BBR Sept '11

DH 10 September 2011

Published from Dubai Media City

Dunia’s crisis-proof approach Amlak faces huge liquidity gap

A Free Zone Defies Recession

Vol. VII. No. 55 September 2011

Editor’s note

Publisher & Managing Director Sankaranarayanan

sankar@sterlingp.ae

MANAGING Editor K Raveendran

ravi@sterlingp.ae

Editor C L Jose

cljose@sterlingp.ae

consulting Editor Matein Khalid

matein@sterlingp.ae

Director Finance Anandi Ramachandran

anandi@sterlingp.ae

Editorial Contributing Editors Anand Vardhan MARKETING Account Group Manager Rizvin Ali

rizvin@sterlingp.ae

DESIGN DIRECTOR Ujwala Ranade

ujwala.art@gmail.com

ACCOUNTS Sujay Raj Circulation Supervisor

Printing

sujay@sterlingp.ae Ibrahim A. Hameed

Asiatic Printing Press L.L.C., PB 3522, Ajman, UAE. Tel. 06 743 4221, Fax: 06 743 4223www.asiaticpress.com, email: asiatic@eim.ae Distribution UAE: Tawseel PB No 500666 Dubai, UAE. Tel: (+971 4) 342 1512 Sultanate of Oman: Al-Atta’a Distribution Est., Kuwait: The Kuwaiti Group for Publishing & Distribution Co.Bahrain: Al Hilal Corporation, Qatar: Dar Al-Thaqafah, Saudi Arabia: Saudi Distribution Company

Banks need to start lending The UAE’s banking sector with about 50 banks has been struggling to grow in the last more than two years. The asset base of the banks, which had been growing at about 20 to 30 per cent in several years until 2009, has hardly grown since then. In the past 18 months since the end of 2009, the cumulative growth has been a little over 12 per cent. Though the UAE’s banking sector is being hailed for its strong capital base, with one of the highest capital adequacy ratios (CAR) in the world at 21 per cent, many view this as a burden for the banks. With the capital base growing and at the same time the profit falling or failing to grow, many banks are facing the prospects of living with a lower return on equity (ROE), which is widely regarded as a key measure of efficiency for any institution. It is true that the UAE banks are in a better position than many others to embrace the Basel 3, but the immediate question before them is how to make a better use of their capital base. Many leading banks have parked tens of billions of dirham with Central Bank for paltry returns. BBR believes the banks will have to wake up from the slumber and start lending once again. It doesn’t make business sense to say, “Let the economy improve so that we can start lending.” Economy needs money to grow, and we are sure the banks will certainly observe much greater prudence and caution while lending than during the pre-crisis period.

CL Jose

SterlingPublications FZ LLC Loft Office 2, G 01, Dubai Media City

P.O. Box 500595, Dubai, UAE. Tel. + 971 4 367 2245, Fax +971 4 367 8613 Website: www.sterlingp.ae Email: info@sterlingp.ae Overseas offices: India: Anand Vardhan, DII/89, Pandara Road, New Delhi, 110003. Tel: 0091 1 26517981 BANKING & of BUSINESS September Bahrain: Sunliz Publications W.L.L, PO BOX 2114, Manama, Kingdom Bahrain. REVIEW Tel: 00973 17276682

2011 1

CONTENTS

8

FACILITY AGREEMENT

Tranche One key to Damas 2 BANKING & BUSINESS REVIEW

September 2011

BBR Exclusives 19

5

11

10

Top UAE banks take beating on ROE DGCX plans Dubai oil, Oman oil futures Deyaar defaults on Islamic obligations Amlak faces Dh9.8b liquidity gap

17 Facts about investing 22 Cross-border deals

dominate realty sector 24 Dunia approach proves

crisis-proof 32 Dubai exports sustain

growth trend

3

ROUND UP

Abraaj acquires Amundi’s PE platform

Dana Gas posts Dh216m net

A

D

braaj Capital, the leading private equity and alternative asset management group in the Middle East, North Africa and South Asia (MENASA), said it had acquired the North African private equity platform of Amundi, the French asset manager jointly owned by Société Générale and Crédit Agricole.

Under the terms of the agreement, Abraaj Capital has taken over management of the $161 million SGAM Al Kantara Fund as well as absorbed the 11-member Amundi investment team, thereby significantly enhancing its presence in North Africa. Abraaj Capital has also acquired Amundi’s stake in the Kantara Fund. “With five existing investments in Morocco and Tunisia and pursuing an active pipeline of investment opportunities across North Africa, the Kantara Fund is a buyout and expansion capital fund, primarily focused on small and mid-cap investment opportunities in North Africa,” a statement said. The acquisition includes fully staffed offices in Morocco and Tunisia thereby expanding Abraaj Capital’s presence in the region.

