Interview: “We’re more of a customer-driven wholesale bank that acquires and distributes”

There has been enormous change within National Bank of Abu Dhabi (NBAD). New people have been hired for its bonds and syndication businesses so that less time is wasted on relationship mending and more spent on complicated structured finance, structured trade finance and project finance.

The wholesale bank has long been considered a large, bureaucratic, state-owned institution, but following the appointment of Alex Thursby as Group CEO in July 2013, the bank has started to pursue a new strategy to build on its capital and liquidity strength. For Thursby, the appointment represents a fantastic opportunity because the planned changes are supported by the Board and can be brought about within a stable, growing region with the long-term backing of its major stakeholder, Abu Dhabi Investment Council.

A customer-focused strategy
Thursby has set about modernising the bank around a customer-focused strategy based on two pillars: Pillar 1 centred on commercial and retail banking and Pillar 2 focused on wealth management and very concentrated areas of wholesale banking, specifically, trade finance, capital markets and targeted market segments.

He acknowledges that the new strategy has meant changing the organisational structure and bringing in new people but claims to have found some really talented people within the bank who have now been given new opportunities to excel. Despite its strong government business base, the bank has substantial non-government business that requires high levels of customer service and it is here that much of the recent efforts have been focused.

When asked if improving customer service levels represented a cultural challenge, Thursby strongly rejected the notion by asking, “How does Emirate Airlines or Etihad do it?” before acknowledging that a new team will work on the customer service proposition for the next three to four years. The emphasis is on two facets: responding to quickly resolve customer problems and getting staff to understand that the way they present themselves as an individual reflects on the bank. To address the first point, the bank has added extra capacity and introduced technology to track and monitor customer complaints. For the second, half of the workforce has been put through a one day “bring your heart to work” programme while new hires are now psychometrically tested for customer orientation.

The customer-focused organisational changes have also meant creating a matrix structure comprised of five umbrella customer groups intersecting with segments within wholesale, commercial and retail, and wealth management with product centres of excellence embedded within the three divisions. It is the role of bankers from each segment to bring the segment’s product capacity to customers of the whole bank. The aim is to achieve divisional cross-selling to broaden the platform. To move away from a siloed structure, the bank is currently placing all front-office delivery programmes and development staff together on one floor to promote greater interaction.

Continuing to focus on the changing face of wholesale banking
NBAD’s wholesale book has traditionally been bigger than its retail book but Thursby has set out to change this by growing retail assets. He advises that the 26% growth over the same period last year had been achieved alongside a 15% rise in deposits, achieving nearly three times retail deposits to assets. But this has not meant a loss of focus on the wholesale book as the bank is now third in global Sukuk sales following rapid growth over the last year.

The suggestion that such growth in Sukuk is reckless brought a swift retort, “If you call the Hong Kong Monetary Authority, Goldman Sachs and the UK government reckless, then I’m interested in your view of reckless.” In fact the bank has discovered a new emerging market for debt that is growing at 50% per year, distributed from four financial centres—Abu Dhabi/Dubai, London, Hong Kong and Kuala Lumpur. Investors want the asset-based, not asset-backed, paper on offer and NBAD has a base in all four of the major Sukuk distribution centres.

“We’re slightly ahead of the game. We sell approximately 55%–70% in the Middle East, 5%–10% in London and the rest in Asia,” said Thursby before adding, “It’s a really different investor base. What people have failed to understand is the depth of liquidity in this region. When you look at the standard bond markets, people sell them into the US, and what happens within the next six days? They get sold into this part of the world. What we’re doing is taking out the middlemen, which are the US funds.”

Thursby predicts compound growth around 50% a year for the next five years for Sukuk bonds. In his view much of this origination will be done in Asia. He points out that it is already happening in Kuala Lumpur and has started in Hong Kong where Thursby believes Norman Chan and his team have begun to build a sovereign yield curve for Islamic paper, much in the same way that Temasek built the Singapore dollar curve in the past.

This is significant in terms of NBAD’s new strategy as the liquidity surpluses that will be built up by Islamic investors will need to be managed which is where NBAD’s Pillar 2, the bank’s wholesale wealth management network, comes into play. The bank has established its wealth management business, which is currently generating 10% of its total revenue, in three places, Abu Dhabi/Dubai, London and Switzerland. Based on a borderless, integrated network model, the business is kept quite separate from local UAE Gulf business. Customers comprise predominantly the Gulf Arab population, although a move into Asia is considered for the future. The fee income generated from the business has grown 20% year-to-date, bringing the bank’s total fee income closer to 30%, a good decision in Thursby’s view, given margin compressions within the highly competitive Gulf market.

