Safety first

United Arab Bank’s conservative lending policies appear to have paid off. According to chairman Sheikh Faisal Bin Sultan Bin Salem Al Qassimi, the time for expansion has arrived
Safety first
UAB is aiming to double both the number of branches and its balance sheet within twelve months
By Elizabeth Broomhall
Wed 09 May 2012 04:39 PM

Walk into United Arab Bank’s new Abu Dhabi branch, and you get an immediate feel for what the company is all about. The interiors are luxurious but not over the top. Everyone seems excited to be in the presence of the media, and as the interview is about to begin, staff lurk in the entrance of the room in a bid to get a glimpse of what is going on.

Bank chairman Sheikh Faisal Bin Sultan Bin Salem Al Qassimi is seated on a clean white sofa, with flowers on pine coffee tables either side of him. The room, which constitutes the ‘wealth management section’ of the bank, is spacious but cosy, and you can imagine high net worth individuals feeling very at home here in the future.

In 2011, United Arab Bank, otherwise known as UAB, reported a net profit of AED330m; which was a record for the bank and a shock to the industry.

According to Sheikh Faisal, the story of UAB is slightly different from that of other banks, many of whom have continued to struggle in today’s post-recession climate.

Established in 1975 in partnership with Société Générale, the Sharjah-based firm was designed to manage the banking needs of Emiratis and long-term expatriates. At 37 years old, it is certainly not a new company, but its business model has kept it rather under the radar in recent years, and only now are large numbers of people beginning to recognise its name. In the early days, its focus on corporate banking over retail lending combined with a conservative approach to branch expansion pushed the bank into the shadows of its competitors, whilst a gradual move away from its original plan to serve Emirati customers kept it from reaching its potential. According to figures released in 2009, just 3 percent of the bank’s customers were Emirati.

It was that same year the bank decided to embark on a programme of diversification in a bid to reconnect with its former client base, and to boost its profile in the sector, Sheikh Faisal says. The company was motivated partly by Commercial Bank of Qatar’s decision to buy a 40 percent stake in the bank in 2008, replacing SocGen as the major shareholder, and partly by the changes in economy and society.

“Things have changed tremendously in the UAE and worldwide in the last 37 years, and so three years ago we decided to put together a detailed transition plan,” he says. “Although the bank started off well and with good management, we saw the need to modernise our systems and implement changes which would help us to achieve our growth plans.”

Unfortunately the bank’s plan was interrupted by the financial crisis, which shook the UAE to the core as property prices plummeted by more than 60 percent and investors fled the market. Banks were hit particularly hard by the crash given the collapse of the stock market, in addition to their exposure to debt-laden government entities and a sharp fall in loan issuance. Most have since battled to make healthy returns.

Sheikh Faisal says UAB could not avoid the recession, but was able to bounce back fairly quickly due to its conservative lending policy. As the rest of the industry has fought to contend with slow loan growth and the side effects of a battered real estate market, UAB enjoyed its late arrival to the party. Last year, not only was it capable of lending to sectors where other banks could not, but its strong financial position meant it could comfortably strive to capitalise on untapped markets. For the whole of 2011, it recorded a non performing loan ratio of 1.6 percent, one of the lowest in the industry, and over the last three years witnessed a 300 percent growth in its retail business.

“When we began the bank we didn’t want to take risks,” Sheikh Faisal explains. “We didn’t go into high-risk sectors like real estate. We were very satisfied to have slow growth and less profit. In 2007 and 2008, things started to have an effect. But in 2011 we were not really affected by what was happening because [previously] we did not enter into investments or any portfolio which had a high risk. In fact, the bank’s growth was excellent in 2011, and the bank’s spirits have been really good in the last year.”

Asked about the impact of aftershocks such as the central bank’s lending caps rolled out last May, he says there was also not much change for UAB. For other banks, the controversial new rules which limited personal loans to 20 times a borrower’s monthly salary and repayment periods to 48 months, created a tough environment for growth.

“The central bank is well aware of the capabilities of the different banks in the UAE and I definitely support the cap,” Sheikh Faisal says. “It is needed to make sure that companies don’t invest their customers’ deposits in high-risk loans and give big loans to individuals who are quite high risk. In terms of UAB, the lending cap hasn’t really limited our growth, as we have always been self-capped in a way.”

