Michael H. Tomalin

The US economic slowdown caused by the subprime crises, lower liquidity and high inflation are some of the major concerns of Today’s world. According to researchers from Merrill lynch, the US economic slowdown has not yet made its way to the rest of the world, but if you give it time, it will. How do you see the global economic outlook?

Well, it’s fairly gloomy at the moment. We are resilient in this part of the world, obviously, we have a high oil price which helps a great deal, and the economy is growing fast and firmly. But we are internationally active, so we can’t expect that if something goes wrong in the rest of the world, we can’t expect to be immune to this. But I think that overall Abu Dhabi is in a very good position, relatively, actually and absolutely, to weather the storm. I think the storm has got some way to go yet, there are more problems on the horizon and we haven’t seen the long-term effects of the slowdown of the American consumer, who has actually kept a lot of the world economy going, will find it more difficult to spend because the situation in the United States is not as good as it was. There is a limit to how far the interest rate can go down; the interest rate has come down a long way and they can’t continue to move it down. Particularly with the spectre of rising inflation, we see that in high commodity prices, we see that in relatively liberal monetary policy, which of course it’s required at this time because of the difficulties that banks are having themselves. The central bank has had to support the banking system. So, I think we could see some difficulty and turbulence ahead of us. Overall, long-term, I remain very confident about the global economy; in the short-term it’s going to be bumpy. In the UAE, though, we are relatively resilient to these international pressures.

How many years will it take for this to calm down?

Oh, if I knew the answer to that! I think we’ve got 3 or 4 quarters before we’ll start coming out of this. Things will come up in a different way and we’ve already seen an improvement in credit spreads, for instance. We still haven’t seen easing in the interbank lending; banks are still a bit nervous about lending to each other. We expect to see more losses reported amongst the global banks represented, but we’ve come to the end of that process. The bit that we haven’t seen yet is the full impact of the decline in confidence, the decline in credit markets’ impact on the US consumer, nor have we seen the full impact of much higher energy prices on countries like China. The Chinese economy – I have just come back from that part of the world quite recently – still continues to grow very strongly. It slowed down from double digit growth to about 6% or 7%. Still, we haven’t seen the full impact of all this on the whole world so quite a lot of these things are sort of a play out. So, the progress towards a more comfortable future will take place in small degrees. There’ll be some times when you’ll see very good news and sometimes it’ll seem to be going in the opposite direction. But overall, I don’t think that we’re facing catastrophe, I don’t think we’re looking at a replay of the 1930s, I think that we have much better tools, we have a much better understanding of the way international markets operate, a much better understanding of the processes of credit. Central banks and governments are clearly well aware of the risks. People looked over the precipice perhaps some time and saw what might have happened if some of the major national institutions were actually allowed to fail and these people looked over the edge and said “we’re not going to allow that” because the effect of it in markets generally would have been horrendous. So, that fills me with a certain amount of confidence that the regulatory authorities, central banks, and governments are tuned in to the fact that we do have some serious issues here that need to be handled. So there’s light at the end of this tunnel. Sometimes it’s difficult to see the light because the tunnel isn’t straight, it tends to twist and turn a little along the way.

We have recently seen a lot of discussions and attempts to regulate sovereign wealth funds. In your opinion, why are we witnessing these attempts? Is there any particular reason behind this?

Well, I think some people outside sometimes get a bit concerned about sovereign wealth funds but I’ll just make two or three points about this subject in general. The first obvious point to make is that sovereign wealth funds are the same; they operate in different ways. When we talk about sovereign wealth funds from Abu Dhabi, they have behaved, over a long period of time, in a highly responsible way. They have actually been, without doubt, a force for good; they have come in and purchased assets in difficult times and we saw that recently with the purchase of Citibank, which was very helpful to Citibank, and by extension the American banking system at the time that it was done. If you think of the Abu Dhabi funds, they’ve always taken a view that it’s in partnership with the existing management and with the hosts, with which they are treating. So, it’s a very positive approach. Not all sovereign wealth funds everywhere necessarily behave the same way. I think that as far as the ones from here are concerned, people can feel very comfortable. As time goes by, people are recognising that. I noticed that the German authorities recently made a statement that sovereign wealth funds are welcome, for instance. I think that, as this process unwinds, people begin to recognise that sovereign wealth funds are not a threat but an opportunity, and furthermore, far from being unhelpful, they’re actually positively helpful. If we don’t allow sovereign wealth funds to reinvest, how are we going to recycle? This vast amount of money that is rising because of the current price of energy and if we don’t recycle this money in some way then we are going to have much greater economic problems going forward. So, provided that it’s done in a responsible, considerate way, as it is, I don’t think people should be concerned about it and I think they should look at them very positively.

