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UAE banks tighten their belts.

Summary: Farhad Irani, Executive Vice President, Head of Retail Banking Group, Mashreq discusses the UAE's financial situation and the challenges and opportunities ahead for banks

Banks in the UAE are having to tighten their belts, according to Farhad Irani, Executive Vice President and Head of Retail Banking Group, Mashreq, as the entire UAE economy begins to head into a consolidation phase. One of the largest areas of risk is in the SME fold, with Mashreq CEO Abdul Aziz Al Ghurair reported as saying at the UAE Banks Forum in November, that there will be $5 billion worth of skips in 2015, according to Reuters. Irani believes that this will ultimately be closer to $7.5 billion. Banks in the UAE are currently working together to try to stem the number of small business owners fleeing the country with unpaid debt, in a re-run of 2008.

"I was at the UBF conference recently and was talking with a CEO of a national bank and we were talking about SME escape zone--how long will the tail [of the default] be and it is anyone's guess. My sales force says it will end by Q1 2016, my Head of Risk says it will end by the end of Q3 2016--my Head of Risk is more practical. It is big, it is a $7.5 billion hit to the banking industry. I think the whole SME book would be $70 to $80 billion, so that [skip] is serious in any industry," said Irani.

The number one go-forward challenge is getting the SME skips out of the way, hoping that the landing in the aftermath of this will be soft, and that the UAE Government will find its ways to continue pump-priming, creating economic value, employment and buoying up the economy; because 60 to 70 per cent of the country's GDP is still Government-controlled. It is also controlled indirectly through property projects that the Government sponsors. The large infrastructure projects, the great big employment generators, around which the private enterprises and small businesses flourish. That should continue, according to Irani.

Another problem currently facing the banking sector is overleveraged retail lending and the deepening of debt. In previous years, the banking sector was less transparent and money could be fed into overleveraged areas, but the introduction of the new Al Etihad Credit Bureau and various regulations suggests there will be no banks able to help individuals in financial distress because the banking system is now completely transparent.

The good news is that for Mashreq, 2015 will be a very good year notwithstanding the slow-down, partly because of the liquidity in the wealth sector. The Bank made more profit than in 2014 in the retail banking sector, in spite of a big gap on the wealth securities front. However, the year has not been without its challenges for Irani.

"My biggest challenge has been the nature of this market, brought round by entropic behaviour. That generates huge challenges in terms of building loyalty, continuing relationships, hiring people that are here for good, and tackling fraud," said Irani. "Entropy is such a big issue in this market-- the UAE get-rich syndrome--the get smart and rich syndrome--'bend the rules and don't get caught' is a regular feature that I have not seen in 32 years in other markets."

Irani stated that it is becoming difficult to file police notifications for fraud, bounced cheques and fraudulent financial transactions, because of the backlog of financial cases that the police are facing. Staff fraud is also a problem for banks in the UAE*. According to Irani, these are not sophisticated cyber-frauds, but rather basic fraud; fudging of documents, hand in the till at teller counters, the stamping of documents incorrectly saying that originals have been seen and that the ultimate beneficiary has been met in person.

"There has been an increase in fraud in the country in the last 12 to 15 months. Definitely an increase," said Irani.


Despite the current challenges, Irani doesn't think the economic correction in the UAE will be cataclysmic. He believes that the top line growth for banks will be in the high single digits and costs will be almost flat with a two to three per cent growth. He predicts that the correction will be benign because there are certain parts of the economy that will give and certain parts that will take.

"Some provisions will be created for the SME sector, but I think among customers the borrowing appetite has dropped dramatically, which is good because a) the Al Etihad Credit Bureau controls wasteful expenditure b) there is not much demand to borrow funds. Where was the money going originally? Business, trade, property--our mortgage business has come down quite dramatically; almost 70 per cent of our mortgages are refinancing of existing property-- it used to be 10 per cent last year," said Irani.

Personal loans can be taken out at a five per cent interest rate in the UAE, and the money may be used as down payment on a house or apartment in India, for example, where a local mortgage is eight to 14 per cent. That traditionally lucrative lending market is fairly flat at the moment, according to Irani. The credit appetite amongst target markets will also drop dramatically, Irani predicts, and that will result in banks having to get very aggressive on pricing, the most disastrous part of all competition strategies. Lending will be down, lending will plateau out, and the HNWI sector will take up the gap.

"Bankers will begin to realise big is not beautiful: you don't need to have huge branch networks, digital, mobile, internet will become mainstay, there

will be a lot of consolidation, maybe some banks will merge, some banks will exit. But the big banks will get stronger because the situation will slow down and when that happens, there is always quality and anything that is owned by a large family or the Government will benefit. That is my prediction," said Irani.

Transactional retail banking and the retail banking of yesterday--which was lending-oriented with 75 per cent of revenues coming from credit cards and personal loans--is over, according to Irani. Credit spreads, delinquencies, costs of operation in the old transactional lending retail bank, challenge the entire model. Three and a half to four per cent interest was the old model, effective next year a bank may earn one per cent interest, meaning that there is 3x reduction in the profitability of that business. Compound that with Basel III and IFRS capital adequacy requirements, and banks will have a bloated balance sheet with huge capital adequacy requirements untenable for shareholders to continue with that model.

"Where do we go from here? Model-wise, what we saw happening in the last two years is a move from transactional banking to SME services. SME was a new frontier. In the last two years I reckon $35 billion SME assets have been put into this industry and it helped the economy grow. The Governor of the Central Bank of the UAE [HE Mubarak Rashid Khamis Al Mansouri] talked about the need for banks to continue engaging with SMEs because that is the engine of growth. But, SMEs in free trade zones face compliance issues, too much exposure, no local trade, bubbling of inventories, fictitious inventories etc. this suggests that the opportunity that is there is finite and the next wave I believe is wealth," said Irani.

Wealth should be a good enterprise for banks going forward. According to Irani, if Dubai gets it right, the instability in the surrounding region makes this a beautiful opportunity to accumulate, manage and have succeeding generations engage in that wealth kept aside for families in the Middle East. Therefore the DIFC, the English Common law, the security is essential in engaging with the wealth segment. Security is paramount-- anything that happens to security would be disastrous. The stability of the Government is also critical.

"In the UAE there are no political issues, there are no trade unions, and this is very good for the creation of a wealth enterprise. The country's safety, healthcare etc. I think all these things go well for the country," said Irani.

Farhad Irani

Farhad Irani has been with Mashreq for four-and-a-half years and is leaving the UAE to focus on family life in Australia. Irani gave Banker Middle East an overview of his outlook for the UAE economy for 2016 and beyond and the transformation the banking industry is facing, shortly before his departure from the UAE.

Irani, during his time at Mashreq, was instrumental in taking the entire retail banking segment at the Bank from market position at number eight or or nine in terms of size, and growth momentum to number four or five depending on the product group.

"Our balance sheet is one third the size of the state-owned banks, but in terms of profile, innovations, service and engagement, I dare say we are punching well above our weight class," said Irani.

During the four and a half years that Irani was been running the retail division the Bank has seen huge growth in its financials, customer footfall, balance sheet growth, the number of products per customer, service scores, and employee engagement scores.

Farhad Irani says that the UAE SME sector will see skips of around $7.5 billion.

Farhad Irani says that UAE banks should look to the HNWI segment for growth in 2016 and beyond.

In the UAE there are no political issues, there are no trade unions, and this is very good for the creation of a wealth enterprise.

Farhad Irani is leaving Mashreq after four and a half years at the helm of Mashreq's retail banking.

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Publication:Banker Middle East
Geographic Code:7UNIT
Date:Dec 31, 2015
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