UAE, RAS AL KHAIMAH - Economy
Before joining RAKBANK, Peter England spent seven years as the head of retail banking at CIMB Bank Berhad, where he managed CIMB Bank Malaysia’s business lines for individual and small enterprise customers in Malaysia, Singapore, and Cambodia and worked on developing a wide range of conventional and Islamic products and services. England has over 33 years of working experience in all aspects of retail banking and wealth management, and was based in Asia for 16 years after a banking career in Australia that spanned 17 years.
Undoubtedly 2016 has been a very difficult year for RAKBANK. Not only are we the largest SME lender in the country, but also close to 30% of our total book through 2015 was exposed to the SME segment. Even our retail portfolio had quite a lot of SME-related lending in it, for example personal loans to SME employees and auto loans to owners of SMEs. It has had a significant impact on our numbers with loan loss provisions rising sharply for 2016, as was the case in 2015. This was a deliberate strategy of the bank implemented around 10 years ago to move into SME lending as its predominant driver of profit. This is a strategy that has benefitted the bank for many years, but over the last two years SMEs have been running away from the country at a rate never witnessed before, even during the global financial crisis. Many small business owners were simply over-leveraged and, when economic activity slowed, they could not afford to repay their debt. With the lack of bankruptcy laws, the typical approach was to leave the UAE and perhaps work things out with the bank from their home country. Two years ago RAKBANK set out on a strategy to diversify its income base and of course it is difficult to do this in the midst of an epidemic within the SME segment, but our diversification strategy is beginning to work. That said, it will not be quick enough to make up for the challenges in the SME sector in the short term.
It is still too early to comment in terms of how effective it will be. My understanding from discussions with various experts is that the law is extremely well drafted. The challenge will be in the implementation because it is new and the technical and intellectual infrastructure needs to be developed, and the whole process, including the court system, needs to be aligned. It will take at least a year until it becomes effective in practice, but at least it is a well-drafted law by all accounts and has all the fundamentals. It is just a case of the system catching up and getting in line with it, but its implementation is certainly welcomed by RAKBANK.
RAKBANK, by its nature, will always be predominantly a retail and small business bank. However, if we have a broader and larger balance sheet that is more diversified than our current one, then we should be able to do better throughout the economic cycles. A bank may not always maintain the same level of return on assets or equity, but generally in the longer term we should see a more stable profit position. One of the things we decided was to move back into wholesale banking. Our view is that, by YE2019, when our next three-year strategic plan commences, wholesale banking should represent about 30% of our book, compared to 8% at YE2015. We have also moved back into banking in Ras Al Khaimah over the last two years and have become more active in the wholesale and retail banking spaces because they hold good opportunities. We have the ability to meet people easily and it is only proper that RAKBANK should be the primary Bank in Ras Al Khaimah. It is good business and we have a natural advantage that we want to capitalize on now. The other big push for us is into mortgages. In the past our strategy had been high-risk, high-return lending, and clearly mortgages and wholesale banking do not fit that philosophy. The margins are lower and therefore growth is slower. Another by-product of that is we now require a larger balance sheet to achieve a similar level of return. Having said that, RAKBANK is still the best-capitalized bank in the country.
Islamic Banking in the UAE has to a large extent been more of a complementary offering. It has tended to be Islamic banks or banks offering Islamic services that match what they offer in the traditional banking space. We see an opportunity to develop unique products in Islamic Banking; for example, RAKBANK is about to launch a new Islamic product that has not been done in this market before and is something we do not offer in conventional banking. Even in the conventional space we have recently launched a new mortgage product and we will be developing an Islamic equivalent to in order to service all our customers.