'UNITED Bank of Kuwait (UBK) is undergoing a structured dose of change,' is the instant reply from Adel El-Labban, the recently-appointed chief executive officer, when asked about his plans for the bank. Behind these carefully-chosen words lies a detailed plan for the reorganisation of the oldest London-based Arab bank.

UBK was established in 1966 as a consortium venture by several Kuwaiti financial institutions. Since its launch the world has changed, and as a result of improved communications and the rapidly growing sophistication of international financial markets most of the other joint venture operations established in London by Middle East financial institutions have disappeared. UBK has survived, but has for sometime been regarded as an anachronism. 'In the past, UBK has lacked consistency in its approach to finding a role in the market,' concedes El-Labban. However, the 'structured dose of change' he is to administer is intended to give the bank new direction and purpose.

El-Labban is keen to stress the bank's new direction, and to exploit its Janus-like character. 'UBK is now established on the London banking scene, but it also has access to a wide client base in the GCC,' he says. A pivotal role is envisaged in which the bank will try to exploit its comparative advantages. El-Labban wants to reorientate UBK's activities to extract the most value from its four key assets: its good name and reputation; a solid capital base; an established position in a high-quality regulatory environment; and its good relations in the Gulf.

'UBK must exploit its advantage in intermediation. It is starting from an OECD market, while its rivals are operating from Arab countries but are trying to do the same business in Western markets,' he says. 'They are starting from the more difficult end.' Equally, UBK has an advantage over non-Arab banks when it comes to penetrating Arab markets and selling products in them. 'We are in a unique position to combine strong relationships and product knowledge,' he says. 'We are simultaneously a Middle East operation and a London-based bank.'

El-Labban says that the new regime will re-examine both capital-intensive operations and develop new ones that are less capital-intensive. He is fully aware that UBK is a small to medium-sized institution in the London markets, and that its size is a constraint. Its role as a lender and its options in treasury markets are limited by its capitalisation and leveraging. 'We don't have a massive balance sheet, so we need to be more nimble. It is crucial that we maintain tight risk and cost control,' he says. 'Over-exposure must be avoided.'

It is little surprise that El-Labban preaches caution after the bank's financial performance last year. UBK reported a full-year loss of ú8.97 million ($14.2 million) - the first loss reported by the bank in its history - mainly as a result of over-exposure to high-yield positions in Russia. Losses were further compounded by rushed exits from emerging market securities and the strengthening of provisioning for the remaining Asian exposure. 'The relaunch of the bank must be based on sustainable lines of business consistent with the bank's capital base,' says El-Labban.

UBK's future capital-intensive operations will be driven by the need for risk control and will be orientated towards placing assets. 'We know GCC markets and must look to intermediate and sell into them,' he says. 'We will access assets and access the markets to sell them in.'

Product focus

There is a conviction that UBK is well positioned to exploit a central deficiency in the GCC market. 'The major international banks are interested in consolidation and are not focusing on product development or placement in the Middle East,' says El-Labban. 'Regional counter-parties are too small for many of the bigger international banks.'

The bank's position in London, at the heart of a well-regulated environment, and its good reputation, will also provide a boost to the development of its fee-based operations. 'Put simply, UBK has to expand its client base to expand its business,' says El-Labban. 'Single strategies don't work, so we have to think in many directions.' With its limited capital base, the bank's future will be determined by growth in the right directions. 'The character of the bank has to change: we must become a lower-risk operation; increase our private banking activities; make capital gains on trading; and be an effective originator of products,' he says.

The real change in the bank's character is described more succinctly when El-Labban says that he wishes to invert the current interest/fee income profile of 60/40 within the next three years. 'I want boring fee income, not more volatile performance fees, but everyday fees,' says El- Labban. 'I want to be able to sit down at the planning stage and know where 85 per cent of future revenues are going to come from. That makes finding the other 15 per cent a lot more fun.'

UBK caters for both high net worth individuals and institutions and its wealth management services have both sharia-acceptable and conventional capabilities. These are the activities which will have to be expanded if the 'boring' fee income is to grow. 'We are looking to build our portfolio of products. Because of our size we have a limited in-house product generation capability, so we are going to outsource some products,' he says. 'But our in-house products are moving forward.'

