Gulf Bank could arguably be described as one of the most customer-centric banks in the Gulf and now, under its new management, it is entering a new phase of profitability after a tough 2009. Michel Accad gives Banker Middle East his views on what lies ahead for banks in Kuwait and the wider region
Michel Accad is the man who has been tasked with heading one of the toughest banking turnarounds in recent history in the Middle East. He took the helm at the bank after it went through a traumatic time in late 2008 and early 2009 when it lost approximately $1.4 billion in derivatives trading.
The bank underwent a fundamental overhaul in which its board resigned and non-performing assets were gradually removed and core operations were focused on.
This has been reflected in the views of the ratings agencies. The bank's long-term credit rating was first upgraded to A by Fitch in mid 2010, while Moody's reaffirmed its BBB rating in early 2011. In late May 2011, Standard & Poor's revised its outlook on the bank to stable from negative. At the same time, it affirmed its BBB-/A-3 long- and short-term counterparty credit ratings on the bank.
"The outlook revision reflects our (S&P's) view that Gulf Bank's financial profile and performance have stabilised. Management's efforts have, in our opinion, proven successful so far, notably thanks to active provisioning, the gradual restoration of net interest margins, the clean-up of some nonperforming loans (NPLs), and good cost control. Furthermore, we see the bank's sound capitalisation and adequate funding profile as providing additional layers of comfort," the rating agency said.
"The ratings on Gulf Bank reflect our view of its strong commercial position as the second-largest conventional bank in Kuwait, adequate funding profile, and sound capitalisation," it added.
Gulf Bank was established in 1960 and now has a network of 51 branches throughout Kuwait. The main groups of the bank are Consumer, Corporate and International Banking.
The bank has won the 'Best Retail Bank' award from Banker Middle East for four consecutive years. Other awards include the Best Product and Best Loyalty Programme, the Best Advertising and Marketing Campaign and the Best Retail Customer Service and Best Phone Banking Service awards.
Accad, who joined Gulf Bank as the Chief Executive Officer in the summer of 2009, is a Lebanese national with over 30 years banking experience in the Middle East and Africa and joined Gulf Bank from Arab Bank in Jordan, where he was Assistant Chief Executive Officer. During his tenure at Arab Bank, he was responsible for all banking businesses globally, including Corporate Banking, Investment Banking, Retail Banking, Private Banking, Credit and Treasury. In addition to his role as Assistant Chief Executive Officer, he served on several Boards of the Group, including Europe Arab Bank, Arab Tunisian Bank (as Chairman since 2008) and Arab Invest (the Investment Banking and Brokerage arm of the Group).
Before Arab Bank, Accad had spent 27 years with Citigroup, which he joined in 1979, and where he held a number of senior positions. His last position with Citigroup was as the Division Head for the Middle East and North Africa region, based in Cairo, Egypt.
Which challenges have you faced since taking the helm at Gulf Bank?
At the end of 2008, Gulf bank was facing an existential crisis because we had lost our capital, which was about a billion dollars through various derivative exposures. The big challenge was to rebuild trust in the bank and to restore its profitability to pre-crisis levels within two years.
When I joined in mid 2009, half of the team at the top level was let go and the board had been entirely changed. Most of the new senior executive team came in the second half of 2009. What we have done since then is put in place a two-year plan to restore the profitability of the bank and put all those troubles behind us.
On a semi-related subject (and perhaps some football team managers might understand), is running a bank like managing a football team?
(Laughs), well it is funny because a top team also has between 10 and 12 people, so it is no different from running a football team at least in terms of number of players on the field! You need different skill sets for the jobs. You can't have a football team completely made up of 'Messis' [ed. Lionel Messi, the FC Barcelona and Argentina forward], where even if you have stars all around, it doesn't solve everything. You need dependable people to do the background work (your defence), you need people to work on infrastructure and risks (your midfield), and you need people to work on building the business (your forwards who score goals if you will), so it is a nice image, yes. (Laughs)
In which banking area is all the action going to take place in Kuwait in the coming three to five years?
First, I will tell you where we are focusing as Gulf Bank. One of our mistakes was trying to do too many things at the same time. Not only were we a commercial and retail bank, but we tried to do some international transactions, we tried to do some direct investments, some asset management, some proprietary trading and so on. You can't be good at all those things.
What we have decided to do is focus on our core competencies as a domestic commercial and retail bank, essentially the plain vanilla stuff. We exited all of the other peripheral activities that we had.
Now, in terms of Kuwait, I think there is an ambitious developmental plan in the country for the next five years and this plan talks about $130 billion of investment. If you want to be realistic, maybe it won't happen in its totality, maybe it won't happen in the time frame that they say, but some things will happen and they will be substantial. Therefore, I think that a lot is going to happen on the commercial side, because you [will] have a lot of construction and contracting going on, and contracting and trade finance are areas where we are very strong.
