BANKERS are not a popular bunch. Since the financial crisis of 2008 they have become whipping boys for regulators and politicians while, arguably with some justification, finding themselves as the focus of public ire, perceived as and risk takers playing financial roulette with the nation’s economy.
Richard Williams, finance director at the Bank of London and the Middle East (BLME), is happy to challenge the conventional perception of bankers. As the FD of a wholesale Islamic bank which is one of the main providers of Islamic finance in the UK, and claims to be the largest Islamic bank in Europe, Williams has had to adhere to the principles that Islamic finance upholds – fairness, integrity and transparency.
The principle of fairness is reflected in the risk and reward-sharing element that forms the foundation of every Islamic financial transaction. Islamic finance aims to create business activities that generate a fair and equitable profit from transactions that are backed by real assets. This method of financing avoids speculation, short selling and excessive credit creation whilst encouraging sound risk management procedures.
“A very good thing about Islamic finance is that you are very restricted in the way that you can act as a bank. You have got to be conservative in your lending and trading concepts. We do not speculatively trade in anything. Really what we are reinventing is the British merchant bank,” Williams tells Financial Director.
This approach has allowed BLME to avoid many of the criticisms levelled at its conventional peers and avoid some of their pain. BLME entered the market back in 2007, with consolidated assets of £298m and operating profit of £9.3m, but soon found itself growing into the teeth of the worst banking crisis since the turn of the twentieth century. Despite the headwinds, operating profit swelled to £28m in 2008, £30.3m in 2009 and £40.4m by the end of 2010.
But when impairments are taken into account it is clear that BLME was not wholly insulated against the market strife. The bank slumped to net loss of £13.2m for 2009, but managed to bounce back in 2010, reporting a health return to profitability of £3.5m.
Part of BLME’s success is down to its strong capital base. In 2008 and 2009 the conventional banks were almost out of the market when BLME was going in. With regulators enforcing more stringent capital requirements on banks, there is a need for fewer assets on more capital.
“Everybody is chasing the better names, the better credit qualities. We are fortunate in that we have got a lot of capital relative to our assets. We will be able to grow our balance sheet based on the amount of capital that we have got,” Williams says.
However, since 2008 Williams says he has made efforts to reduce the bank’s balance sheet, cutting it from £867m in 2008 to £712m in 2010.
“We were lending quite a lot of our capital out in the interbank market. We were very liquid but we didn’t need to be. It wasn’t particularly profitable so we have shrunk our balance sheet in order that we needed to borrow less for the amount of corporate lending we are doing,” he says.
Williams is adamant about the bank’s plans to raise its quality of earnings, largely by more corporate lending and more fee income from its asset management and private banking business.
The bank’s turnaround between 2009 and 2010 was led by a strong performance by the markets division, particularly the management of the bank’s investment portfolio and capital and continued top quartile performance of the US Dollar Income Fund, which invests in a combination of Islamic bonds, sukuk and interbank transactions.
“That is very considerably above its target of 1% over Libor. It’s historically been about 4% yield and is in the top decile of funds. Out of 800 funds we are in the top 10, which is pretty good going for a new fund,” Williams says.
Asset management is an area where Williams thinks Islamic finance will achieve considerably growth although he expects it to be a slow burner. But BLME has made progress in this space with the recent launch of a High Yield Fund, a Sharia’a compliant fund which targets institutional and high net worth investors in Gulf countries seeking to generate higher returns than those targeted by BLME’s US Dollar Income Fund, and a Light Industrial Building Fund which invests in sustainable property assets across the UK.
“It is a slower business to grow. Everybody says it takes three to seven years to grow an asset management business and we are only two and a half years in,” he says.
Williams also points to the strong earnings growth in BLME’s corporate banking division, particularly in the area of equipment leasing to UK based corporates and SMEs with the bank reporting a 96% increase in the number of leasing deals completed in the first half of 2011, with 57 deals completed compared to a total of 29 in 2010. The volume of deals completed totalled £67m in the first half of 2011 versus £19m for the same period in 2010.
“We have put three times as much leasing assets on the book as this time last year. It is very Islamic, it is asset based. If you kick it and it hurts it is an Islamic loan – it’s a caterpillar truck or a building, it is not credit default swaps. We do not do the speculative stuff. It is a very good business model not to in my view,” Williams says.
Product development has been high on Williams’ agenda and the bank is active in internet banking, where it launched a Premier Deposit Account facility. Since advertising savings rates of up to 4.8% on comparison sites such as Moneysupermarket.com, BLME has seen a fourfold increase in customer deposits. This is attracting a non-Islamic customer base.
“It is a deposit account for anybody. It has gone up to 240 depositors from nothing in relatively short time. We are using the same marketing techniques as other products,” he says.
Williams is not an FD by trade. And in the case of launching BLME he says that experience of the banking sector outweighs a traditional finance background.
Although a qualified accountant, Williams’ early career in investment banking was spent with Chase Manhattan, Credit Agricole and Bankers Trust. He then spent 10 years at Robert Fleming & Co setting up their global equities derivatives business. According to Williams, the most important experience for leading the finance function of a start-up banking operation is having varied experience across the industry and being involved with start up operations.
If you have a certain amount of big business, big banking experience you have got to know how big banks experience things and the controls that are in place,” he says. “But you have also got to be involved in a start up. Islamic banking as a start up business isn’t any different than a start up things I have done. It is a new set of rules, but just adhere to the rules and you can do it.”
Williams adds that FDs of City banks are few and far between.
“There aren’t many of them. To find listed financial management controller experience is relatively rare. Most the people that work in finance in the banks work as financial controllers reporting back into their head offices. We are a fairly rare breed,” he says.
The most important skill Williams has had to exhibit appears to be the ability to drive a hard bargain. He has had to engage heavily with HMRC and the Treasury on its VAT methodology to make sure that there was a level playing field for taxation of Islamic banks.
In last few years there have been changes in the treatment of alternative finance and “that was where the level playing field was levelled.”
“It has been fascinating working in this environment where you actually go to Treasury and find out what the politicians want you to do. Are they minded to change the finance act? The answer was yes,” Williams says.
If HMRC and the Treasury was not enough, Williams has also had to battle with the FSA over liquidity funding for Islamic banks. The FSA requires all banks to have very goof liquidity funding but Islamic banks cannot hold gilts – the safest instrument in the UK.
“The FSA allow us to hold Islamic development bank sukuk as AAA instrument and we have a fair holding of that instrument but we don’t hold much cash. We hold other assets and have things we can liquidate if necessary and we have interbank deposits which are maturing daily, so liquidiy is not a problem. But you have got to negotiate with the FSA on their liquidity thinking. I am a bit disappointed that the Bank of England won’t allow us to deposit with them.”
But Williams does not see this as being any more restrictive than when you want to set up a business in India, Malyasia or Taiwan. “You have to figure out what the regulations are. The fact is that we are doing it on home turf but in a new environment. I don’t think we have had to negotiate more, I just enjoy it.”