RakBank expects income not lower provisions to boost 2019 earnings

Exclusive: The lender plans to issue a bond by the beginning of the second quarter

Rakbank CEO Peter England: 'First quarter net income rise a result of the bank's diversification strategy.' Jaime Puebla / The National

The National Bank of Ras Al Khaimah expects to post higher earnings rather than just lower provisions in 2019 compared with last year and aims to issue a bond of about $500 million, its chief executive said.

Rakbank, which reported a 13.2 per cent net profit increase for 2018 thanks to an 8.5 per cent drop in provisions, expects to boost its income as it continues to diversify its loan book composition, Peter England told The National. Fourth-quarter net income also surged 20.3 per cent on higher non-interest income and lower provisions.

“We are in a very difficult business environment, but I think the work we have done in the last three years should put the bank in a very good stead to hopefully perform even better than in 2018,” said Mr England.

Rakbank has been cleaning up its loan book, which had a big exposure to struggling small and medium size businesses, prompting it to increase its provisions against bad debts.

Although it still specialises in extending loans to small businesses, it has got rid of high-risk lending to such enterprises and started to grow wholesale banking and lending to financial institutions to diversify its balance sheet.

For example, its retail customer assets as a percentage of the total dropped to 53 per cent in 2017 from 69 per cent in 2014 and are forecast to decrease further to 43 per cent in 2020.

Meanwhile, wholesale banking customer assets, which made up 4 per cent of assets in 2014, grew to 13 per cent in 2017 and are forecast to reach 19 per cent of total assets by 2020.

Financial institutions customer assets, which did not exist in 2014, have increased to represent 12 per cent to the total in 2017 and are projected to reach 16 per cent of the total in 2020.

The bank still expects its provisions to decline further in 2019 but not as much as the 8.5 per cent drop achieved in 2018, Mr England said.

“We have done a lot of work in the last three years to look at the composition of our loan book and move from very high risk lending to balancing it up with some wholesale bank and some financial institutions lending and so on,” he said.

The bank, which saw expenses increase 2.9 per cent year-on-year in 2018, expects a lower percentage growth this year, he said.

He added that the bank does not expect to benefit much from the US Federal reserve’s plan to be “patient” with interest rate hikes this year, but the U-turn in policy will help the UAE economy because the dirham is pegged to the dollar and the Central Bank in the Emirates mirrors the Fed’s moves.

The bank is not actively looking at mergers or acquisitions despite the flurry of deals in the UAE and the Arabian Gulf region as a whole, said Mr England.

“If you are a smaller bank, you need to have a reason for existence,” he said.

“Whilst we have grown our wholesale business and other areas in the business, that has been in order to balance our risk and help us grow our balance sheet. The heart of what we do is still largely small business and consumer banking.”

The bank, which has issued an $800m bond under its $2 billion Euro Medium Term Note Programme, plans to tap the bond markets between the end of the first quarter and the beginning of the second quarter to repay the bond maturing in June.

Rakbank has already paid about $100m of the bond and is looking to issue a benchmark bond of a size of about $500m. The remainder will be paid from its own sources, he said.

“We have diversified our funding sources quite significantly over the last few years, so we will look at a smaller amount [for a bond] and pay the amount in June,” said Mr England.