OBG talks to Rick Pudner, CEO, Emirates NBD

Interview: Rick Pudner

How has the cost of funds for Dubai’s lenders changed over the past several years?

RICK PUDNER: Following the global credit crisis in 2008 and subsequent economic downturn, access to international capital markets was quite limited and relatively expensive, forcing banks to deleverage by focusing on deposit gathering while concurrently restricting new loan underwriting. This clearly intensified competition for deposits and drove up pricing for time deposits in 2009 and 2010.

By 2011 most UAE banks had deleveraged sufficiently and the sector loan-to-deposit ratio reached a more sustainable level of 100%, while EIBOR rates began to decline at the same time. This enabled deposit pricing to fall and banks to gradually focus more on underwriting. In addition, towards the end of 2011 and beginning of 2012, investor sentiment towards the GCC region and risk appetite generally improved, allowing greater access to international capital markets at more reasonable prices.

To what extent have banks been affected by their exposure to government-related entities that have been classified as impaired?

PUDNER: The classification of government-related entities has clearly had an impact on profitability through the direct impairment provisions taken, as well as the ongoing carrying cost for non-performing or restructured loans. In the context of this macroeconomic backdrop, the UAE economy has been relatively resilient with a strong, healthy banking system and liquidity levels, as well as an average of mid-single-digit operating profitability.

What factors do you see as the most important in terms of asset quality going forward? On what basis can the Dubai market be viewed?

PUDNER: We are now more than three years past the global credit crisis of 2008-09 and have already experienced the worst of the impact in terms of asset quality. Much progress has been made in renegotiating and restructuring many of the government-related and private sector entities to ensure corporate deleveraging occurs in an orderly manner with relatively limited shocks to the banking system.

Going forward, Dubai is well placed for continued growth as it leverages its status as an important trading and financial centre for the region, and this growth will support the deleveraging process. While formation of non-performing loans is expected to continue in 2012 and possibly 2013, the rate at which this occurs will likely slow.

How do the business habits of family-owned conglomerates and their levels of debt affect the banking sector, especially considering that most of their debt is financed locally?

PUDNER: Prior to 2008 many family-owned conglomerates in Dubai took advantage of the buoyant economic environment to diversify their businesses into non-core areas, and some invested excess cash flow in real estate and equity markets.

As these markets began to correct post-crisis and economic growth slowed down considerably, many of these businesses were faced with deteriorating asset valuations and declining cash flows. As a result, many of these family-owned operations started refocusing on their core businesses, divesting non-core businesses and renegotiating debt facilities with banks to align repayments more closely to their underlying business cash flows.

In most cases, this strategy has been effective in managing the debt burden of these family-owned businesses, while limiting the impact on the banking sector, particularly as the transport, logistics, tourism and trade sectors in Dubai recovered strongly during 2010 and 2011. Over this period, corporations focused on deleveraging, applying cash flow to repayments and limiting their new borrowings, which in turn subdued banking sector loan growth.