Since El-Labban arrived in April, the most significant product launch was that of a new open-ended arbitrage fund in July. Managed by the Asset Management division, the fund aims to produce net returns of about 10- 15 per cent a year by applying moderate leveraging to capture price anomalies on debt and equity securities. The initial $50 million for the fund was raised in the Gulf, mainly from Kuwaiti investors, but it will be made available to pension funds and institutional investors in the UK and continental Europe. It is a low-risk fund and is about 85 per cent invested in bonds and cash.

Such a vehicle is a foretaste of UBK's future role. 'We have a sophisticated product understanding learned in London which will give us a competitive advantage when we take this experience back to the Gulf,' says El-Labban. With this in mind, the arbitrage fund is expected to be followed by a number of other products for debt, equity and real estate markets. 'We are looking to avoid the transactional approach and are seeking to develop relationships and generate wealth,' says El-Labban. 'There is the potential for high fee income, and such products are not users of capital.'

To maximise the benefits of this style of expansion, UBK needs to broaden its customer base and the fastest route will be through the establishment of bilateral arrangements with institutions in the Gulf. 'To tap the private banking market we want to have local banks selling our products,' says El-Labban. 'But we have to be very selective to ensure that the partners we choose are fully committed.'

One of the ways of ensuring co-operation that extends beyond the short- term is to take a significant shareholding in the partner. The purchase in May of a 22.7 per cent stake in Bahrain-based Al-Ahli Commercial Bank is seen by El-Labban as an investment in a bank with good management and strong earnings growth potential, and as an investment in the expansion of UBK's own operations. The ú19.8 million ($31.4 million) paid for the stake also secured a deal by which UBK can market its investment products through Al-Ahli's well-developed network. 'Al-Ahli has a very good understanding of selling products, as its venture with ED&F Man has demonstrated,' says El-Labban. 'Investment products are not peripheral to Al-Ahli's activities but central to them: it is our perfect counter-party in the region.' He says this is the first step in widening UBK's access to the Gulf: 'There may be more similar deals, we are constantly screening.'

Also in the pipeline is a major restructuring of UBK's Islamic banking division. Plans are under consideration to spin off the Islamic Investment Banking Unit (IIBU) and establish it as an independent joint venture enterprise. Islamic banks from the Gulf are expected to come in as shareholders to boost the entity's capital base as UBK dilutes its holding to a minority position. The deal is expected to take place towards the end of the year or in early 2000.

El-Labban sees a number of advantages in such a move: IIBU's capital base will be strengthened, greater experience of Islamic banking will be brought into the entity, and, by removing the institution from the aegis of UBK, it would have its Islamic credentials enhanced. The new bank will also be in a unique position as the only Islamic institution selling products directly into the non-Islamic world. 'The unit already manages about $800 million-900 million in its leasing and real estate funds, and with new Islamic mortgage products there is considerable room for growth,' says El-Labban. 'There are some four million Muslims in the UK and eight million in the US who at present have limited access to Islamic banking.'

Hand-in-hand with the restructuring of UBK's operations comes a cost- cutting programme. 'Rationalisation lies at its heart. We only need one lending group, one processing unit for settlements and one back office,' says El-Labban. 'If we streamline our operations we can become more efficient, and reducing staffing levels will obviously reduce costs.'

There have already been significant changes in personnel within the bank. El-Labban is not the only new face. Andrew Buxton, the former group chairman of Barclays Bank, will become an independent director on 1 November, and John Turnbull arrived in March from Warburg Dillon Read to head the Trade & Export Finance division. At senior board level, Hamad al-Marzouq and Mohammed al-Marafie have taken up position as co-deputy chairmen following the departure of Bader al-Rushaid, who resigned after 10 years' service. Other senior figures have left the bank in recent months: Nicholas Anderson, former head of institutional marketing; Subhi Ben Khadra, head of Arab capital markets; Bernard Wagenmann, chief executive of UBK Asset Management; and Mark Burton, chief executive of UBK Real Estate Group.

There are early signs that the 'dose of structured change' might be the right medicine for the bank. Headline interim results show that UBK has moved back into profit with earnings of ú6.2 million ($9.8 million) in the first half of the year. 'The significant fact is not only that profits are back, but that the quality of earnings has changed. These earnings are from sustainable sources and not from more volatile proprietary trading,' says El-Labban.

The bank is still in a period of transition but El-Labban says the transformation will be completed by the end of the year, by which time UBK will be a very different bank.