Adel El-Labban is one of the most distinguished bankers of his generation. He led Commercial International Bank as it became the premier bank in Egypt, and he led Ahli United Bank’s expansion to become the largest bank in Bahrain. Earlier this year, he resigned from Ahli United Bank, so Arab Banker asked him to share his experience, and offer some guidance on the components and conditions that are needed to deliver healthy banks and banking systems.
Experience is supposedly the maturing of judgment over time, forged by trial and error. A forty year career in regional, commercial and investment banking, mostly spent in a CEO or Board capacity across Egypt, the UK, Bahrain, the USA and the GCC, has given me an opportunity to witness and to closely interact with the recurring financial and political upheavals of the region as well as with the far reaching regulatory, technological and social transformations that have reshaped the global banking industry.
In sharing points of relevance from this long journey, one must tread carefully between the Scylla of personal nostalgia or historical trivia, and the Charybdis of regurgitating current fashionable industry trends or platitudes. Relevance, in my view, is only driven by the test of time through proven ability to generate sustainable value accretion, currently and more importantly in the future. My themes have been chosen with these criteria in mind and solely represent the personal judgment (or lack thereof) of the writer.
Banking, in all its forms, is a risky business, essentially based on third party trust and funding. It must therefore balance its risk appetite and actions to ensure deposit protection and readily available funds while generating sufficient returns to satisfy the demands – oftentimes excessive – of shareholders, management and other stakeholders. De-risked banking – as postulated by regulators in the aftermath of every crisis – can only exist when these constituencies accept utility type risk-returns, and this has not, and is not likely to, happen.
Adel El-Labban was Group Chief Executive Officer of Ahli United Bank from 2000 until early 2023. Before that, he led Commercial International Bank in Egypt. In 2015, Mr. El-Labban received the Arab Bankers Association’s annual award for Distinguished Service to Arab Banking. He has also received distinguished achievement awards from Euromoney and the Union of Arab Banks. He currently divides his time between Bahrain, London and Egypt.
Effective risk frameworks
Accordingly, the first future truism is the need for very effective and dynamic risk identification, monitoring, measurement, management and remediation frameworks. These should be properly implemented by qualified bank staff with sufficient independence to withstand the inevitable pressures from their peers in revenue centres. The key pillars of this approach are a full buy-in by a competent Board and qualified CEO, advanced MIS and forward-looking data analytics to ensure a real time – not post fact – enterprise wide holistic risk vision, and lastly a continuing commitment to the long-forgotten magic potion of common sense and reality checks at all levels. If greed negates common sense and avarice overrules informed independent judgement, it is a matter of ‘when’ not ‘if’ the ship hits the rocks, as seen with many regional and international banks over the years.
Being sustainably profitable within a low risk (‘boring’) business operating profile is the ultimate accolade for any successful business. However, this requires a major mind set revision which does not appear to be taking hold as the banking industry continues its repetitively myopic scramble to boost returns through quantitative increases in risk assumption while ignoring or failing to properly understand and harness the major opportunities provided by data and technology, the two great modern enablers, to achieve its profit aspirations at lower, not higher risk levels.
Avoiding funding meltdowns
The second future truism is the continuing absolute primacy of banks’ funding activities over their asset mobilization operations. Banks typically fail for liquidity reasons, not because of provisions eroding their capital adequacy.
Liquidity crises are sudden massive coronary attacks resulting in quick financial demise as happened to Bear Sterns and Lehman Brothers in 2008 and to Silicon Valley Bank (SVB) and Credit Suisse in 2023. Only unprecedented government interventions at very high economic costs contained the list of failed banks and averted systemic meltdowns. The avoidance of funding disruptions is therefore the present and future crux of banking prudence and successful continuity. The rapid timing and pace of liquidity crises has been exacerbated by digital technology facilitating instantaneous large withdrawals by clients through e-channels, as seen in the recent spate of US regional bank failures.
Despite this truism, banks have been, and continue to be, predominantly run with an asset-focused mentality. Funding availability, growth, diversification and costs are rarely recognised to the same extent by the industry in its annual awards and plaudits, or by the individual institutions in setting their internal strategic priorities and/or their remuneration policies, despite their critical importance. This entrenched asset bias creates and maintains the seeds of future similar problems arising, as the quicker and easier path of increased risk assumption to bolster profits is preferred, at the expense of the safer, slower and albeit more difficult liability-focused approach. To be clear, all banks adopt both approaches, but the degree of time, investment, management commitment and compensation allocation between them requires serious re-balancing if more sustainability in earnings is to be achieved.