The commission instituted by the UAE government has recommended maintaining the dirhams peg without any change in the currency exchange rate against the dollar. How do you assess this decision, as many argue that the peg is hurting the economy? What is the impact on the banking sector in the UAE?

If you look at this peg, it has served the UAE very well for many years. I’ve just recently come back from Hong Kong where they also have a Hong Kong dollar peg. The points that were made to me in Hong Kong were that they have lived with the dollar; they’ve lived with the good times of the dollar and the not so good times. But the point that’s made, and that is made here as well is that if you move it once then you can move it again and again and again. So, it’s a very big strategic decision to move it. I think that the consensus here is that we won’t move it and it’s not for me to say that, it’s obviously for the central bank, the government and the administration to say that. However, my sense is that that is the conclusion that has been reached and I can understand how that conclusion has been reached. There has been some speculative build-up in dirhams as a result of this. Clients want to invest in dirhams and borrow in dollars, which has had some impact on the banking system in the UAE. I think that as people begin to appreciate that a reevaluation or a change in the peg is not imminent then those speculative pressures will unwind and the markets will become more normalised.

The UAE is soon to adopt the Basel II accord. In your opinion what are the challenges and advantages of this?

Certainly, there are a lot of challenges. We are already Basel II compliant; we report all our numbers in a Basel II compliant way. I think there are huge opportunities for us because it allows us to assess our risks in a very systematic way. Also, from the point of view of other banks looking at us, it means that people don’t necessarily use a rating approach towards the UAE; they can use an experience approach towards the UAE and towards the National Bank of Abu Dhabi. So, when risk managers in other parts of the world look at us for counterparty risk, they will see that the National Bank of Abu Dhabi has been an immaculate payer since it began 40 years ago. It’s got an immaculate 100% record. I think that that will have a very positive effect when people do their analysis on the way that we are treated. Under the current Basel I arrangement, because the UAE is not a member of the OECD, we’re treated as a non-OECD bank counterparty, which is a different rating from an OECD bank counterparty but this will disappear under Basel II. It’s a really arcane distinction as a matter of fact; whether you’re a member of a particular club or not. The real distinction ought to be: is the National Bank of Abu Dhabi a good risk or not? The rating agencies think we are, we are a AA rated bank Basel II, which puts us among the strongest banks in the world. Our counterparties think that we’re a good risk. So, Basel II will actually allow other banks looking at us to treat us equivalently to any other bank that is a AA bank anywhere else, whether in Portugal or Hong Kong or the United States. Because we’re a AA bank in a non-OECD country, the risk factor they have to apply under Basel I is a higher risk factor, which really doesn’t make much sense. So, Basel II is a substantial improvement. Basel II has other elements aside from that, it has supervisory elements, it has three pillars, and other elements in terms of the government, supervisory elements and market transparency. All these things accord precisely with the way the UAE is moving and the way the National Bank of Abu Dhabi is moving. So, it fortifies what we’re trying to do here at the National Bank of Abu Dhabi.

With 48 banks in the UAE, of which 21 are national and the remaining 27 foreign, the sector by many accounts is over banked. The merger of Emirates Bank and the National Bank of Dubai is setting the stage for consolidation. How will this consolidation impact the banking sector?

