage more tourism trade from China to the UAE, and significantly strengthen the trade and economic ties between the two countries.

"China's economy is predicted to be the world's largest by 2012, and president Hu Jintao has stressed that his country sees the UAE as its first trade partner in the Gulf and the Middle East," said MashreqCEO Abdul Aziz Al Ghurair.

"We are fully committed to making that vision a reality, and our joint venture with CUP further strengthens the ties that have bound our two countries."

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