There has been enormous change within the wholesale bank. New people have been hired for both bonds and syndication and now less time is wasted on relationship mending and more spent on complicated structured finance, structured trade finance and project finance. Five industry groups have been formed: traders and retailers; real estate and family conglomerates; aviation and transportation services; sovereign wealth funds, funds and pensions (not hedge funds); and energy. Thursby is keen to stress that NBAD as an internationalising, mid-sized bank needs to be highly focused. “The RBS model of ‘I can be a global player and I can be all things to all people’ is dead.”

Supply chains and East–West trade flows
After exiting some sectors, NBAD’s current focus is on financial institutions and energy, with increasing efforts being made to build the trader space. “We’re helping oil get from Kuwait to Singapore. We’re helping India procure from this part of the world. Our trade portfolio is more non-funded than funded.”

NBAD is able to offer clients short-term competitiveness, with priced funding accepting counterparty risks as both sets of counterparties are known to the bank. “How many banks in this part of the world understand Senoko, Petronas or Pertamina (oil companies)? We do as we understand them both as entities and the risks associated with China.”

Herein lies NBAD’s competitive advantage over Chinese banks vying for the same business: Arab exporters know the bank and feel comfortable with it, compared to Chinese banks which are lesser known entities. The bank is doing well with oil sector clients with its trader group beginning to make inroads with car and equipment importers although Thursby acknowledges that there is more work to do and expects it to be a five-year journey.

When it was suggested that Thursby was using the sum total of his worldview—his knowledge of everything—in his current role, he agreed. “That’s the whole basis of someone like me being here. I think within the next five to six years, what I’ve got to leave as an individual is an institutional knowledge to a cadre of people who are (or can become) as effective as I was perhaps ten years ago in terms of knowledge of various parts of the world. There is a scarcity of people who understand that East–West corridor as a whole. I’ve worked in Africa, the Middle East and Asia. There are not too many people in the world who’ve done that.”

Building an effective, sustainable model
Organic growth requires funding but Thursby is adamant that NBAD is not setting out to achieve this by leveraging the balance sheet and increasing capital costs. He notes that to date NBAD’s return on equity (ROE) has marginally increased due to higher yields from retail despite margin compression and increased fee income, the result of strategic choices for the balance sheet.

“The important point is that people who try to take their ROE from 12% to 18% in one year are finished; it’s impossible. The Western world teaches you that. It’s a gradual, incremental increase. It’s about grinding out an effective business model that has a good ROE and growth potential. It’s not about optimising ROE and then five years later having no growth. That is the difference between us and Asian banks as a whole as well as some Middle East and African banks,” he elaborated.

Thursby is scathing about banking models adopted by some of his compatriots in the West that, in his view, ignored liquidity. He cites the lack of liquidity at Northern Rock, a British bank, as a cause of the bank run that led to its demise. Northern Rock had leveraged its balance sheet 54 times on a very narrowly focused mortgage book and 35% customer deposits. He remains scornful even when it is put to him that if liabilities are scarce, a bank will seek other sorts of funding. “If you profit optimise, it all comes to roost at your doorstep at some point. It’s about building, so if you stop investing you have to start to do crazy things to make your quarterly or half-yearly earnings. It’s short-term and it can break the bank.”

Managing a bank is an art, not a science
Yet Thursby still believes in the Basel internal risk models, provided there are controls in place managed by experienced people such as bankers and regulators who understand the models and are able to flag issues when they feel that something is not quite right. “That is an art, not a science, and it is gained through the development of bankers over a period of time. That’s what we’re trying to do here.”

To effectively manage Treasury, NBAD now has in place product control, risk processes and asset/liability committee (ALCO) processes, plus a market risk separator and, as a third line of defence, a new CFO, James Burdett, a former senior executive with ANZ. Over 400 NBAD bankers have been singled out for development. They will be expected to gain first-hand experience of the many types of risks that effective bankers must manage through assignments to different areas of banking in different countries.

“We know not all of those guys will make CEO, but what we want to do is give people an experience where they understand what credit risk looks like, what market risk looks like and what they mean in the first line of defence which is the businesses. They should also understand operational risk and reputational risk. They should understand not only the verticals of all of these, but the horizontals and how they interrelate, which very few bankers in the world understand.”

Managing present growth
These are the foundations for tomorrow but today a lot of the growth is fee based, so the bank does not need to aggressively grow the trading book as it is well funded.