There will also be activity in the corporate finance and project finance side where you need to structure deals and so on. That is also an important area where I think we are well-positioned.
At the same time, you have got quite a depressed market on the real estate side and on the stock market side and it will probably remain so for the next two to three years, but after that, you could see a revival in investment banking activities. I think there is also demand for Islamic banking, but we are not a player in either sector, or we don't necessarily aspire to be.
Do you think it will have an effect on loan growth throughout the second half of 2011?
I think it will have an impact on loan growth, but it will take longer than the second half of this year. If you look in general at the loan levels at the banks, you see that loans are rather flattish and that there is excess liquidity being generated thanks to the Government being quite generous, for example, with the people.
This excess liquidity, however, has not translated into more loans. People thought at first that banks had become more conservative, but I think that this is not the truth at all. I think the truth is 'we would love to lend' but what is happening because of the uncertain situation regionally, it really hasn't taken off. Investors are very reluctant to invest capital for any project; and I'm talking about both, equity and debt capital. Investors are not borrowing; they are very cautious; their attitude is wait and see. As long as this happens, the loan growth will be slow.
Therefore, loan growth is due to a shortage in demand; it is not a supply issue - supply is available; there is simply no (or very limited) demand.
Do you think that will mean that banks will post gradually lower provisions for the rest of 2011?
At Gulf Bank, we have been very aggressive on the provisioning side. The reason is evident and maybe a bit cynical, but when you have a new team coming in, it is easier for us to say 'oh well, we have got all those bad loans that we need to recognise, but we were not responsible for booking them.' It is cynical, but at the same time it is healthy because it allows you to put all your problems behind you and concentrate on the future. In our case, credit provisions will be falling, rather dramatically this year compared to 2009 and 2010, though they are likely remain higher than the normal historical average.
There are other banks which have been conservative all along, so they didn't have a lot of doubtful exposure to start with. They have been in general more conservatively managed, so these have posted low provisions and will continue to post low provisions. Many banks in Kuwait would fall into either this category.
It is possible that there are also banks which have not yet fully recognised the extent of the problems that they have and will need to post more provisions. However, the reassuring part on the provisioning side is that local banks are very strongly capitalised today and if some banks need to post additional provisions, they have the capital base to be able to absorb it.
Do you think that reduces the possibility of any consolidation amongst Kuwaiti banks?
Unfortunately yes (laughs), because if you want compelling arguments for those banks, I mean why should they join [up]?
Although, if you think about it (forget NBK, which is truly in a lead position in this market), if you took the number two and three banks, or the number three and four banks and they were to join together, then they would become an entity with a 20 or 25 per cent market share and would equal NBK. That would be a compelling argument to have, let's say, a smaller piece of a bigger pie for common shareholders, but it's not necessarily how people think.
I think consolidation would be useful, but somehow I don't think it will happen because there are too many vested interests wishing to maintain control and too big egos.
The reason I ask is because the Qatar Central Bank's decision to bank Islamic windows and there has been some speculation that it would lead to consolidation amongst the banks there. Do you something similar happening in any other MENA countries where they decide to ban Islamic windows?
In some countries like Kuwait you already have separate conventional and Islamic banks. I am not very up-to-date on Qatar, but I doubt if this action on its own will lead to further consolidation. I think more is required, but the truth is, most central bankers in the region would wish for more consolidation and larger banks, but they can't force shareholders to do it. On this point, I would be siding with the central banks. It would be a 'nice to have' thing, but again, it very difficult to see.
The UAE Central Bank and even Kuwait's Central Bank have set out to limit fees and loan terms, which to some people would see as a belated move, after the storm. What is your view?
Kuwait is a very tightly regulated market, especially on the consumer side. For example, your consumer loan spreads are restricted to three per cent by the Central Bank. The types of fees you can charge are also very limited and regulated. Now, of course as a banker, I would say, 'Well, come on, we should be given a bit more leeway because if you have a spread of three per cent, what's your average loss norm on consumer loans? How can you really make money?'
From my perspective as a commercial banker, yeah, I would like the market to be a bit more liberalised and the Central Bank to be a little less interventionist.
However, if I look at it from a central bank's viewpoint and from a macroeconomic viewpoint, I think that what they have realised (and not just in Kuwait, but in many other countries in the Gulf as well) is that the consumer tends to be over-borrowed. This has created some crises which have forced governments to give relief to certain debtors and to give grants at certain times. I think it is to prevent this overheating through consumer finance that the central banks are intervening and restricting margins.
What, then, do you think is lacking in the way of regulation in Kuwait which could boost the banking sector? What would you change?