For the last 5 years, we have been the biggest bank in the UAE. We lost that position in terms of physical size although I think, in terms of return equity, we’re still more profitable than most of our major competitors. We’re now the second biggest bank in the UAE because you put bank number 2 and bank number 4 together and, inevitably, they became bank number 1. The trend towards consolidation is inevitable; I think it’s something that will come across the UAE. The UAE is coming up towards a $200 billion economy. It’s a sizeable economy, and yet the financial institutions in that economy are relatively small compared to the size of the economy. There are some different economies of scale as a result of that. In a global marketplace, which we are in now, one does need a certain amount of size if one is competing in the corporate finance space; in asset management and project finance clients expect you to have teams of experts to do various things in different areas, you need a lot of skills. These skilled people are hugely expensive and you need a bigger bank with a bigger cashload, a bigger core revenue base to support all these professionals doing their various things. So, it does make sense in the long term that there will be more consolidation of banks in the UAE. But having said that, we’ve grown our profits on a compound basis over the last eight or nine years by an average of 30% a year, which is one of the fastest growing banks in the world in terms of growth profits. You could say if you’re doing so well, why do you need to consolidate? So, the National Bank of Abu Dhabi has a sustainable strategy to build our business by investing wisely through our business, we have asked our shareholders for new tier 1 capital this year. We’ve actually built it and made it ourselves in that sense; maximising the returns for our shareholders. The way I see it, we have a strong, sustainable strategy to grow our bank organically and that’s the track on which we are now set. However, I think, long term, there are additional opportunities that the owners of these banks may wish to take in due course in order to create a larger bank in Abu Dhabi.

In this context, could we see something similar happening here in Abu Dhabi between NBAD and Abu Dhabi Commercial Bank?

I wouldn’t like to comment on any particular combination. This is an issue for the owners of the organisation, for the shareholders not for the management. All I can say is that I generally believe that, in the long run, consolidation would be a good thing. I’m not saying with whom or how. A second point is that we have a strong strategy to grow our business, we’ve proved that and we’ve grown our earnings by 30% compound over the last 8 years. This means that we’ve taken a bank that was making 11% return equity, 300 million dirhams in 1999 to a bank 875 million dirhams in one quarter – the first quarter – in 2008, which is by any standards remarkable. We did that without asking our shareholders for any new money and without consolidation. We have sustainable organic growth strategy that we can defend.

What is the essential part of this strategy? It seems to be working very well.

I think the key is putting the customer at the heart of the business. As a result of that, we have avoided toxic waste in our balance sheet, we don’t have any exposure to SIVs, CDOs or subprime. We used our cash balance sheet to support our clients that is one key ingredient. Another is that we’ve got a consistent strategy, we set out our strategy in 1999, we’ve obviously improved it here and there but the ingredients of that strategy remain the same. We knew what we wanted to do and we did it. Also, of course, the most important thing is that we are very lucky to be in Abu Dhabi. Abu Dhabi has a great growth story of its own. The government is very good and the country is stable and well managed from an administrative point of view. So, we’re sitting here in a country that is growing very fast. It’s like walking up an escalator that’s going up! If you’re walking up, the escalator is going to take you up anyway. So, even if you stand still, you’re going to go up in Abu Dhabi. However, if you start walking up the escalator as well, then you can get the kind of success that we have been able to achieve in the last few years.

How would you evaluate Abu Dhabi’s financial and banking sector compared to Dubai? What is the appeal of Abu Dhabi?

I think the appeal of Abu Dhabi is that it represents about 60% of the economy of the UAE. It’s clearly where the money is made because this is where the dominant energy sector is, it’s also the capital city. I think Dubai is more of a trading city and it’s done a fantastic job and we have good businesses in Dubai; about a third of our UAE business is in Dubai, which more or less reflects the balance of the economy. We have several branches in Dubai and we have an outstanding business model and we’re delighted to be there. So, I think the cities actually complement each other very well and the Dubai story is a very exciting story, we’ve seen that over the last five to seven years. I think we’re going to see a very exciting story here in Abu Dhabi. The plans for Abu Dhabi 2030 are very ambitious, even if only 70% of them are achieved – and we hope 100% will be achieved – then Abu Dhabi will be transformed into one of the great cities of the world. We’re very lucky and privileged to be headquartered here. In terms of the banking scene, the fact that Abu Dhabi is larger part of the economy, the centre of government and the centre of the energy industry – particularly in this time of relatively high energy prices – there is an accumulation of capital in Abu Dhabi, which gives Abu Dhabi a particular position – especially in the asset management area, the management of assets, because we have many big companies such as Mubadala, Taqa and the newly-formed council, who have great ambitions to expand their investment base across the world. So, banks are here to serve those ambitions. We are also building a new airline, Etihad. As the national bank we want to support the national airline and there’s a tremendous opportunity for building that relationship traction with all these emerging businesses in Abu Dhabi.