Nevertheless, although the bank is satisfied with the small but safe returns that can made from US Federal Reserve paper for example, it is still faced with the dilemma of how to make even better earnings. Thursby makes the point that this is where it is important to have executives who can manage to balance and manage risks across the customer groups, noting that management of this risk is owned by all executive management including the EXCO (CFO, CRO, CEO and head of markets, etc.), the ALCO and risk management committees. “We all own it and we have very valid discussions. You also have to start ALCO from a pretext of risk, not from the pretext of making money, and base your governance around that.”

NBAD expects to create and complete Pillars 1 and 2 of its strategy within five years. Building and improving the spine of the bank is likely to take three years with the front office delivery for electronic platforms for most of the bank’s businesses (the physical part of Pillar 2) on track for completion next year. This year has seen the completion of around 30 projects in the domestic retail and commercial banking businesses that have helped to improve the bank’s spine. Project milestone expectations have been exceeded, as have the bank’s financial goals for the current year.

“For Pillar 1—which is the Gulf retail and commercial business—I would like to see the retail business fully modernised and the model starting to kick in by the end of next year. By the end of this year we want commercial banking to be built up—hiring people, generating business, the new model clicking into gear—and we’ve done that. We’ve made inroads into the wholesale side, and I’d like to see that built up as well, in terms of our products, to be complete by the end of next year. In terms of the physical building and the customer acquisition, it’s a four or five year plan.”

The bank has been able to attract qualified staff with the right skill sets; Thursby describes some young recruits as outstanding. However bringing about cultural change amongst existing staff remains a challenge. Under the bank’s Emiratisation policy, half of the top team is Emirati and seen as “pretty good”, while its Afaq programme, under which 50 young Emirati’s a year are recruited, has seen the arrival of several woman. “We think we’re going to have some outstanding female Emirati bankers in the next ten to 15 years.”

Personal influences
Thursby spends most of his time in Abu Dhabi. He describes his remit as managing shareholders, strategy including ensuring execution, and working with finance and technology to build up the spine of the bank.

“I think the CEO’s role is about meeting major customers, getting feedback, engaging with staff, looking at where we are on customer service, and product roll-outs, but also spending time with regulators.” He adds, “As we go off-shore, it’s mainly about meeting regulators and country strategies that relate to that, as well as seeing major customers. You have to refine your day a little bit and be focused on those three things.”

Even so Thursby describes his current role as not very different to his previous role at ANZ where he was the chief executive for international and institutional banking responsible for delivering ANZ’s super-regionalisation strategy. He acknowledges that his role at NBAD is similar but at a higher level although he must now delegate everything after reaching agreement about tactics with the top team. He is accountable to the NBAD board but he also sees the EXCO and its five sub-committees as key control functions keeping his actions honest. “I think we’re one of the most advanced banks in this part of the world in terms of our governance.”

Anywhere but Europe or North America
When it was suggested that while at ANZ, he built the international franchise through M&A at a higher cost, Thursby points out that what was achieved was remarkable given that it only took five years, although he also acknowledges that the financial crisis helped. He addressed the challenge by focusing on customer segmentation rather than products, leveraging the existing FX business. He also notes that although he and his team had a hard grind growing the transactional banking customer base, the business has since done very well.

“The wholesale side and commercial side have done very well, but I sort of changed the world around a bit and looked at it through customer segmentation, not through products. I think what happens is if you just look at the world through products you end up, after a period of time, dropping into risks that are hard. Anyone who’s building a business has got to have lower customer numbers but deeper penetration. That will give you the right ROE.”

The suggestion that wealth management helps ROE discipline due to its focus on customer profitability is met with the response that the same applies to wholesale and commercial customers as well, as just lending to any of these customers does not result in consistent ROE. However Thursby also believes that ANZ’s Asian business will hold the bank in good stead for the future as it gives the business a source of deep liquidity.

“That’s why I think Mike (Smith) is such a good CEO at ANZ, because he has the guts. He’s built what was a number four bank and created an institution that I think will be safer in the long run. They’re in a great spot, and no other Australian bank can do it now.”
Thursby notes that ANZ is in a good position but must keep going, comparing it to Citi’s Asian business that in his view is its best apart from New York. He also agrees that Citi should have followed AIA and listed in Hong Kong as it would have created so much more liquidity.

“If you look at Citi, the two or three times it’s nearly gone broke, it’s because of what’s happened at home. As a banker, for markets, I would prefer to be anywhere but Europe or North America.”