RICK PUDNER

"The banking sector is sufficiently de-leveraged, however de-leveraging of some of the corporate customers still has some way to go."

Rick Pudner
CEO, Emirates NBD

Banking in the Middle East: From the conventional to the innovative

How has the banking sector in the UAE evolved over the past 10 years?

The UAE banking sector witnessed tremendous growth over the past decade, driven by the growth of Dubai as an economic trading and financial hub, the corresponding deregulation of financial and property markets during this period and of course the strong performance of the oil-based economy.  As a result, while UAE GDP more than quadrupled over the last decade, banking assets increased more than six-fold. More recently, however, given the onset of the Global credit crisis towards the end of 2008 and the ensuing economic downturn, growth has clearly been more subdued and the sector has concentrated on de-risking their balance sheets, de-leveraging and improving profitability and levels of capitalisation. With the benefit of hindsight, I believe this was both a healthy and required adjustment as the previous levels of growth were clearly not sustainable longer-term and has now resulted in a banking sector that is more robust and in a stronger position to take advantage of sustainable growth opportunities going forward.

What lessons has the banking sector in the UAE learnt from the financial/Dubai crisis?

In my view, the lessons learnt over the past couple of years are not unique to Dubai or the UAE banking system, but are relevant in most countries around the world as this really was a global phenomenon. Having said that, some of the lessons banks in the UAE have learnt, to my mind, include avoiding excessive leverage, sticking to your core business lines, being more aware of model risk and tail events in relation to risk management and the importance of adequate corporate governance and incentive structures.

Will non-performing loans and maturing debt throw up new problems for the banking sector to deal with?

While we are clearly not out of the woods yet, it has now been more than 2 years since the onset of the financial crisis and from our perspective it looks like the worst is behind us.  The economy is now gradually improving, there is greater visibility and clarity on the key Dubai debt restructurings and the banking sector is now in a much stronger position. We expect non-performing loans to peak in 2011 and see gradual improvements over the next years.

Has the banking sector de-leveraged to a sufficient degree or is there still a way to go?

The banking sector has significantly de-leveraged during the last two years and average loan to deposit ratios for the sector have now declined to below 100%. By way of example, in the case of Emirates NBD, our loan to deposit ratio was 129% at the end of 2008 and we have brought this down to 92% at the end of the first quarter of 2011. As a result, I would say the banking sector is sufficiently de-leveraged, however de-leveraging of some of the corporate customers still has some way to go. You can see healthy growth in several sectors in the region already and banks will play an important in sustaining this going forward, especially also providing sufficient lending facilities into areas like SMEs.

Given the peg to the US dollar restricts the UAE's ability to influence interest rates what steps can the UAE take to provide itself with more monetary flexibility?

The most obvious solution would clearly be to de-peg the UAE Dirham from the US Dollar and either operate a floating exchange rate mechanism or peg to a wider basket of currencies.  This was widely speculated as a solution when the economic cycles of the US and the UAE were very divergent in 2007 and the first half of 2008. This pressure has receded as both the US and the UAE faced an economic downturn during 2009 and 2010 and the need for flexible monetary policy was much lesser.  Another solution which could aid in monetary policy flexibility is the development and maturing of a federal or government bond market which would allow the authorities greater control over money supply through open market operations.

What will be the big growth markets in the Middle East from a banking perspective over the next ten years?

A big opportunity for the Middle East remains the continued drive by its constituent countries for further diversification from the traditional oil-based economies and associated investment in infrastructure as well as the further economic integration of the region.  Given Dubai's role as the primary economic hub for the wider region, its banking sector is well placed to take advantage of this opportunity.  In addition to this, the banking market in the region is still relatively immature in both retail and wholesale banking arenas with product and service offerings being mostly 'plain vanilla' and current methods to stratify and reach customers being fairly conventional.  Further maturity of the sector in these areas as well as the relatively low levels of penetration of financial services products currently, particularly in retail, will bring further growth opportunities.

What changes would you like to see in the banking sector in the Middle East by 2020?

I would like to see greater integration between GCC economies and more open and flexible regulatory regimes. In addition, I expect to see more innovation in the banking system, both in terms of product and service offerings and in terms of new ways to stratify, target and reach customers. I also see further opportunities to be more customer-centric, truly understand customer needs and proactively provide tailored banking solutions.