Frankly, I would (for example) free up the ability of the bank to charge practically whatever they want (within reason), especially on corporate customers. Now maybe you want to retain certain limits or whatever for the consumer side. But for the corporates, you need to liberalise the type of fees and the spreads that you can charge. I think that would be an encouraging sign. When you look at the losses that the banks have experienced recently (and I am not just talking about Kuwait), it doesn't always seem to be such a profitable proposition. That's one of the things I would like to see change.
How does Gulf Bank differ in what it offers retail banking customers compared to other banks in Kuwait?
What we tried to do (and I think it was a mistake) from 2005 to 2008 was to differentiate ourselves through innovation and product offerings that we maybe didn't master very well and we rolled out perhaps a bit too quickly.
I think what characterises us today (back to our 2000-2005 roots) is the fact that we are a bank that is really focused on serving the customer locally. This is our focus; therefore our strength is really in the quality and speed of our service, in the friendliness of our staff, which is very important. Even surveys have shown that customers are happy dealing with Gulf Bank because the staff is very friendly and understands their needs.
But more importantly than just friendliness and empathy, service quality means the fastest possible turnaround with the least number of errors. We have invested a lot in our IT systems, in our infrastructure and process improvements in a way that will enable us (in the next few months) to be, I believe, head and shoulders above the competition in terms of service quality and client satisfaction.
Do you envisage a time when the majority of retail banking business in the Middle East is done electronically? Or is the region still very much a cash-based economy?
In general, I think that we [in the region] have not done too badly in terms of internet banking. Now of course you have got a certain layer of the population that we find will never adapt to internet or mobile banking, but when you look at the younger crowd, everybody is using internet banking. From now on, the challenge will be moving from the internet on your PC to the mobile phone.
While a few people already get their balance information or do some transfers from their mobile phones, we haven't reached a stage, where at the click of a button my account is automatically debited, or I swipe my phone in the grocery shop and my accounted is debited. This is the next stage in mobile banking. We are still very far from it and it is a very complex issue and requires a lot of investment. We would like to be amongst the first there, but let's see, it's still very early.
Are too many banks more interested in offering services to SMEs as opposed to loans?
I can't speak for other banks, but it is a strategic area for us, especially when you see that our core competencies are the domestic commercial and retail banking sectors and SMEs fall completely within that. It doesn't make sense to be banking at one end with corporates and at the other end with consumers, but ignoring the small businesses in between. That won't work.
We have been incubating a new division which we call Business Banking that focuses on SMEs. I believe we are the only ones with such a single-minded focus in Kuwait because the success factor in business banking is not to manage it as a mini corporate bank, as if it is the same as doing corporate loans and you tailor make it to each customer (but the amounts are smaller). I think that is the wrong model and I believe that is how many banks would want to do it. Those who have tried it that way have probably failed already or they will soon fail.
What we are looking at it, is as more of an expansion of the consumer space, whereby it should be done based on a scorecard, based on large volumes and based on turnarounds that are as fast as consumer loans. For example, if somebody comes in, you should be able to give him an answer the next day. I think you can succeed under this format and this is what we are trying right now.
We have invested a lot in that and as far as I am concerned, I believe that yes, there is a need for this and those who are there first will essentially own that market in the future. Will it be a huge market? I don't know, perhaps not, but I believe that there isn't enough space for everybody in that market and those who are there first in will probably be the leaders.
What do you think the Basel III limit of a three per cent leverage capital ratio will mean for banks offering trade finance?
We have run simulations on how much capital we would need under Basel III requirements (and of course, some leeway has been given to central banks to add some additional requirements), but under a typical scenario we are practically Basel III compliant or very close. Now, not on all the individual processes of course, but in terms of capital adequacy calculated in a fair and broad way.
I think that a lot of the banks in Kuwait could probably say the same, although I don't know if they have also run simulations or not, but they would probably be compliant simply because the level of capitalisation that was already required by the Central Bank is 12 per cent (it is much less in OECD countries) and that already gives you a big margin. Most of the banks, at least half of them, are 50 per cent above that limit, at 18 per cent; you even have a couple of banks at over 20 per cent.
No matter how you calculate capital, provided you have taken the appropriate provisions and that your balance sheet is for real, if that is the case, then you are probably well-covered anyway on Basel III.
What would you have been if not a banker?
(Laughs) I was a banker by accident. I didn't initially plan when I graduated to be a banker, so I could have been anything else also by accident. That is the honest answer.
Who would you like to play you in a movie about your life?
Oh my god, what a question! I wasn't expecting this! Well, look, I want somebody to be good looking (laughs). I don't think I am worth making a movie about.
© Banker Middle East 2011