My third truism centres on capital adequacy. Its erosion is usually a consequence of misjudged risk decisions or, to a lesser extent, is due to lack of control on costs or on dividend pay-outs. Although it enjoys voluminous coverage under the Basel guidelines, capital adequacy however represents a slower type of banking ailment which can oftentimes be delayed, massaged and even disguised by creative accounting measures of over accommodative external auditors, and can even at times be overlooked by regulators or their governments seeking to defer or hide any signs of banking instability or economic stress. Capital gaps, unlike their liquidity equivalents, are not mortal events so long as depositors do not panic and continue to trade normally with the bank. I am not arguing that undercapitalization is acceptable or is not a relevant financial and regulatory measure of financial good health but only that its consequences should be put into proper context in the overall spectrum of banking risks and failures, based on actual bank failure experiences.
The regulatory landscape
My penultimate point is on the regulatory landscape. Supervision under the Basel aegis has exponentially mushroomed, annually complemented with new thematic launches which are often of debatable value to large segments of the industry. This raises a number of questions: has the current age of regulatory overflow reduced systemic risk? Has a safer more growth-conducive banking and economic environment been created? Has the ‘one size fits all’ approach dominating most regulations been effective? Are key banking regulations fair and even handed across and within countries? Is regulatory independence a free pass to commit errors with serious long term economic consequences, at no risk of accountability to the responsible regulators for their well-established failures? Are consumers receiving better and fairer value from banks?
For a pre-Basel 1 banker, the answer is, on balance, an emphatic ‘no’ to all the questions above with the possible exception of the consumer protection issue where the pendulum has over-swung to the other extreme. A regulatory regime based on the quantum of rules, not necessarily on their logic and value, a regulatory regime without any form of real internal or external accountability, a regulatory regime with no economic outlook flourishing in a culture of fear and intimidation is a double-edged sword. It generates an atmosphere of bureaucratic compliance not understanding, of obedience not initiative, of token dialogue not real consultation, and this is adverse to healthy growth and even to the realisation of its key goal of systemic risk containment, as proven by the very recent US regional banks’ collapse and by the demise of Credit Suisse which triggered immediate fears of a global systemic banking crisis.
Clarity of vision
My point is a challenge to regional banks’ vision and governance. Simply put, vision is clarity on the future nature of the business and its expected results. This is the core foundational responsibility of the Board and management team. Hiring external consultants to advise on strategic options or to hold hands for their implementation is usually the first step towards underperformance if not outright failure. It practically signals the inability or unwillingness of the Board and management team to prepare, sanction, own and implement a coherent plan based on a rational assessment of available alternatives of which they are the most familiar in terms of potential challenges and opportunities. Without clarity of vision and ownership at all levels of the organisation, full staff engagement, coordinated initiatives and optimised results become random occurrences.
Governance at the Board level cascading into all levels of the organisation is the other critical missing link. A board failing to require, own and pursue the needed actions to maximise its shareholders’ value in terms of risk, liquidity, capital, data and technology policies and initiatives, will not realise the potentialities of any business. A management team not actively engaged in the formulation, modification and execution of these decisions, and objectively held accountable for their proper delivery, will not optimize results in a sustained manner nor will be capable of effectively interacting with their staff and other stakeholders
Data and technology are today’s great enablers. Their importance cannot be overstated. Investing in these capabilities is however a necessary but not sufficient condition for creating competitive advantages. These investments must be undertaken in the context of a full enterprise-wide transformation plan and not as a series of disjointed initiatives with no clear goals and without sufficient ownership by their final Owner-Users outside the data and technology departments. The human transformation at the Board, management and staff levels is the indispensable sufficiency factor needed to reap a full harvest through real organisational transformation. These key future requirements cannot be achieved without enlightened vision and defined governance.
If proper ownership and delivery of vision and governance can be achieved or at least materially improved, regional banks will be positioned to significantly grow within and outside their home markets in a prudent and profitable manner, to leverage and monetise the major opportunities afforded by data and technology in a defined and targeted fashion and to chart their future courses of action with enhanced clarity, accountability, sustainability and scope for profitable innovation. Regional banks have long been losing global market share on all fronts despite their nominal growth and the sustained surge of mineral wealth over decades. This counter intuitive outcome can perhaps be altered if some of the root causes described above are addressed.
If understood and implemented, these notes can hopefully be a starting point to a better future.
First appeared in the September 2023 Edition of Arab Banker, the annual publication of the London Arab Bankers Association