Until the merger of Emirates Bank and National Bank of Dubai last summer to form Emirates NBD, National Commercial Bank (NCB) was the biggest bank by assets in the GCC. To date, its focus has been on the Saudi market, but NCB is now looking to expand and consolidate its dominance of the Saudi banking sector through a partnership with investment bank Goldman Sachs.

Leading the expansion is Abdulkareem Abu al-Nasr, chief executive officer (CEO) of NCB since January 2006, who has risen through the ranks during 11 years with the company.

In April, NCB paid $1.08bn for a 60 per cent stake in Turkish bank Turkiye Finans, following a SR15bn capital increase in 2007. “This was done to support our objective of expansion through acquisitions,” says Al-Nasr. “We have ample capital to allow us to do at least one more acquisition, and strong profitability to support us.”

Target markets include Egypt, Kuwait and Qatar, where the bank has identified opportunities for growth. “Entry will depend on things like the nature of the target, strategic fit and valuation, but we are now actively looking,” says Al-Nasr.

Alongside regional expansion, Al-Nasr has several challenges to deal with closer to home. Inflation, a new mortgage law and the strain on human resources are all issues that are new to the market, which has for years been able to post major growth on the back of economic expansion and the booming stock market.

The most significant challenge will be how Saudi banks cope with a massive increase in the cost of dollar funding during the global credit crunch. “Clearly dollars are scarce,” says Al-Nasr. “Even in the international markets, the price of dollars has gone up dramatically and banks in Saudi Arabia are disadvantaged because they do not have a natural dollar funding base. Most deposits are in riyals and any dollar funding is usually short term in nature.”

Diversifying funding has become a priority for NCB and the wider banking sector, but with pricing rising in the bond and commercial paper markets, NCB has no plans to raise debt until conditions improve. Al-Nasr does, however, say that launching sukuk is a possibility.

As for inflation, one of its effects is the increasingly demanding expectations of the workforce. Despite inflation having only accelerated in Saudi Arabia over the past 12 months, hitting 9.7 per cent in March, Al-Nasr says the already inflated costs of food and rent are starting to affect wage negotiations. He is not optimistic about the inflation outlook.

“Today I think there is no clear vision of a quick and effective solution to inflation, so the expectation is that inflation will continue to rise,” he says. “In a way, it is the cost of growth but the current monetary policy puts a lot of lim-itations on the authorities here. The concern is that if the upward trend in inflation continues, it becomes a structural problem rather than a cycli-cal issue. That will be a major problem for every-one, especially the financial sector, because you will be losing real value out of financial assets.”

Rising operational costs aside, the firm is pur-suing its plans to establish a joint venture with Goldman Sachs. It is a move that many institutions are considering, following the Capital Market Authority’s (CMA) decision in 2007 to force banks to separate out their investment banking activities into separate legal entities, for which the CMA will take over as regulator, while the Saudi Arabian Monetary Agency (Sama) remains regulator of other banking activities.

This coincides with the opening up of the market to foreign investment banks following Saudi Arabia’s ascension to the World Trade Organisation (WTO). For most local banks, it means simply creating wholly owned subsidiaries, while foreign banks can enter the market through single-branch operations.

International partnerships

Saudi banks with existing links to inter-national institutions have benefited from giving their partners greater access to the Saudi market. For example, HSBC now effectively runs the investment banking operations of Sabb, while Banque Saudi Fransi has brought shareholder Credit Agricole into the kingdom more formally through its new investment banking arm, Calyon Saudi Fransi.

With no existing partnerships, NCB has been in talks with Goldman Sachs about a deal to incorporate its expertise into its own investment banking subsidiary, NCB Capital. After signing a memorandum of understanding with the US bank more than a year ago, a deal is expected to finally be close. “We are going through the final regulatory approvals and we expect that in the second quarter of 2008, we will announce the results of that,” says Al-Nasr, although the exact ownership structure of the tie-up is still being debated.

Access to Goldman’s expertise will be a major boon to the bank, which Al-Nasr admits does not have a strong offering in investment banking. “We have a strong presence in asset management but are trying to grow our other investment banking operations, and clearly Goldman Sachs has a lot of capabilities in investment banking,” he says.

He is also looking at alliances with other global institutions to bring their expertise into the kingdom through NCB. These could be through a special relationship with one bank or fostering relationships with several preferred collaborators, depending on the nature of the deal.

The flipside of the entry of foreign competitors to the market is that NCB will also be competing with them. “Competition is the nature of things and is the way it should be,” says Al-Nasr. “The magnitude of projects and investment activities going on in the kingdom is massive, the whole pie is getting bigger so it is fine to see other players entering the market. This interaction between local and international banks will also help to raise the bar in the banking industry.”

Al-Nasr has mapped out three pillars to NCB’s growth strategy. First is to grow the NCB franchise organically; second is to expand the scope of the bank by moving into new product areas such as project finance, auto leasing and real estate finance, where he says the bank has been under-represented in the past; and third is international expansion.

Recruitment concerns

Matching the bank’s ambitious growth strategy with an ability to actually hit those targets is not as easy as it once was in Saudi Arabia. The lack of resources is proving to be a significant constraint. “We have been reviewing our human resources strategy for the past two years and as part of that we have introduced new retention plans, incentive plans and expanded our recruitment programme,” says Al-Nasr. “We are now much more active at going into universities both here and abroad to recruit young Saudis, particularly in the US, the UK and Egypt.”

He does not understate the importance of this to the future of the bank. “A strategy that does not have the basic enablers to be executed is a strategy that will fail,” he says.

Because of the high importance Al-Nasr places on this issue, the bank takes a sophisticated view of recruitment. “We need to align our strategy with the number of people we need to achieve it, and when we need them and what kind of experience they need to have,” says Al-Nasr. “Then we can re-engineer the recruitment process along with the retention and development schemes.”

The past 12 months have demonstrated that growth is not always guaranteed, even with the economy growing at such a pace. Overall, the sector’s profitability dropped by about $8bn in 2007, with NCB’s profit declining by 3.7 per cent, before recovering in the first quarter of 2008 by almost 5 per cent. “The good thing is that growth is starting to come from core businesses again and is not the result of a bubble, so I think 2008 will be a good year for the banking sector but we are well past the years when growth was 50 per cent,” says Al-Nasr.

The huge local currency liquidity in Saudi Arabia also means that competition for assets will intensify. “The banking system is very liquid and all the banks are competing to deploy their capital,” he says. “That does not create a perfect environment for maintaining margins. It is clearly a different environment to what it was five years ago, when the banks were much more comfortable.”