Exclusive Interview: Emirates NBD CEO Shayne Nelson On Dubai’s Boom

It’s late afternoon on a Thursday when I walk into the office of a man who arguably holds one of the highest banking positions in Dubai.

But far from displaying any signs of exhaustion from the past week, Shayne Nelson, the CEO of Emirates NBD, looks robust and dapper and ready to spend an hour discussing the ins and outs of the UAE’s – now recovering – banking industry.

Previously the head of Standard Chartered Private Bank, Nelson, who took up the position of CEO at Dubai’s biggest lender in November 2013, recently revealed a strong half-year result, with net profit for the first six months of the year up by 30 per cent to Dhs2.35 billion.

Total income for the period also grew by 27 per cent to reach Dhs7.04 billion, while pre-impairment operating profit rose by 35 per cent to Dhs4.91 billion. Total assets grew by two per cent to Dhs348.3 billion.

“The combination of very good revenue growth at 27 per cent, which is an outstanding result for us, and keeping costs in control helped us achieve that growth,” says Nelson.

Costs for the first half of the year amounted to Dhs2.13 billion, an increase of 12 per cent over the same period last year, but the cost-to-income ratio stood at 30.3 per cent, down 4.2 per cent year-on-year.

“We kept costs very flat. We are watching what we spend. For a bank of our size, savings can also be eked out of things like procurement and through negotiating rentals, which is hard these days because it’s a tough retail market, but we are trying,” the chief executive explains. “There is a lot more discipline about how we manage our costs.”

One factor that has weighed on the bank’s balance sheet over the last few years has been the high percentage of non-performing loans (NPLs), carried over from the financial crisis and Dubai’s property crash in 2009.

But with the UAE’s economy recovering strongly – Emirates NBD predicts GDP growth of five per cent for this year – the lender’s legacy problems could soon be coming to an end, asserts Nelson.

The bank’s NPL ratio (non-performing loans divided by total loans) improved to 13.5 per cent at the end of the first half of 2014, from 13.8 per cent in March 2014.

“A lot of our problem loans were related to the real estate market and strong recovery there has helped us recover those loans. We supported a lot of our customers through those tough times and now that things are better, they are selling units or buildings and repaying debts,” he says.

According to its latest results, the bank’s NPL coverage ratio (provisions for NPLs divided by NPLs) reached 64.7 per cent, up 12 per cent from 52.7 per cent in the first half of 2013.

“Our aim is to get it to 80 per cent including Dubai World and if the conglomerate does rectify, then we expect to get our coverage up to 100 per cent. I think if you look at the pace at which we have been topping up our provisions, [we expect to achieve it] by the first quarter of 2015.”

Emirates NBD is the largest single creditor to state-owned Dubai World – one of the worst hit during the crisis in 2009 – which is in the midst of $25 billion restructuring plan. The bank has said it could reclassify its exposure to the conglomerate as a performing loan in 2014.

However, in a statement released by Moody’s rating agency in May 2014, it stated that the bank’s NPL ratio remains well above the UAE average and global ba2 peers at around nine per cent and 4.4 per cent respectively.

“NPLs remain constrained by the concentration of legacy government-related assets that were booked before 2009 and, whilst the improving operating environment will lead to further easing in asset quality pressures, a material drop in NPLs will only stem from the resolution of some of the largest legacy problem loans,” Moody’s said.

EXPOSURE RISKS

Following the financial crisis, when many banks in the UAE suffered a major setback because of high exposure to the government and related entities (GREs), the UAE Central Bank set lending limits.

It capped the amount a bank could lend to government and GREs at 100 per cent of its capital base. The regulator provided lenders in the country a five-year grace period to comply with new rules, which came into effect in 2013.

Owned 55.6 per cent by the Investment Corporation of Dubai (ICD), in which the Dubai government is the main stakeholder, Emirates NBD’s exposure to sovereign debt amounted to Dhs98.6 billion at the end of June 2014, accounting for around 40 per cent of the bank’s total loans while loans to GREs reached 13 per cent of total lending in the first half of the year.

While there have been some concerns expressed about the bank’s high exposure levels, Nelson is not too worried.

“We are the biggest bank in Dubai. By that very nature, we are going to have risk concentrations in the emirate. We were born and bred and raised here, for the development for Dubai’s economy,” he says. “I am not unhappy with our current concentrations; my view is we will get in line with the Central Bank’s directives.

“Given the size of the GREs within the economy, if you are based here, you are going to have concentrations here and it’s not a bad thing.”

