Shayne Nelson is in a remarkably good mood as he settles down for our meeting. And it’s not the glorious view over the bustling Dubai Creek that has the Australian in fine fettle, rather the previous night’s business on the 16th floor of Emirates NBD’s HQ building.
Dubai’s largest bank held its annual general meeting (AGM) at its Creekside headquarters — once the city’s most photographed building before the arrival of the Burj Al Arab — at which Nelson presented the 2014 figures. Income was up 22 percent to $3.9bn and net profit increased by 58 percent, to $1.38bn.
In what was reportedly one of the shortest AGMs in the bank’s recent history, shareholders approved an increased cash dividend of 35 fils per share.
No wonder Nelson was on good form.
A 36-year veteran of the banking industry, the Perth native admits his intended career path almost didn’t happen before it started, when he missed his stop for an interview with ANZ Bank.
“I missed my bus stop when I was going for the interview and I stopped [instead] in front of National Australia Bank and I left 14 years later,” he quips.
From bank teller to CEO, Nelson has been involved in most parts of the banking industry, firstly in Australia and later in Asia, when he moved between Hong Kong, Singapore and Malaysia with Standard Chartered, before taking over as CEO of its Middle East and North Africa business.
“I had the boom and the bust of the financial crisis. I was here in Dubai for the tough times as well,” he says.
Nelson became group CEO of Standard Chartered Private Bank with additional responsibilities for small- and medium-sized enterprise banking in 2010 before returning to Dubai to take over at Emirates NBD a year ago.
Similar to the way in which he turned around Standard Chartered’s Malaysian business, and doubled it within two years, he saw plenty of opportunities to grow Emirates NBD’s prospects.
“I’ve worked in quite a few different areas and banks with portfolios or businesses that needed restructuring or rebuilding,” he says.
“I’ve done quite a bit of that in my history. I think to me, it’s a bit like Malaysia experience — a great, historical franchise that really wasn’t hitting its full potential. I think Emirates NBD had obviously gone through some difficult times with the global financial crisis and its exposures, and my view was that was a temporary measure. You can fix that pretty quickly if you focus and get the franchise motoring and firing on all cylinders. It’s just a powerhouse,” he adds.
Describing the performance in 2014 as “exceptional”, the growth has come at a decent period for the country’s banks. However, profit growth at UAE lenders is expected to slip to 5-6 percent this year, according to a report issued last month by ratings agency Standard & Poor’s.
UAE lenders have enjoyed bumper earnings growth in recent quarters, aided by buoyant economic conditions locally, strong credit growth and the reduction in levels of cash set aside to cover bad debts.
In the final quarter of last year the top eight UAE banks by assets all reported year-on-year net profit growth of between 13 percent and 82 percent, building on successive quarters of strong growth earlier in the year. However, lower oil prices are expected to feed through into reduced economic growth in the Gulf Arab state this year, which will reduce demand for new lending from companies and in some cases will increase default levels on existing debts, S&P said.
However, Nelson, who took over from Briton Rick Pudner, says that Emirates NBD’s recent conservative approach means that it can cope with any potential headwinds. Some of the legacy issues with bad debts still remained, but the recent $14.6bn restructuring of Dubai World’s debt has enabled Emirates NBD to reclassify its $2.3bn exposure to the state-owned conglomerate from “impaired” to “performing”, thereby dropping the bank’s bad debts down from 15.1 percent to 8.3 percent in 2014. “We played very conservative on it and we were the only [UAE] bank that had it classified as non-performing. It wasn’t until the agreement had been signed that we reclassified it. So we’ve been playing the conservative card on that for a long time,” Nelson says.
The vast improvement in non-performing loans (NPLs), he says, was not just down to the Dubai World debt deal.
“If you look at our NPLs in 2015, a lot people will say that was largely because of the Dubai World reclassification. Sure, that was a piece of it but there was also our recoveries that we got out of that portfolio in 2014. There was also some other reclassifications that we did of writing off about just over $3bn of retail loans that we had 100 percent provision on for years,” Nelson says.