Damas CEO honoured

T

he CEO of Damas, the Middle East’s leading international jewellery and watch retailer, Anan Fakhreddin, has been honoured as the ‘Turnaround Executive of the Year’ in the 8th annual International Business Awards (IBA) 2011. Damas International Ltd also earned a ‘Distinguished Honoree’ Medal in the category of Company of the Year - Retail. “It’s a great honour for Damas to win these two awards and be among the selected winners from the host nation of the IBAs this year,” said Ibrahim Belselah, Chairman of DIL. The announcement comes only weeks after Damas announced a net profit of Dh53.3 million for the financial year ended 31 March 2011. Damas had reported a loss of Dh2 billion in the previous financial year. The IBA is the only global, all-encompassing business awards program honouring great performances in business. Honorees were selected from more than 3,000 entries received from organisations and individuals in more than 40 nations.

4 BANKING & BUSINESS REVIEW

September 2011

ana Gas, the Middle East’s largest regional private sector natural gas company, has posted a net profit of Dh124 million for the second quarter of 2011, a 276 per cent increase compared with the second quarter of 2010.

The net profit for the 6 months ended 30 June 2011 was Dh216 million compared with Dh66 million in the same period last year. The net profit for the six months excludes an unrealised gain of Dh172 million on the company’s investment in MOL (the Hungarian oil and gas company, one of the company’s partners in the Kurdistan Region of Iraq), booked directly to equity in line with the company’s published accounting policy.

Revenue from the sale of hydrocarbons increased to Dh627 million, with gross profit reaching Dh341 million. These figures represent increases of 46 per cent and 90 per cent respectively, compared with the same period last year.

“This is due to strong production growth coupled with higher market prices for oil, condensate and LPG during 2011,” a statement from the company said.

Production increased in aggregate by 20 per cent, from the company’s operations in Egypt and in the Kurdistan Region of Iraq, where production from the Khor Mor field continues to increase

E&Y(MENA) announces 20 new partners

E

rnst & Young has announced the admission of 20 new partners to its service lines and industry sectors across the Middle East and North Africa (MENA) region, bringing the total number of partners in the MENA practice to 123. Welcoming the new partners, Abdulaziz Al-Sowailim, Chairman and CEO of Ernst & Young MENA, said, “We continue to focus on our priority of fostering a unique people culture based on development, diversity and engagement.” The new appointments reaffirm Ernst & Young’s commitment to developing leaders internally while attracting the best talent from the market place. It provides geographical mobility to people in its 87 country operations in Europe, the Middle East, India and Africa (EMEIA) regions.

Ernst & Young also announced the admission of 548 new partners across its global organization

DGCX plans listing of Dubai, the Middle East Dubai Oil, Oman oil city of future contracts

D

ubai has been crowned once again as the ‘Middle East City of the Future 2010/11’ by fDi Magazine underlining the Emirate’s premier status as a preferred foreign direct investment destination. Dubai ranked exceptionally well across all categories achieving top positions in Economic Potential, Infrastructure and Business Friendliness.

Sami Al Qamzi, Director General, Dubai Department of Economic Development (DED), said, “The ranking of Dubai as the ‘Middle East City of the Future’ is a strong testament to the economic fundamentals of the city, and the growth potential that Dubai offers to investors from around the world. From creating the right infrastructure to establishing business-friendly policies, Dubai has been focused on all-round development and creating a conducive environment for growth.” Fahad Al Gergawi, Chief Executive Officer of Dubai FDI, the foreign investment promotion arm of DED said the sustained top ranking by fDi Magazine for Dubai reiterates the strong growth potential that the city offers for foreign investors to set up business and record tangible growth.

Foreign direct investment to Dubai has recorded an impressive growth of 4.5 per cent this year compared with 2010 and is poised to make a solid growth of 30 per cent next year, said Al Gergawi. “The access to a rich talent pool of skilled professionals, the high quality of life that the city offers and the ease of doing business in Dubai are all driving forces for the continued competitiveness of the city,” he added.

DAE signs 4-year credit facility

D

ubai Aerospace Enterprise (DAE) has successfully concluded discussions with its existing lenders and reached agreement on a new, 4-year credit facility to replace the existing credit facility maturing on July 13, 2011.

DAE is a globally recognised aerospace company specialising in maintenance, repair and overhaul (MRO) services, aircraft completions and aircraft leasing. The company is headquartered in Dubai and operates in four continents and employs over 4,000 people.