Is this how National Bank of Abu Dhabi fits into the overall strategic plan of Abu Dhabi 2030?

We are a listed company. We are 70% owned by the Abu Dhabi Council and 30% owned in the stock market. Foreigners are free to invest in our company and indeed they do. In fact, I’m off to Paris next week to talk to a group of European investors who are looking at our stocks. There’s a limit as to how much they can buy but they’re a long way off the limit now. So, we see the National Bank of Abu Dhabi as part of the furniture. This year we celebrate our 40th birthday; we were founded on February 13 1968 and it’s perhaps worth reminding ourselves that when the bank was founded there was no national currency, the UAE didn’t exist and the first set of accounts drawn up with the bank were drawn up in Bahraini dinars. All this change happened in 40 years, it was very different here. Abu Dhabi is one of the most remarkable stories of economic and societal development in the history of mankind, as well as Dubai and the UAE as a whole. It is an amazing transformation that has been done with a huge amount of success.

NBAD’s net income rose by 45% to 875 million dirhams ($238.3 million) in the first quarter of 2008, compared to 600 million dirhams last year. What ability makes you perform better than last year?

Well, the bank is bigger and it’s all part of our plan to grow the bank at a sustainable pace over time. So, we set out a plan in 1999 to grow the bank from 300 million dirhams to a billion dirhams profit within five years. Actually, in 2004 we were the first bank in the country to achieve a one billion dirham profit level. Then, from that point on we want to grow the profits by at least 20% per annum and we’ve actually substantially exceeded our target. So, the bank gets bigger as the economy is growing. The UAE economy is growing, in money terms, by around 20% a year so, if your relative position remains the same, you would expect your profits to grow. If your profits are not growing in those sorts of orders of magnitude then you are actually slipping behind your peers. So, we have done better than the market but the whole market has done very well. We’re up 46% and several banks are up 20% or 30% as well. The National Bank of Abu Dhabi is currently the largest bank in Abu Dhabi.

What effect do you think National Bank of Abu Dhabi has had on Abu Dhabi, both in terms of direct and indirect impact? How do you assess this?

I think it’s probably fair that the customers be the judge of that. However, what we try to do and what we hope we succeed in doing, at least in part, is provide a financial way of supporting Abu Dhabi’s ambitions by providing excellent service for our customers – corporate customers and individuals – by flying the flag for Abu Dhabi and the UAE around the world. We have a substantial business outside the UAE. We are one of the largest banks in Egypt, for instance, where we have almost 25 branches. We also have 6 branches in Oman, we’re in Bahrain, Kuwait, London, the United States, and Paris. Through these offices, we’re a bridge into the UAE story for them. So, in Paris, for instance, at our office in Champs-Elysees they talk to French companies about joining the UAE and vice versa. So, UAE companies who want to go to France will come to our office, and French companies who want to come here will come to our office. So, I think we support Abu Dhabi and the UAE by being one of the largest financial institutions and hopefully making a contribution to the overall development of the economy and society. Regarding corporate social responsibility, we were the first bank to introduce an explicit corporate social responsibility policy, and I understand there are only four listed companies in the UAE that actually publish their corporate social responsibility policy. I’m proud to say that we’re one of those. We believe that we are part of the fabric of Abu Dhabi’s society. We put great emphasis on Emiratisation, which is very important to us to train and provide the best careers to young Emiratis who want to develop a career in banking and finance. We’re setting up a National Bank of Abu Dhabi training academy for developing these ideas in alliance with top class business and banking schools around the world. We contribute financially to a large number of good causes in the country. So, we like to be a good citizen and spend a good portion of our profits every year on our home – which is not just Abu Dhabi but other parts of the Emirates and of the world.