“We now have over 100 percent NPL coverage and a lot of that stock of problem loans has collateral behind it. We would expect as we go into 2015 we will be working that portfolio hard to make sure we optimise our return on it,”
The problematic loan book was one of the first areas Nelson wanted to address when he assumed control a little over 12 months ago and quickly established a workout unit in Emirates NBD.
“I’d run workout units before and my view is that leaving problem accounts with managers that often wrote the business in first place and often don’t have the skillset for workouts versus managing a day-to-day positive business, is a mistake. You don’t get the optimum return out of it, and you don’t [get] the problem solved quickly enough,” he says.
“I think the timing was pretty good because we had the recovery of the Dubai economy with property prices coming back quite strongly. A lot of the exposure was property-related in some form, which certainly helping curing a lot of the problems that we had,” he adds.
Nelson says the bank also got a handle on its capital management.
“Our advanced deposit ratio had been up in the high 120s at one stage. Now we’re locked in as to what we all do with liquidity. The range, which is 90 to 100 percent of advanced deposit ratio, is where we’re locked in as an organisation and I’m a firm believer of ‘you get the dollar first before you lend it’. You don’t lend the money and then find the dollar to lend.
“Relying on the professional markets is fine in the good times, but when it gets tough, that sticky liquidity that you need is very important for you as an organisation, as a lot of banks in this region found out,” he says. Much of what Nelson has done has been based on his own previous experience, being able to identify where the bank can do better, and take advantage of its position as one of the top lenders in the region.
“Competition is quite tough,” he admits, “but we have scale and that’s one of the big advantages that we have in the UAE, with our branch network, our loan size, our ATM network, our point of sale, and so on. We have the right mix of business between consumer and wholesale,” he adds.
And he’s also added a few products in the bank’s treasury platform to tap into some fee-earning business that foreign banks had been capitalising on.
“I think historically what happened here is we’d write the loans and the foreign banks would take all of the derivatives off the back of it — the interest-rate swaps, the foreign exchange, the hedging, they’d do all the nice, low capital intensive, high-fee earning business and we would do all the riskier, tough stuff that’s capital intensive,” he explains.
“That’s now changed. We build all those products now, and we can meet those customer needs, rather than allowing a foreign bank to do it, or us backing it out to a foreign bank. Hopefully we’re making it a lot tougher for the international competition that’s within the market.”
While the results and the changes that he put in place have all been positive for Emirates NBD, Nelson does have a number of concerns, including the price of oil and the effect on liquidity. “Banks have got used to, in the last few years, significantly improved liquidity through the system. But if you think about how many barrels they’re producing, will those fiscal reserves be coming back still to Saudi and to the UAE? I think that is one of my concerns about 2015/16 — what does it do to the liquidity of the system? It has got tighter in the last few months and that balance between loan growth and liquidity is very critical,” he says.
The Al Etihad Credit Bureau has been widely welcomed by the banking industry, including Nelson, who says banks will be able to “price the risk a lot better”, but he warns there could be a drop in consumer loan demand, and therefore spending as well, as banks “get to know what they didn’t know” about their customers.
“I think good borrowers will get cheaper over time but there will be an effect for those people who have got multiple credit cards that no-one knew about; suddenly they will be under pressure,” Nelson says.
“We have seen in other economies where the bureau has been introduced that it has affected consumer loan demand and consumer spending. It’s normally a short-term situation, 12 months and that’s it,” he adds.
The UAE is set to introduce a new bankruptcy law this year, and Nelson hopes that there might be a provision for bounced cheques.
“If people commit fraud, obviously I expect them to be charged and to be dealt with by the authorities. People who get into financial difficulties, not always of their own doing, I’m certainly not an advocate of using the prison system as a remedy and I think a bankruptcy law — I know there’s one being drafted — is certainly necessary for the development of the economy,” he says.
