While the chief executive of the London-based multinational lender Standard Chartered is facing a crisis of confidence following two years of waning profits and a sagging share price, the head of the bank’s UAE business is upbeat about its prospects in this part of the world.
Despite the recent drop in oil, the UAE, the region’s second-biggest economy, remains a bright spot in a world where growth is slowing, according to Mohsin Nathani. The bank is also well positioned to profit from trade flows in and out of Asia and Africa, home to some of the world’s fastest growing economies, he says.
“The UAE is not only important to the Middle Eastern region,” says Mr Nathani, who became the chief executive of Standard Chartered’s UAE operation last year. “From the global perspective, it’s in the top five among 75-odd countries. Number five in terms of revenues and number four in terms of operating profits. It’s a very important market for us and as a result in this part of the region, it’s very critical.”
Still, it would need a huge push from the region to pull Standard Chartered out of the morass it is stuck in as a result of its focus on emerging markets in Asia, the Middle East and Africa. The bank said last month it would end its institutional cash equities, equity research and equity capital markets activities as part of a series of cuts, announced in November, designed to save US$400 million this year.
It also said it expected to cut 2,000 jobs across its global retail operations, after having cut 2,000 jobs in the final quarter of last year.
Profits for 2014 are expected to fall for a second successive year and losses from bad loans could continue to rise this year as some of its $61 billion of commodities loans sour. Analysts say that could leave the bank needing to raise cash or shrink its lending to improve its capital strength.
“There’s no silver bullet here, the company has to adjust its strategy and it’s also heading into choppier waters on the macroeconomic front,” says Joseph Dickerson, analyst at Jefferies. He estimates impairment losses will rise to $2.7bn this year, up 68 per cent from $1.6bn in 2013.
In the third quarter of last year, the bank reported a 16 per cent decline in third-quarter pretax profit to $1.53bn from a year earlier. There was not a breakdown for Middle East profit. The bank will report its 2014 full year profit next month.
More than 90 per cent of the bank’s business comes from emerging markets and growth in these commodity-rich parts of the world has slowed in the past couple of years as the price of everything from oil, steel and palm oil collapses amid low inflation, currencies weaken against the strengthening US dollar, and deficits widen. Loans to businesses that are sensitive to the fluctuation of commodity prices also have not helped.
Not only is Standard Chartered’s core business of giving out loans suffering, the bank has also been battling regulatory woes. In August, the bank was fined $300m by the New York department of financial services for suspicious transactions involving clients in Hong Kong and the Middle East.
As a result, Standard Chartered announced in August it would close the majority of its small and medium-sized enterprise (SME) accounts in this country, prompted by higher compliance burdens and a squeeze on profitability due to intensifying competition with local banks.
All the bank’s troubles have led the its biggest shareholders to demand the ousting of the lender’s chief executive Peter Sands, who has been in the role since 2006. Those investors are not happy that the London traded shares of Standard Chartered have dropped 21 per cent in the past 12 months.
By contrast in the UAE, banks have come out of the financial crisis of 2008 in somewhat better shape and the regional operations of other international banks in the region such as HSBC have in recent years also reported buoyant earnings from the Middle East.
After the financial crisis and the Arab Spring of 2011, governments in the region spent heavily on infrastructure to stimulate economic growth and banks were among the businesses that benefited the most.
Starting from 2012, bank earnings began to improve as lenders cleaned up bad loans from the heydays before the crash when credit growth advanced to a record 41 per cent in 2008.
Last year, loans and advances grew at a rate of about 9 per cent, according to analyst estimates.
As corporations struggled to clear bad debt, banks focused their energies on individual customers and SMEs as ever decreasing interest rates made it ideal to get a loan to buy everything from cars to homes. That demand was reflected in the growing profits of the banks. Beginning in 2013, they started to report record earnings, a trend that repeated itself last year when the UAE economy grew by more than 4 per cent.
This year that looks more unlikely as economists lower growth expectations for the country.
The drop in the price of oil, which plunged up to 60 per cent since last June, will slow economic growth in most of the Arabian Gulf. Standard Chartered has forecast that in the UAE, GDP growth will slow to 3.8 per cent this year from 4.5 per cent last year.
Low oil prices will be a challenge to economic growth in the UAE but Mr Nathani sees some silver linings. A slowdown in the property market has made it more affordable for end users to buy homes. It has also brought down the cost of living and made the country a more attractive place to do business. It had risked losing some of its lustre amid the spiralling costs and rising inflation.
Last year, as home prices rose, demand for mortgages began to cool off a bit as end users found it difficult to come up with the deposit needed to secure a mortgage. That caused concern among many officials that the UAE would no longer be a competitive place to come and do businesses in.
“The more affordable a place is, the better it is for its economy,” says Mr Nathani. “Individually, someone will make less of a gain or someone will have to pay more, that’s beside the point.
“It helps the economy and we’ve seen this in so many other markets, including in the UAE five or six years ago when the prices really went up and then corrected. One of the reasons it cooled is because it doesn’t become affordable and the cost of doing business goes up.”
As well as feeling the pain from lower oil prices, banks may also see a slowdown in the first couple of months of this year of loans to individual customers as the nation’s credit bureau gets into full swing.
The Al Etihad Credit Bureau has compiled a credit history of customers at all the of the country’s financial institutions, allowing banks to see how indebted their clients are.
“There will be a temporary blip in loan volumes once the bureau becomes operational but medium to long term, it’s the best thing that can happen,” says Mr Nathani.
“And we’ve seen it in other markets. The problem is today that there are many people who have higher debt than they should have,” he says,
“So once the bureau starts, these people will all get capped. So the applications that will come to the industry will have some rejection rates.”
mkassem@thenational.ae
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