What would you like the National Bank of Abu Dhabi brand to be associated with in the future?

I want it to be associated with the UAE and Abu Dhabi, obviously that goes without saying as this is where we come from; our base. I want it to be an ambassador for the UAE, which is a remarkable country. I want it to be a brand for the capital city of that country. I want it to be consistent with all the things that make the UAE and Abu Dhabi so successful; an open-minded, liberal approach but very mindful of its heritage and understands where it comes from, a good sense of its history but also a good sense of where it wants to go. So, embracing the best of the world outside but also maintaining its tradition. That’s not very easy thing to do but, as far as we’re able we will support Abu Dhabi because it fits in very much with the way I think about this bank. It has a huge history, it is part of the DNA of Abu Dhabi, and I want it to be part of the DNA of Abu Dhabi in a very positive way and making a very positive contribution. I want it to also represent things like financial excellence. I want people to look at the National Bank of Abu Dhabi and think of it as excellent; excellent in its service. To give you an example of that, we are currently holding a risk conference, and we’ve been very active, not only in the UAE but regionally on the risk side, I think it’s fair to say we’re on the forefront of these things; that we are cutting edge in terms of Basel II compliancy, in terms of portfolio management. Also, I hope it will contribute positively to the overall development of banks and banking institutions across the MENA region. So, I want Abu Dhabi and the National Bank of Abu Dhabi to be seen as leaders. I want to show that we have ambition, which is to be the largest bank in the Arab World by 2012. So, we have a lot of work to do. It’s all part of ambition driven off a very strong, clearly-delineated and very well-understood strategy. We want to lead by example in things like integrity – 100% integrity, and transparency with our customers; a can-do attitude – we can do it, we will do it; leadership; respect – treating people as we wish to be treated ourselves, which is a very important aspect and a tradition of this country; and passion – the passion to drive the National Bank of Abu Dhabi forward as a great financial institution.

You also mentioned that you will be doing a lot of networking in the United States and in Paris. What is your international strategy?

Our plan by 2012 is to be one of the largest banks in the Arab World and, of course, our expansion also has to reach outside the Arab World. The Arab World is, in fact, a fully functioning part of the modern world economy. So, we need to have our bridges into and businesses in Europe, in the United States and in Asia. We’re expanding internationally within the Arab World. We’re digging deeper in markets like Egypt and looking at new markets like Libya and Jordan, where we’d like to get more involved. Outside our region, we’re also looking to extend our networks into Asia, into cities like Hong Kong, where we hope to open a branch later this year. So, we want to be seen by the outside world, people looking at our region and all the expansions that are going on here, as one of the leading banks that they would want to use as a bridge into our world and we need that bridge to be globally active and have a strong international franchise in support of that.

Are you also looking for some strategic international partnerships?

Not in the formal sense of them owning part of us or them doing something for us, but rather in the sense of supporting them and their ambitions. We do have partnerships with a Japanese bank, an Italian bank, and other banks, which are not equity partnerships but strategic partnerships: they look after our clients in their part of the world and we look after their clients in our world. So, they are a kind of network management partnership where we have a close relationship with those banks. We’re actively engaged with financial institutions around the world, we feel that we can treat pari passu on level terms with Morgan Stanley, Goldman Sachs, Deutsche bank, Citibank, HSBC, Barclay’s and so on. We work with these banks as partners. So, sometimes they use our skills to help them and sometimes we use their skills to help us. We feel that we can probably manage money based in this region better than somebody based in London and vice versa. That’s why we manage their money here and they manage our money there. That is how our partnerships work; we are not true partners, rather than partnerships where there is a deficiency and we actually go to another bank to fill that hole for us; we’re not doing those kinds of partnerships.

What is your personal ambition? What would you like the National Bank of Abu Dhabi to become?

I’d like it to achieve the objectives we’ve set out for it. Setting out the vision is the easy bit; it’s the execution that’s the hard bit. I would like to hope that in the years ahead we will achieve the goals we’ve set for ourselves.