By Sarah Townsend
Abu Dhabi Islamic Bank is performing better than its peers as the finance sector battles challenging economic conditions. But its Group CEO Tirad Al Mahmoud warns the country is stuck in a credit crunch as cautious lenders pull the plug on clients.
The refreshingly frank Group CEO of Abu Dhabi Islamic Bank (ADIB) whispers at the end of our interview, “Look, I hope I haven’t said anything obscene — I don’t want to sound like Donald Trump!”
There is little chance of that. Tirad Al Mahmoud, a former Citibank executive who joined ADIB in 2008, is talkative and direct but that is where the similarities end.
In an interview with Arabian Business in Dubai, the Qatari national gives a shrewd analysis of the challenges facing the UAE banking sector and imparts his equally no-nonsense vision for ensuring growth of Abu Dhabi’s largest Sharia-compliant bank over the coming years.
Rocked by low oil prices and macroeconomic instability, the UAE’s banking sector has seen its earnings squeezed as liquidity tightens and credit growth remains sluggish.
Most banks reported either flat or negative growth in net profits over the third quarter of 2016. However, there is light at the end of the tunnel, analysts claim, pointing to a modest upward trend in profits for the first nine months of the year.
Ratings agency Moody’s predicted in October that UAE banks’ solid profitability and capitalisation levels would protect them against an anticipated 5.5 percent increase in bad loans by mid-2017, while sufficient liquidity would provide a cushion against declining government deposits and subdued asset growth.
Yet the overall picture is gloomy. Data from the UAE Central Bank show that total banking sector deposits fell for a third consecutive month in August, by 0.5 percent compared to July. Meanwhile Moody’s predicts that credit growth will slow to around 3-5 percent annually for 2016 and 2017, down from around 8 percent for 2015 and reflecting the findings of the central bank’s third-quarter credit sentiment survey, which showed a downward trend in overall credit appetite for business and personal loans.
With the scene set, Al Mahmoud is not prepared to sugar coat the situation. “We’re not out of the woods yet,” he says. “I think the industry is likely to remain mired with credit issues until the middle of 2017. The digestive process requires time; I think we’ve swallowed quite a bit and we need time to digest.”
There is nothing “magical” about mid-2017, he says, “it’s just my own sentiment”. But he says his forecast is based on his view that oil prices will stabilise by December, and that, as they recover, there will be a six-month lag before they will start to have a positive impact on the economy.
In the meantime, his biggest concern is that UAE banks have created a “credit crunch” scenario by too hastily clamping down on borrowers. “The banks themselves are part of the problem right now,” he says. “They have unwittingly created a credit crunch environment — you know, robbing Peter to pay Paul. We may be justified in taking remedial measures against a defaulting portfolio but I think the banks have gone way too far by cancelling lines and basically turning off the taps from a credit perspective.
“There are some bright signs of a few banks saying, ‘wait a minute, there’s a light at the end of the tunnel’. [ADIB] is one of those banks trying to maintain confidence and provide support to the market, but too many others have pulled the plug too fast on too many clients and that’s creating a domino effect.
“This is a message I’d like to get out: that we’ve had a credit crunch in place for a few months now and it hasn’t eased yet.”
The UAE Banks Federation has done a great job in advising its members to take pre-emptive measures to prevent a credit crunch but few banks have taken that advice constructively, Al Mahmoud warns, declining to provide specific examples.
For its part, ADIB has taken a “prudent view on credit extension and capital management, while continuing [its] conservative practice of building provisions”, Al Mahmoud said in a statement announcing the bank’s third quarter results for the period ending
September 30. ADIB’s net profit rose 1.1 percent to $138.5m (AED508.9m), from $137m in the third quarter of 2015 — largely as a result of bad loans, the bank said. Credit provisions and impairment charges rose 38 percent year-on-year to total $72.88m, compared to $52.5m in the third quarter of 2015.
Group net revenues increased by 6.6 percent to $372.7m from $350m in the year-ago period, and the bank now has over 903,000 customers, having added 48,000 new customers in the year to September 30, ADIB reported.
Al Mahmoud tells Arabian Business that while the bank’s growth is “modest”, it is better than many of its peers. Dubai Islamic Bank, the UAE’s largest Islamic lender, posted a 9.9 percent drop in third-quarter net profit this year, partly due to a rise in impairment charges.
“Our most recent results speak about significantly higher credit provisions than last year in every single quarter, and the 1.1 percent growth is after taking much higher provisions,” he says. “But if you look at the whole of our results, you can see that the business is impressively performing at the top line levels.
“Revenues have grown consistently, our expenses are very much under control and the cost of credit, or provisions, reflects market reality and has increased year on year. Despite this, we still made a net income growth and are keeping our fingers and toes crossed that we will continue being positive for the next quarter.”
Al Mahmoud adds that ADIB is one of the most liquid banks in the UAE with a regulatory ratio of 85.3 percent as of 30 September compared to 88.3 percent the previous year. Its capital adequacy ratio is 15.03 percent compared to 14.70 percent in the third quarter of 2015.
“Our ratios are the best in the market; we’re flushed with liquidity, we really can’t complain.”
