It’s been a busy year for our friends at Mashreq. The private lender rolled out Mashreq Neo — its digital banking app — in Egypt; is preparing to launch it, as well as Islamic banking services, in Pakistan, was involved in the region’s largest sustainability-linked financing transaction to date ; launched Neo Corp in Kuwait, — and grew its net income 14% y-o-y in 1H 2024 despite the introduction of the corporate tax and a challenging regional and global macro environment.

Mashreq also issued USD 500 mn in additional tier 1 (AT1) bonds — its second issuance of the kind — that carried the lowest coupon rate for AT1 bonds for a UAE bank in three years. Investor appetite was heavy: The issuance was 4.4x oversubscribed.

For those less familiar: AT1 bonds are unsecured capital instruments that banks issue to raise their core equity base.

Leading on the capital raise and helping steer all of that growth is CFO Norman Tambach (LinkedIn), who took on the role a little over a year ago. Tambach came to Mashreq from ING Germany, where he was named CFO and executive board member in 2019, after joining in 2013, following nearly two decades with KPMG in Europe.

He joined Mashreq at a time when its plans for growth and digitization were coming together more than ever — and just like every Mashreq executive we’ve sat down with, Norman is incredibly aligned with Mashreq’s vision for growth and its love for technology, AI, and staying ahead of the curve.

So what went into one securing one of the best coupon rates for a Tier 1 issuance in years? It took a good story, strong fundamentals, continuity when it comes to raising capital, and identifying the right cohort investors — folks with appetite for the story and risk profile of an entrepreneurial UAE bank.

We spoke to Norman about all this and more as we enter a new interest rate environment, with the US Federal Reserve having started easing and table and geopolitical tensions on the rise. Edited excerpts from our conversation:

ENTERPRISE: Walk us through the AT1 issuance — how did you lock-in that coupon rate?

NORMAN: The story of Mashreq over the last two years has been very positive, so we have a great story to tell. I headed to London alongside Hammad, our head of treasury and capital markets, where we had two days of investor presentations and visits. The key to those types of meetings is that you have to sell a convincing story.

The investors will want to know, “Is it just good marketing? Or does it really have a strong foundation?” It’s also about building a personal rapport, so you have to try to make a connection. Management tell stories, and the investor won’t have confidence in the story if they don’t have confidence in the management team in front of them.

With something like a Tier 1 issuance, the key question is, “Why do you want the money?” If it’s just to go out for a dividend or something else, that’s not good enough — they want a good story there. They want to know that you have a sound strategy, you’re committed to growth and that you are able and planning to call on the first contractual call date.

And we have a story — a good one. We are experienced in the market. We have already previously issued some Tier 1 and Tier 2, and we will probably replace them and call them on their call dates, so being in the international capital and debt markets is a continuous process for Mashreq.

We also had to make sure we were going to the right investors. We had a lot of interest from investors because they saw, and were able to understand and assess, a UAE or GCC bank’s risk profile, especially considering the bank’s growth story. We mapped out professional investors within the GCC and internationally who have an appetite for investing in the region and can understand the underlying risks and rewards. The UAE government’s long-term vision for the banking sector, combined with a regulator such as the Central Bank of the UAE, and the thriving regional financial services sector, also helps support a healthy environment for issuances.

The regulator is very sensitive to ensuring alignment of interests between banks and investors. Both the government and the regulator understand the dynamics of the international debt and capital markets well, and the last thing they would want is to make it difficult for financial institutions to raise Tier 1 or Tier 2 debt and/or capital in the future.

You have to understand the dynamic of the region to do a real risk assessment of this instrument from an investor perspective. If you can do that right, and you assess the dynamics of the regional economy, and Mashreq’s financial strength, then it’s clear that the probability that we will default on the issuance — or that we would not call after five years — is, in my opinion, very, very low.

E: Why was it the right time to go to market with this issuance both for Mashreq and from a pricing perspective?

NT: You want to have an optimal capital structure as a bank, which contains common capital, Tier 1 and Tier 2, and you want to have the right amounts of each. You also have to know that when you’re in dire straits as a bank or if the economy is not in the best place, that is not the time to do a capital or Tier 1 issuance. You do it when things are looking rosy, and the need for capital is not even that high because your capital position is strong, but fresh capital will help finance future business growth.

When investors asked why now, I explained that we were, relative to our peers, a little bit low in terms of our Tier 1 mix of total capital. With this new issuance, our capital components are again more at par with our peers in the region.

We want to go regularly to the markets, and we have to continuously replace our capital — that’s a strategy. We have a capital target that is well above the regulatory requirements; we foresee sound profits going forward; and our pay-out ratio has been approximately 50% over the last couple of years, so for that growth to continue, we perform some capital planning which ensures that we have ample capital for the next couple of years.

Obviously, it was also a good time for investors — we priced the issuance at a little above 7%, and that’s a very attractive coupon for the risks they take, especially now that the market expects two more rate cuts of 25 bps each before the end of this year, and another four of the same size next year, so that’s maybe 200 bps down when you factor in the half-point cut in September.

In the region where we are now, we have very good economic growth rates. Here in the UAE, you’ll see a growth rate of 4% or maybe even 5% in the next couple of years, and it has a lot to do both with the country itself and where it’s situated in the world. To the East of us, we have India, and a lot of economists see us as being in the “decade of India.” To the West, we have Saudi Arabia, who are investing a lot inside the Kingdom, as opposed to just outside of the region. We’re in between those two neighbors, so the odds are good that you will see very healthy growth rates in this region for the next few years, and you cannot say that for a lot of parts of the world.

E: I’d like to switch gears now to your expectations for the business climate through year’s end, given the wider context of interest rate cuts.

NT: Rate cuts have an impact on most banks. The impact will likely be limited this year since they’re confined to 4Q 2024, but next year and in 2026, we will see some impact on interest income. But I do think banks will still be quite profitable, but maybe not as extreme as it has been with respect to net interest income.

The two things we plan to do to offset this impact is to focus on profitable growth of our customer deposit and lending business — by growing your volume, you can compensate (at least partly) the loss of interest income following net interest margin compression — and focus on further growing our non-interest income to ensure we reduce the overall impact of market rates volatility on our net profit.

Two other important factors impacting the profitability of the bank are risk costs and operational costs. Currently, risk costs for regional client lending are relatively low for banks. We’re still in a very benign economic environment, and at the moment we do not see clear indications that this will change soon.

The second important thing is keeping operational costs under control, while allowing for investments. Mashreq is a bank with a tradition of cost-consciousness; we’ve moved around 50% of our staff into lower-wage countries, and we continue to re-balance among countries where we would like to grow our staff to keep future operational costs under control.

The third thing in which we’re investing is further digitalization and making use of generative AI in all areas of the bank, including finance. We are investing a lot to make sure our internal processes are fully digitalized and scalable. Ideally, they should seamlessly work with our already largely digital client interfaces, like the Neo app.

We’re also currently looking into finalizing a proof of concept this year to automate the full process of management reporting. This includes crafting a readable report and

using genAI to analyze developments and formulate commentary. We already know this is technically possible, and if the proof of concept is successful, we want to scale it up across all our periodic management reporting. Our finance professionals would just do final checks, which would save us a lot of time that we can use to bring even more added value to our internal stakeholders.

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