The past year has not been an easy one for Bahrain’s banks. With the government suffering from low reserves and high debt, the country’s fiscal position remains weak and this has had a knock-on effect for the banking sector.
Last May, Moody’s downgraded ratings for four Bahraini retail banks to negative — reflecting the sovereign’s declining financial strength, it claimed at the time. The following month it said operating conditions for the country’s banks “would continue to deteriorate over the next 12-18 months”, with ongoing pressure on loans and profitability.
Meanwhile, in January this year, analysts at BMI Research, part of Fitch Group, predicted that commercial banks in Bahrain would see only a modest uptick in asset growth from the anticipated recovery in oil prices, as a national liquidity squeeze continues.
It was amid these tough conditions that Jean-Christophe Durand, a former BNP Paribas regional head, in December took up the reins as CEO of National Bank of Bahrain (NBB), one of the banks that Moody’s had downgraded six months earlier.
NBB is Bahrain’s largest state-backed bank with 26 branches across the kingdom, as well as one in Riyadh and one in Abu Dhabi. The government holds a 44.2 percent stake in the bank via sovereign wealth fund Mumtalakat.
In a rating action last November, Fitch attributed a more positive outlook to NBB and four other banks in Bahrain, confirming them as ‘stable’. NBB has certainly bucked the trend in terms of profitability when compared to many other GCC banks. It reported a 5.4 percent net profit rise in its full year results on January 30, from $146.97m in 2015 to $154.88m in 2016. Its capital adequacy ratio was reported to remain “strong” at 35.4 percent and the bank was said to have a “well-diversified asset composition with strong liquidity”.
However, NBB is not immune from economic headwinds. Its total balance sheet declined slightly from $7.98bn in 2015 to $7.92bn in 2016, as did earning assets, from $7.55bn to $7.51bn. Customer deposits also dropped, by 7 percent to $5.55bn.
In an exclusive interview with Arabian Business in Manama — his first since taking the helm at NBB on December 1 — Durand is stoic. He concedes that Bahrain’s economy has been “a bit subdued” but that the bank’s 2016 financial performance was “commendable” given the context.
“Obviously, I’m new, I’m still discovering, but my first observations are that NBB is a strong bank, a robust bank, with a strong base,” he says.
“The economic environment globally and in the region has been challenging but I think [the results] show a commendable performance. Net profit was above average for the region and although the balance sheet size reflects the overall state of the economy, the fact that NBB managed to improve its profitability is a very good sign.”
A veteran banker from France, Durand has lived in Bahrain for 28 years and joined NBB from BNP Paribas, where he was head of corporate and institutional banking for the Middle East and Africa (MEA) until last August. He spent several months as an advisor to the CEO of Mumtalakat before joining NBB.
Two months prior to Durand’s departure, BNP Paribas’ Bahrain-based MEA chief operating officer, Christophe Mukerjee, also left his post amid a restructuring at the French bank that is expected to see up to 150 jobs lost in the region. It is executing a cost-cutting plan to shrink its global operations by 12 percent by 2019 — just one of many international banks that have sought to scale back their presence in the GCC to focus on core markets such as Europe.
Unsurprisingly, Durand declines to comment on the circumstances that led to some of his former colleagues leaving their jobs, and there is no suggestion that he or Mukerjee were among those made redundant.
He says: “I don’t want to comment on my old bank. I am at NBB now. What is important to emphasise is that I have been in Bahrain for 28 years and I believe in this region. For me to have the chance to lead a bank like NBB was extremely attractive when there is the opportunity to grow and create new business.”
The main reason for the opportunity is precisely this retrenchment by global banks, which is creating room in the market for local rivals to capture business from foreign companies.
“What we have seen is that Bahrain is attracting a lot of new investors and new companies at a time when large, international banks are not expanding in the region,” Durand says.
“I’m referring to banks like Barclays, HSBC and Standard Chartered, which have traditionally been very present in the retail networks here and today they have modified their strategies and are refocussing their operations towards core markets, larger clients and government sources of business.”
He adds: “There are a number of factors driving this and it’s not just Bahrain, it’s global. Everywhere in the emerging markets there are regulatory constraints and capital constraints, and in the region capital is a key decision-making tool for international banks — they allocate capital where there is the best return.
“You also have the issue of compliance, increasing requirements from central banks all over the world to limit outsourcing — a lot of elements that are making it less attractive for international banks to have operations here. So there is a huge opportunity for local banks to complement this.”
Expanding NBB’s foreign client base is a key objective for Durand. But it is only one in a brimming in-tray of tasks the French banker has set himself for his first 12 months in the job. Among the others are enhancing NBB’s digital operations and conducting a thorough review of its branch network to identify efficiencies and untapped opportunities. At the heart of this is the need to diversify the bank’s client base and deepen its relationship with existing customers so as not to lose market share, Durand says.
“We are starting from a very strong base and have good relationships with government entities such as Alba. [NBB was involved in Mumtalakat-owned Aluminium Bahrain’s recent securing of a $1.5bn loan to help finance its Line 6 expansion project].
“But there are also very good clients in other sectors that we want to reach. I don’t mean we are absent from those sectors but we can develop the relationships more and broaden the range of products.
