NBK chief raises red flag on risk

Veteran banker Ibrahim Dabdoub has many reasons to be happy. His bank, the National Bank of Kuwait, posted record net profits of $1bn in 2007, and followed that with another high of $309m in the first quarter of this year, up 28 per cent compared with the same period in 2007.

The chief executive seems to have steered clear of the subprime crisis and has expanded the bank – one of the Arab world’s largest – with acquisitions in Egypt and Turkey. He is also working on plans to launch the first Islamic private bank in Switzerland in partnership with a Saudi institution.

But he has some concerns as he watches the oil-fuelled boom sweep across the Gulf, generating hype along the way. It is time, he says, for red flags to be raised.

Like other bankers, he believes the boom can be sustained. Most studies indicate that oil prices will not drop below $80 a barrel any time in the near future. That means that the record surpluses and bulging sovereign wealth funds governments are enjoying are going to become larger. As it is, Mr Dabdoub estimates that the likes of Kuwait, Abu Dhabi and Qatar only spend between 30 and 40 per cent of their revenue.

His concern, however, is that with the huge number of projects taking place and a surge in consumer and corporate lending, many regional banks lack adequate risk management skills and resources. And “wisdom and risk management”, he says, have now become “a top-notch priority and a requirement”.

“In the first oil mini-boom, 1973-83, we used to have a joke that people used to come here to sell us the pyramids of Egypt. I think this time they are coming here seriously to sell us the pyramids of Egypt, because the kind of deals that we are seeing are ridiculous,” he says. “You will have many mistakes, there are always mistakes after hype – look at what is happening in the US with the subprime [crisis]. There are always excesses and after excesses there are always mistakes.”

He says this could materialise in the form of credit problems – retail and corporate – for Gulf banks further down the road. He acknowledges that the larger banks are well capitalised, but thinks it is an issue that should be raising concerns.

“We are used to 10 to 15 per cent growth rate in loan portfolios and we are seeing much bigger growth rates in the Gulf in general, so you will see problems on the credit side [and] inflation, of course. Inflation is a problem,” he says. “It’s time to have somebody always behind you to raise red flags . . . because you sometimes get too involved, [too] bottom line oriented. If you eat too much, you have indigestion.”

After 47 years with NBK, more than 25 of those as group chief, Mr Dabdoub has seen it all before. He was fresh in his post at NBK’s helm when it was the only Kuwaiti bank to survive intact after the Suq al-Manakh crash in 1982. Nearly a decade later, NBK was there to finance a $5.5bn loan to the Kuwaiti government after Iraq’s 1990 invasion.

He says the bank’s traditions and its culture – Kuwaiti merchants established the institution in 1952 – makes it “very conservative as far as risk management goes”. Mohammed Abdulrahman al-Bahar, 90, one of the founders, is still chairman.

With this in mind, he says NBK is seeking growth of between 15 and 20 per cent.

“We are probably one of the few conservative banks in this part of the world now, given the boom and the hype,” Mr Dabdoub says. “We are not the high-flyers and you see a lot of high- flyers these days in this part of the world, but we are consistent.”

Following its recent acquisitions – NBK acquired a 98 per cent stake in Al-Watany, an Egyptian bank, for $1bn and a 40 per cent stake in Turkish Bank for $160m – Mr Dabdoub says the group wants to “rest for a couple of years to digest the expansion”.

“It’s not easy really to integrate the culture and to create the synergies between the various subsidiaries and branches outside,” he says.

He expects the bank’s total assets to grow to between $45bn and $50bn in 2008 from about $43bn today.

But he does see potential growth in Islamic banking. As well as the project in Switzerland, NBK is applying for an Islamic banking licence in Kuwait and is lobbying the central bank to allow conventional banks to open Islamic windows. Conventional banks are not allowed to provide Islamic banking in Kuwait.

He also sees potential for the region’s larger banks, such as NBK – the third largest bank in the Arab world in terms of assets – in providing project financing for government mega-projects, with spreads increasing following the credit crunch in the west.

“I think six months to one year down the road . . . the oil and gas companies will start feeling the impact . . . in the form of wider spreads and less involvement by the international banks,” Mr Dabdoub says. “It will open the door for us to get more involved at good spreads.”

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