Andre Sayegh, the chief executive of the Abu Dhabi-based lender FGB, is prepared for visitors who might ask him about whether or not he is worried about the more than 50 per cent drop in oil since last June.
Pulling out a 10-year chart for the price of crude he tracks the unpredictable swings with a finger and points out that in the 30 years he has been in the this country it has been more less the same.
“It’s a fact that the price of oil has dropped,” he says at the bank’s headquarters in Abu Dhabi. “Is it the end of the world? No.”
It is difficult to disagree with his argument that the economy has become less reliant on oil and that a dip in the price of crude will not impact the FGB’s activity this year. Still, beyond next year, it is too difficult to predict whether low oil prices will become a new reality in a part of the world that has boomed because of its abundant energy reserves.
“A commodity is not necessarily a straight line,” says Mr Sayegh, who is of Lebanese origin and a citizen of Canada. “There is volatility. Historically there is volatility and volatility will continue. The UAE is one of the countries that are very well positioned to overcome the drop in oil for many reasons.
“The economy now is very diversified and oil represents a smaller percentage of the GDP of the country and the economy is investing in areas that will have benefits going forward,” he says, adding that education and health care are among two industries in which the UAE is developing a reputation for regional excellence.
Mr Sayegh can speak with some authority on economic shocks after FGB came out of the last global financial crisis in 2008, during which oil also lost half of its value, with flying colours and has in recent years become the country’s most profitable bank.
It earned profits of Dh5.6 billion last year, a touch ahead of National Bank of Abu Dhabi (NBAD) at little over Dh5.5bn and Emirates NBD at just over Dh5bn.
Analysts say it reached the top largely by lowering its costs, putting less of a premium on its branch network and more on developing relationships and making its salesforce more effective. It has also realised that it cannot survive on loans alone and has consequently beefed up its fee income business from underwriting bonds and securities, displacing HSBC to become the nation’s leading arranger of syndicated loans. It has also expanded its footprint abroad in recent years.
As a result, the lender became the darling of stock analysts and treasured by investors for its ability to attract individual customers that give banks high profit margins and consequently higher dividend payouts. Individuals have higher rates of default than corporations and therefore are charged higher interest rates.
“FGB’s strength is the retail franchise,” says Jaap Meijer, head of financial services at the Dubai-based investment bank Arqaam Capital. “About half the earnings come from retail customers and they have a different distribution model that has much fewer branches.
“The efficiency is very solid with a low cost-income ratio. On the corporate side it has been bolstering its product capability substantially building on FGB’s strong relationships with a key corporate accounts.”
The slump in oil, the lifeblood of several regional economies, has made it more urgent for banks to entice individuals to take on debt as many corporations that rely on hydrocarbons to fuel their business will suffer a slowdown this year. The UAE is the eighth-largest producer of oil in the world and the Federal Government relies on it for more than 60 per cent of its budget.
So far, however, governments in the region have not indicated that they will reduce spending on infrastructure. Banks, nonetheless, seem keen nonetheless to hedge their bets through foreign expansion, although for his part MrSayegh says FGB’s global expansion is unrelated to lower economic growth forecasts back home.
Local banks have been expanding for several years now outside their home markets amid the compressing margins that they receive for giving out loans as interest rates inch lower. Emirates NBD recently bought the Egyptian assets of the French bank BNP Paribas while banks including FGB and NBAD, the biggest UAE bank by assets, have been increasing their activities in Asia to take advantage of increasing business ties between this country and emerging markets within what NBAD’s chief executive Alex Thursby has dubbed the West-East corridor.
Mr Sayegh says FGB may be interested in establishing a presence in Egypt and is keen on securing a licence to operate a representative office in China by the end of this year. The bank also has representative offices in London, Seoul and Hong Kong, and branches in Singapore and Qatar. And its representative office in India is being upgraded to a branch.
As well as economic growth rates above the global average in recent years, low interest rates have given a boost to banks as the volume of loans increase. Because the UAE, like most other Arabian Gulf countries, has a currency pegged to the US dollar, meaning it has been following the loose monetary policy of the US Federal Reserve, creating a situation where the country’s outsized economic growth appeared to be at odds with the low interest rates that have been in place in the United States to kindle growth.
“Even an interest rate increase by 50 basis points or even 100 basis points is not necessarily something that will block growth,” says Mr Sayegh. “We’re not talking about absolute high rates. We’re talking about, by historical terms, they are still low interest rates. For the coming foreseeable future. Even if they edge a little bit up, they are still on the low side. So this won’t stop the economy from moving ahead.”
While it has bolstered volume at banks, it has reduced the net interest margin that banks get, making bolstering businesses that rely on fees such as underwriting bonds, securities brokerages and asset management more important.
Despite the downgrades in economic growth forecasts, analysts are upbeat about bank profitability, and among the highest dividend payers is FGB.
FGB distributed Dh3.9 billion on its 2014 earnings and is expected to pay out the same amount next year, according to Arqaam data.
The bank’s next act will be more challenging as it expands internationally in parts of the world its local peers are also targeting. And at home, there are more than 50 banks serving a population of 9 million people. If interest rates remain low and loan growth slows banks will have to become more imaginative with their product ranges.
“I think one of the challenges FGB will face is maintaining net interest margins going into 2015,” says Shabbir Malik, a Dubai-based bank analyst at Egyptian investment bank EFG-Hermes. “One, because there is competition, two because rates are still low and liquidity in the system is still relatively comfortable. There is obviously challenges to net interest margin and the bank will try and minimise net interest margin compression in 2015. Secondly, in terms of loan growth it depends on how the economy performs. Generally we expect for a sector as a whole that loan growth is likely to slow down.”
But Mr Sayegh says he relishes the challenge, easier to say perhaps, given his bank is in pole position.
“It will make it even tougher in a sense that we like this because you have to always be on your toes to perform and outperform and this is what’s giving the economy a competitive edge over others,” he says.
“An economy where there is little competition, you tend to sit back and say what. But here this really makes you think more and be innovative.”
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