The banking landscape is changing, he admits, with more and more people using online and mobile to carry out transactions. Nelson feels it’s time to move away from the heavy usage of cheques and cash.
“One of the things I think that the UAE banking system and the central bank needs to work on is the amount of cash that people use in the UAE is very high against just about everywhere in the world.
“The amount of cheques that people use is unbelievably high against the rest of the world. We have a very cash-cheque mindset within the UAE of how we do business, whether it be SMEs, corporate or individuals. There’s a very big mindset there and we need to change that. It’s actually not good for the economy to be just be using cash and cheques. Electronic is far more efficient,” he says.
Like most banks in the country, Emirates NBD has invested millions building its online offerings, but Nelson says all sectors need to catch up in order to move people away from the current mindset.
“We need to get some of the basic infrastructure sorted out as well. In most markets for example, a DEWA would have one code for all banks for bill payment — so all banks would use exactly the same code. The ease for a client to use online bill payment service would be there. It’s not with the way the system is configured at the moment. There’s some industry work that I think we need to do as well to actually improve those capabilities,” Nelson says.
The cash-back facility from EFTPOS (electronic funds transfer at point of sale) machines that are commonplace in Europe and elsewhere is another product he hopes to see introduced this year through the bank’s subsidiary Network International.
When it comes to growth within the group, Nelson says subsidiary Emirates Islamic Bank, which focuses on mid-corporates, SMEs and retail, had a strong 2014. He points to wealth management, historically underserved, as another area for the bank to build in 2015.
Egypt, however, where the bank bought BNP Paribas’ operations there for $500m in 2013, is where he hopes they’ll see some serious growth.
“We’d like that to be our second home. We see the opportunity as being that big. Certainly a lot of our investment will be going into Egypt to grow that franchise. We think we can add a lot of value to the Egyptian economy over time,” he says. With 62 branches there at the moment, Nelson says there are plans to expand that in the coming 12 months and build on the 58 percent increase in profitability the lender generated there.
“We’ll try with some of that branch expansion, to do very digital branches as well, which will match our digital technology that we put into those branches, just to deliver services quite differently to how we do it in a traditional branch,” he says.
“It has actually outperformed our acquisition forecasts. Despite what’s happening in Egypt, this book is performing very well and we want to invest additional money to expand it further. It’s an underbanked market and certainly we believe we have the technology with our digital to make a big difference to the Egyptian consumer.”
Nelson says his expansion plans are based on following where the clients are going.
“For us, North Africa is interesting. Obviously the rest of the Middle East, we’d like to grow [in] Saudi [Arabia]. We only have one branch there. We’re the only UAE bank with a full operation in Saudi, but unfortunately the regulations at moment only give us one. We’d like more branches in Saudi. It’s a big economy,” he says.
Like many UAE companies, Nelson readily identifies the opportunities available in Iran “if it ever gets sorted on geopolitical basis”.
“That is a huge opportunity for the UAE as a whole and for the banking industry. It’s an under-serviced industry with no great technology that needs massive infrastructure spend and it has got a lot of pent-up demand,” Nelson says.
Further down the line, he hints that the lender’s make-up could change dramatically if the right opportunities come along at the right time.
“I think in five years’ time we can be a very changed bank depending on if we find anything significant to buy inorganically over that period of time. I don’t expect oil to be at this price in five years’ time. If it was, then exploration will have dried up and supply have come down. There’s no doubt that would drive oil prices up in my opinion,” he says.
The good mood hasn’t changed by the time our conversation about finance has ended, and moves on to sport. A former state rugby player with Western Australia, Nelson also holds the world record for landing the biggest Giant Grouper, weighing 179.5 kg, off Latham Island, Tanzania. Emirates NBD has landed its own big catch in Nelson, who looks set to guide the bank onto bigger and greater things in 2015.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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