“The economy has been a bit subdued lately but there are an increasing number of new projects in Bahrain, particularly in the industrial and infrastructure spheres, and I believe there is a bigger role to play in the financing of these projects for a bank like NBB.”
There are additional opportunities to play a more “holistic” role in serving existing customers, Durand says. “I’m not just talking about financing but arranging the financing. Participating in debt capital markets, helping clients with trade finance, helping them in hedging risk, becoming part of finance structuring teams, and generally playing a more holistic role in the financing and investments of large corporates in Bahrain. I think NBB should be present in all aspects of the relationships.”
To do this, Durand wants to beef up the bank’s digital functions. “The financial industry is moving very fast. It’s been constantly changing but there’s been a particular acceleration in regulations since the financial crisis in 2008.
“Today, a bank that is not adapted to online banking developments will lose market share, and NBB needs to get on the train.”
Is NBB not yet adapted to the digital revolution, then? It is, Durand insists, but he wants it to be a “trendsetter, not a trendfollower”.
“Technology changes every day and because we represent the government and the financial marketplace, it’s important we’re seen as innovative,” he says.
“My view is that we’re serving our existing customers very well but we need to look at the clients of tomorrow — the younger generation fresh out of university or just taking over businesses.
“They have new expectations and we need to be able to cater to them as they become more and more wealthy. One I think I need to be sure of is that I can adapt the bank for the next decade and ensure we are part of the banking world of 2020.”
This could involve a rebranding in the longer term to reflect new ambitions, and a partnership with a technology firm to provide a new online banking platform, Durand tells Arabian Business. It will also involve a roots-and-branch review of the bank’s bricks and mortar network — to save costs, of course, but also to ensure NBB maintains its visibility as new districts spring up in Bahrain. This is expected to commence within the next 18 months.
Durand declines to reveal anticipated numbers of branch closures or whether there will be any job losses, and insists the assessment is likely to result in new openings as well as potential closures.
“I don’t think bricks and mortar can disappear from one day to the next because we have a strong client base and they are used to [specific branches]. But when I talk about redesigning the network — let’s say ‘optimising’ the network — there are new areas being built in Bahrain, so should we be there? Under which format?
“There may be some other areas that are declining, so the same thing: should we be there? Should we stay there instead of moving to a new residential area or business district? There could be new branch types, too, for example, the famous bank branches without tellers.
“It’s too early to say, but it’s important we’re agile enough to follow our clients and catch the new generation, which is much more demanding.”
Another priority for Durand is to make more of NBB’s two branches outside of Bahrain, although further expansion into the GCC or beyond is not planned at present. In Saudi Arabia, NBB’s growth is hampered by legislation that limits foreign banks to operating only a single branch in the kingdom. The government is reportedly reviewing this policy but Durand says in the meantime the focus will be on expanding the Saudi client base and developing a strategy to “add value” to the current operation in Riyadh.
“For the time being we need to show the authorities we are ready to continue investing and developing there. Saudi Arabia is a strong market and we are at a competitive advantage to have a branch there so we need to make the most of it,” he says.
The strategy is the same in Abu Dhabi, where NBB has had a presence since 1985. “In general, when we have a branch in a country the objective should be to grow. It’s not a flagpole. It has to be a real business.”
Durand tacitly acknowledges the challenges facing GCC banks but says he disagrees with reports such as that of BMI Research in January that warned a liquidity squeeze would continue to affect the sector’s profitability throughout 2017. The report noted that client deposit growth across commercial banks in Bahrain averaged 2.4 percent year-on-year in the first ten months of 2016, down from 6.6 percent in 2014. And it warned that the cuts to the non-investment grade of Bahrain’s sovereign rating by the three main rating agencies last year have further added to the country’s liquidity woes.
“Liquidity is a word that in the banking industry is very sensitive,” Durand says. “‘Liquidity’ and ‘squeeze’ are two words that don’t go well together, and I certainly have not noticed any squeeze.
“The [sovereign] downgrade would only be a concern to us if we were going to the market for future financing, as it impacts on the cost of funding. But our funding is local deposits. Then, if you talk about asset growth, certainly, it’s been a bit subdued because of the wider financial environment.”
Overall, however, Durand believes there will be opportunities for banks to grow their assets over the coming 12 months, thanks to the rise in infrastructure projects in Bahrain and expected uplift in oil prices.
For NBB, he forecasts an improved performance when compared to 2016 and targets a net profit rise of around 7 percent on the past year’s 5.4 percent. He expects loan demand to pick up off the back of new projects and subsequent financing requirements, and deposit growth to remain “slightly better than last year” amid improving economic conditions.
However, one issue for him is worldwide banking industry regulations and, in particular, its effects on how banks allocate capital. “There is more emphasis [globally] on the cost of capital and that’s something that’s not here yet,” he says. “As long as there is a profit… people look at the return on capital but not on allocated capital, yet the overall regulatory constraints need to be taken into account. Today, you cannot say that one country is insulated or isolated from global regulations. It is not.”
With decades of experience, Durand is a savvy and pragmatic new figurehead for the bank — intent on fulfiling his quest to bring NBB firmly into the banking landscape of 2020.
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