And he says the overall banking system, while sluggish, is stable. “Frankly speaking, we do not have a problem or an imbalance in the system. Look at deposits, and look at loans. The loan book is not growing. So why do you need more deposits?
“If the loan book was growing by 10-12 percent then you need more deposits — then we can have a discussion on that. But we don’t have that situation right now.”
Still, ADIB is one of many banks that has cut headcount to adjust to slower economic growth. Bloomberg reported in October that the bank had axed 200 of its total 2,500 jobs over the previous three months, mainly junior roles, and this came soon after news that Union National Bank (UNB) had laid off a reported 50 people and Emirates NBD was cutting its workforce by about 250. In July, ADIB warned it was restricting the amount of new credit it was extending due to an increase in defaults across its business lines.
Al Mahmoud says he is eager to respond head on to the Bloomberg report. “Let me address this very openly: we have not closed a single branch; in fact we’re going to increase. We have not cut a single service; in fact, we’re adding services. For example, we’re investing heavily in digital banking and adding more service channels.
“We’re also adding a new financial institutions business — correspondent banking — and are investing heavily in transaction banking. As of last month, we had 150 job vacancies across the entire bank.
“So in terms of headcount drop, what you are seeing is a reduction in sales forces as sales of a certain product decline and other products are repositioned. There is a reallocation of staff requirements, but we do not have a capacity reduction programme.”
To give an example, he adds: “If you look at our results you will discover our deposits are up by 10 percent, but our loans are up by only 3 percent year-on-year over the first nine months of 2016. The deposits are coming through the branches, where we do not have to have sales forces.
“The loans, however, are through direct sales forces, feet on streets. Volumes are down. People are not spending as much money. So what you see is a volume-driven headcount change.”
Two areas of the business that have been “repositioned” include commercial and small-to-medium-sized enterprise (SME) banking, and the changes include revising distribution strategies and changing the customer selection criteria. However, Al Mahmoud insists that neither areas are “victims in terms of survivability”. “We very much intend to stay in these businesses,” he says.
A fast-growing division is the Barclays Bank UAE retail operations, which ADIB acquired for a reported $177m in 2014. Al Mahmoud says it has grown by around 25-30 percent year-on-year over the last 12 months.
“The Barclays piece came to us to give a boost to our consumer expat banking strategy. It is a thoroughly good business for us and continues to perform,” he says.
Despite saying in 2014 that in banking you need to “go big or go home”, Al Mahmoud says there are no decent acquisition opportunities currently available and the bank is not in any discussions.
For that reason, ADIB has no plans to tap the market again following its $137m rights issue last year. “We’re well capitalised. Our capital adequacy ratio is 15 percent and the minimum requirement as set by the UAE Central Bank is 12 percent. If there was a need for it in future it would be acquisition driven, but as I said there is nothing on the horizon.”
Any future acquisition would likely be in the consumer finance space, in which ADIB wishes to expand its operations, although Al Mahmoud declines to elaborate.
Meanwhile, the group is “actively looking” at international expansion, predominantly with respect to its new correspondent banking division. Al Mahmoud is similarly veiled about these plans, explaining that he does not wish to give away information to competitors at such an early stage. Correspondent banking would involve expansion in markets where there are trade corridors between banks — that is, strong bank-to-bank relationships — rather than markets where it would make sense to open or buy banks.
“Correspondent banking is a whole different ball game,” he says. “It does not require the same investment as a consumer business or a wholesale banking business. It is trade and cash management driven, and it’s a lightweight investment, but it’s significant in terms of business profile and future revenue generation.”
On the day of our interview, Al Mahmoud is preparing to host the finals of the fourth annual Ethical Finance and Innovation Challenge and Awards (EFICA). The awards, co-administered by ADIB, are designed to reward innovations that promote ethical practice in the financial services industry. This year, the shortlisted entries ranged from a Sharia-compliant real estate crowdfunding platform, to a microfinancing initiative for Indonesian villagers.
Islamic financing, of course, has much to offer this emerging ethical finance sector. The industry is forecast to more than double in size to $2.6 trillion globally by 2017 and Al Mahmoud says he is seeing a continued rise in demand for Islamic banking services.
“It’s a much better business model because it’s more ethical for the customer [than conventional banking]. It doesn’t matter whether you’re a borrower or a saver, you’ll always be better off with an Islamic bank because their ethical standards forbid them from taking advantage of you.”
However, he says the industry’s growth is hampered by lack of appropriate regulation and Sharia principles in general. “Firstly, Islamic banking products require standardisation to scale up — whether in documentation or legislation — and this is lacking at present.
“Second, our [Sharia] compliance scholars have a very orthodox view of trade. We want them to take on the different types of trade that have evolved over the years, and we’re not there yet. For example, [Islamic banks’] ability to do direct working capital finance is restricted because we don’t have the time value of money. We can’t simply extend a loan if the client fails to meet the terms because we’re not allowed to charge interest.
“So the process becomes a bit more rigid and a bit more complex and we’re at a competitive disadvantage [when it comes to working capital finance]. On the other hand, we’re very good at long term asset financing, like buildings, ships, airlines, factories, infrastructure.”
For Al Mahmoud, the opportunities the industry presents are numerous — even if it means keeping his head down and steering ADIB through several more months of market uncertainty first.