The firm also has a slight advantage over other banks at the present time, given its ability to lend to real estate. In 2011, it announced a 3.99 percent one-year fixed mortgage rate, the lowest in the market, which it was able to offer due to its “risk-based pricing,” whereby it only lends to UAE residents with a salary above AED 20,000 a month, for completed properties. Sheikh Faisal says it is one of the few banks offering mortgage finance in the current economic conditions.

“We are quite new in this area and quite selective in terms of the customers we provide finance for. We look at their background, their tenure in the UAE and their capability to pay back the loan. In terms of projects, we are also careful because we don’t want to expose ourselves to high risks and the real estate sector is still in recovery mode. So we are very selective. We only provide finance to companies who have a proven track record in that sector of paying back the loans. We also have to know the people and have a relationship with them.”

Going forward, UAB wants to retain its existing conservative lending policy, but focus more on real estate and retail banking. It also wants to expand its branch network, and currently has plans to open several new sites before the end of the year.

“The bank is becoming more aggressive in its expansion, and we have allocated a significant budget for this,” says Sheikh Faisal. “Last year we opened a new branch in Ras Al Khaimah, and last month we launched our first Abu Dhabi branch on Airport Road. Abu Dhabi is going to be a major growth area for us, with another three branches coming this year on Reem Island, Yas Island and in Khalidiya. We’re also opening another branch in Jebel Ali in Dubai, and have one coming up in Sharjah for our new corporate headquarters.”

By the end of the year, he says, the aim is to have 20 branches, almost double what the bank had at the end of 2011, with the aim of covering all the emirates and doubling the bank’s balance sheet in the same timeframe. As for the wider Gulf region, consultants McKinsey, who are advising the firm with its transition programme, will guide UAB on future openings, the chairman says.

“In terms of the Gulf region, our partner and shareholder CBQ is our arm in Qatar, and it also gives us reach in Oman where the company is a shareholder in the National Bank of Oman. Realistically, we want to ensure we have ultimate coverage in the UAE before we look at expanding, but we’re not ruling out other Gulf countries.

“We could maybe start with one country and then expand our presence from there, but this will be further down the line.”

But the firm will not be stopping at geographical growth. Other plans include boosting its Islamic banking and wealth management divisions, given the high demand for these kinds of services in the Gulf and other parts of the world, Sheikh Faisal says.

“Islamic banking is one of the very important sectors for UAB,” he adds. “I was actually one of the first people to ask SocGen when they were a stakeholder to look at implementing an Islamic banking arm – similar to what they had in Malaysia at the time.

“When CBQ took over the stake we had an excellent opportunity to start the division because they already had an Islamic arm. So it was very easy.”

There is of course plenty of room for growth, he says. “We definitely want to expand the Islamic banking section. It is going to be a major contributor to our growth in the future because more and more people are looking at switching from conventional banking to Shariah-compliant products and services, not just in the UAE and the Gulf but also in Europe.

“So we’re growing it day by day. Some customers who have had deposits with the bank and have not been accepting interest on those deposits are now asking us to come up with new Islamic products where they can get the benefits, but in a Shariah-compliant way.”

In the future, he says, the company could potentially launch an entirely separate Islamic bank, but right now this is very much a long- term aspiration.

The wealth management side of the business, otherwise known as Sadara, is a bit like the Islamic banking division; still in its infancy but on the verge of expansion. Sheikh Faisal says it was set up to cater for the bank’s wealthy customers, namely high net worth individuals who want to invest larger capital.

“Those customers don’t want to be treated in the same way as regular customers,” he explains. “They want special services and investment products, not just in the UAE but outside. So we set up this division for them. We see a huge potential for growth as more wealth is created, especially as the recession passes.”

In the meantime, the bank will continue to focus on the recruitment of Emirati staff, he says, who already account for 40 percent of employees. It will also try to build up its reputation in the industry, given that it has some way to go before it can compete with the larger players.

But with a 38 percent growth in operating profit in the first quarter of 2012 compared with the same period last year, and a 55 percent increase in loans, experts say UAB will certainly be a bank to watch in the coming months.

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