According to him, the question that must be asked is about banks’ credit policies – are they conservative or are they aggressive?

“I am an ex-chief risk officer and I can tell you our policies are conservative – whether it’s real estate or construction lending. We do support the industry and we are proud of it, but we are conservative,” he explains.

“That’s one of the lessons that the banking industry learnt; make sure you understand the viability of the project you lend to and ensure that it is going to generate the cash flows to repay you.”

It’s also vital to ascertain the integrity of the clients, Nelson cautions. “It doesn’t matter how much equity they are putting in the transaction; trust with the client is really important. Get that right first, then get the structure right, the equity and the cash flow right and you will be fine.”

LENDING WORRIES

While posting mainly positive figures in its half-yearly forecast, Emirates NBD warned that lending, primarily to corporates, has slowed and that it expects to see lending grow by four to five per cent this year, down from the seven to eight per cent that it predicted at the start of 2014.

Emirates NBD’s customer loans also increased by just one per cent during the first half of 2014 to Dhs241.8 billion.

The drop in lending is reflective of a wider trend across the UAE’s banking industry, states Nelson. While lending could pick up in the second half of the year, since the last four months are generally busier, it’s unlikely that it will reach the eight per cent mark, he adds.

The main reason for the drop in lending is, because of the market picking up, companies are starting to turn to the capital debt market. “Corporates are deleveraging – they are generating cash and paying back debt, which is a good thing.”

The other dynamic that has supported this is the development of the local debt market, especially the growth of sukuks or Islamic bonds. “Generally, bonds are much better for longer-term infrastructure projects and longer-term funding rather than banks,” he adds.

HERE COMES THE CREDIT BUREAU

While growth in corporate loans may have slackened, Nelson says the bank has seen reasonable growth in credit cards, personal loans and housing loans.

The opening of the Al Etihad Credit Bureau in September this year could lead to a short-term dip in lending volumes, but he believes things will stabilise within 12 months.

Over the medium and long-term, the CEO believes the launch of the bureau is “excellent” for consumers and very good for banks because they can risk price and make sure that they don’t over-lend.

“Firstly, it will ensure that we don’t burden clients with debt and can check if a person can afford a loan. We have a responsibility to society that we don’t over-leverage people and cause bad debts and pain and hardship.

“Secondly, because you don’t know what you don’t know, you charge everyone the same. So good borrowers subsidise the bad ones and vice–versa. Now, the best borrowers will get better rates rather than people cross subsidising each other,” he explains.

EXPANSION, EXPANSION

With the UAE boasting 54 banks – not inclusive of the banks operating in the Dubai International Financial Centre (DIFC) – competition has intensified and has led to banks struggling to diversify incomes.

“We have said we want to increase our offshore revenue by 20 per cent – that’s a way of diversifying our risk. So we bought Egypt – for a good price and that’s performed strongly since we acquired it,” says Nelson.

Emirates NBD acquired BNP Paribas’ Egyptian assets for $500 million last year, and the unit contributed profits of Dhs102.8 million during H1 2014.

“Also, our clients are expanding geographically in the region, so it’s very important that we also grow with them. Egypt was a start – we are certainly looking how can we be the regional bank of choice,” he says.

He also highlights that not all of the Middle East is welcoming right now – places such as Iraq and Libya are ripe with opportunity, the current unrest and uncertainty has to settle before they would venture in.

When I pry whether the bank is actively seeking any acquisitions, he remains tightlipped, but laughingly admits that it took them five years to make the Egypt buy.

He quickly adds – seriously – that the process of acquisition is a time-consuming one.

“The jurisdiction you buy in has to be somewhere you can put the right team. If you can’t put your A-Team into an acquisition, don’t do it.”

He also advises that it’s key to check if the acquisition is a cultural fit. “And don’t overpay. Egypt was a great price because at that time the country was going through some difficulty.”

The process of expanding may take time, but the veteran banker says his target is to make Emirates NBD a ‘regional bank’ aka a bank of the Middle East.

“There isn’t any regional bank at present, not one, and there is an opportunity to be that,” he states.

While that may seem like a heavy challenge to pull off, the Australian has had prior experience – quite literally – of snagging a prize catch. The CEO holds the world record for fishing a 179.5 kg giant Grouper in 2004 off the coast of Tanzania.

Fishing is something he loves doing in his spare time. But what does the CEO enjoy the most about his current job?

“I think when you work for an international bank you always have that mother-ship that tells you what to do. I have always been a decision maker and now, running my own bank so to speak, is a great experience.”