|Adnan Chilwan, CEO, Dubai Islamic Bank|
Chilwan says that in early 2014 DIBs ratio of non-performing assets (the equivalent of non-performing loans) will fall below 10%, its lowest level since 2009. DIB is reaping the benefits of a rebounding local real estate market, but Chilwan says he is not fuelling another bubble in the sector.
"The new underwriting is happening on sound risk-management principles," he says. He also says the bank aims to reduce the proportion of its portfolio dedicated to real estate financing to between 22% and 25%, which he deems "a comfortable position".
Real estate has played a big part in Islamic banking because Shariah compliance requires underlying assets in financings. This was especially problematic in 2008, when Dubai was at the centre of a Gulf-wide property crash (coinciding with Dubais external debt crisis in local government-related entities).
Thanks to high oil prices coupled with Dubais status as a regional safe haven for tourism and investment property prices in the emirate have started to recover over the past two years. According to Fitch, 2014 is likely to be another strong year, even in the previously struggling prime segment.
That is good news for DIBs collateral values. Real estate financing reached 37% of the banks book in 2008, and still makes up around 28%, according to the banks investor presentation for financial results in the first half of this year.
"Every developing economy will have an element of infrastructure development and real estate financing; that will continue," says Chilwan. But he says DIB is no longer doling out funds solely on the basis of an expectation that prices will rise. Repayments now begin before a commercial projects completion, for example.
He says: "There will be selective real estate transactions, but we will be well covered. When we are financing corporates, its based on secured cashflows. The financing is not from the project itself but from other sources of corporate income."
According to Chilwan, although the bank has also been present in every syndicated financing in the UAE over the past 24 months, an important part of efforts to sustainably grow the banks revenues has been a greater focus on retail: including personal and car finance, as well as mortgages.
The bank has increased its customers from around 900,000 before the crisis to around 1.4 million now (almost entirely in the UAE). Before the crisis, says Chilwan, about 80% of revenues came from wholesale, while retail now contributes around 50%. "Thats where we want it to stay," he says.
"Over the last five years, weve changed that mix [between wholesale and retail]. I think thats an achievement."
Chilwan says there is a lot of activity in mortgages, yet at much lower loan-to-value ratios: "On the retail side, were financing the end user. Principal repayment is from salary rather than rental yield, so the source of repayment is secure. Banks expect customers to put in more equity now; its less speculative.
"Banks [in Dubai] have made sure real estate demand is real demand."
The first-half investor presentation shows financing for consumers (rather than wholesale) at 42% of the financing portfolio, up from 14% in 2008. Chilwan says there has also been an increased focus on fee income, via cross-selling third-party structured products and takaful (Islamic insurance).
DIBs first-half profit reached $201 million this year, compared with $152 million for the entire year in 2010 (which was a fall from an annual profit of $423 million in 2008). Thanks to strong growth in deposits, the banks ratio of net financing to customer deposits fell to 72%, compared with 88% in 2012.
"Weve got a captive customer base," says Chilwan. "DIB is the oldest Islamic bank in the world. It has been in existence for the past four decades, but pre-crisis the bank had a different strategy. Were now seeing the third generation of customers."
Stronger liquidity is especially important for the home-finance business, after the banks integration of Tamweel, a Dubai-based home finance firm, previously dependent on wholesale-funded business, and of which DIB held 19% before the 2008 crash.
In September this year, DIB announced it had repaid liabilities at Tamweel worth Dh4 billion ($1.1 billion), two years before the scheduled end to a moratorium agreed with creditors in 2010.
So far in 2013, DIB has increased its stake in Tamweel from 58% to 87%. It now plans to delist the firm: completing a strategy to rescue Tamweel started in 2010, when DIB bought a majority stake in it with support from the Dubai government and the UAE central bank.