D

ubai Gold and Commodities Exchange (DGCX) is seriously looking at adding Dubai Oil and Oman oil futures to the list of contracts traded on its exchange where about 15 contracts are already listed.

Talking to BBR, Ahmed Sulayem, the executive chairman of DMCC, the major shareholder in DGCX, said the listing of these contracts is likely to be done next year.

“I think we will see the listing of Dubai Oil and Oman Oil contracts during the first half of 2012 itself. Though both WTO and Brent futures are listed on DGCX, Brent is not giving sufficient volumes whereas WTI is doing much better trading volumes,” added Sulayem.

He said DGCX is also looking at ways to improve the Brent trading on DGCX. “The question before us is whether we should have a delivery mechanism or go in for the settlement in cash (cash settlement),” he further added.

In a different move, DMCC is planning to put the gold securities (DGS) on the trading platform of DGCX – the exchange arm of DMCC and de-list the same from Nasdaq Dubai. The listing of these securities on DGCX will take place by the end of the year itself, according to DMCC. “We will be introducing a technology that can cater to the gold securities trading on DGCX. This is not to antagonise anyone, but we want to make sure the volume of trade in DGS grows,” said Sulayem.

Sulayem said the Centre is also exploring the possibilities of listing DGS on Singapore or Hong Kong or Tokyo, or any of the eastern exchanges. Other than Brent and WTI, the list of energy contracts also includes Fuel Oil, which is hardly trading on the exchange.

DGCX is all set to commence options trading in rupee futures, which is one of the most traded contracts on the exchange. Though gold options are also listed, the exchange is yet to witness encouraging volumes in that contract.

DGCX commenced trading in November 2005 as the region’s first commodity derivatives exchange and has now become the leading derivatives exchange in the Middle East.

An initiative of the Dubai Multi Commodities Centre (DMCC), Financial Technologies (India) Ltd and the Multi Commodity Exchange of India Ltd (MCX), DGCX is the only exchange outside India that allows rupee futures trading.

BANKING & BUSINESS REVIEW

September 2011

5

ROUND UP

Al Rawabi’s $200m expansion plan

A

l Rawabi Dairy Company, one of the leading producers of dairy products and fresh juices in the GCC, has announced an investment of $200 million as part of its ongoing expansion plans. The dairy company, which currently serves Dubai, Abu Dhabi, Sharjah, Al Ain, the Northern Emirates, Qatar and Oman, plans to extend its regional footprint to Bahrain and Kuwait, where it will replicate the business model it successfully runs in the UAE, statement from the company said. Al Rawabi Dairy is also looking to invest a further $100 million this year to further augment its milk production and processing capacity. “We are constantly investing in new technology to maintain the best quality products; this year, we plan to expand our existing facilities with the addition of a world class milking parlor, yard and cooling system. We are also looking to increase the number of our cows to a total of 10,000 from the current count of 7000 by 2012,” said Dr Ahmed Eltigani Abdul Rahim, General Manager, Al Rawabi Dairy Company.

Arcapita posts $50m net income

A

rcapita Bank, the international investment firm headquartered in Bahrain, has recorded a net income of $50.2 million (Dh184.234 million) for the fiscal year ending June 30, 2011, marking a return to profitability for the bank. Total assets at June 30, 2011 stood at $3.7 billion, an increase of 7.5 per cent from the previous year, and recurring income and management fees combined to reach $203.5 million, an increase of 22.2 per cent compared with that in the previous year.

“Based on generally improving sentiment, our expectation at the beginning of the financial year was for return to growth and economic stability,” said Atif A. Abdulmalik, Arcapita’s Chief Executive Officer.

6 BANKING & BUSINESS REVIEW

September 2011

UAE Exchange is ADIB’s collection agent

A

bu Dhabi Islamic Bank (ADIB) has appointed UAE Exchange, the leading global remittance and foreign exchange brand, as a collection agency for Covered Card payments by the bank’s customers. A statement from the bank said UAE Exchange has a wide network of branches across the UAE at which ADIB Covered Cardholders can settle their payments at no extra cost. It added that the new service will be freeof-charge and Covered Card payments can be made during UAE Exchange branch timings of 10:00 AM to 10:00 PM on weekdays. “The partnership agreement with UAE Exchange demonstrates the steps ADIB is taking to offer added convenience and value to customers. The move adds to ADIB’s growing range of services aimed at enabling customers to efficiently manage their banking operations.

Innovative auto financing from DIB

D

ubai Islamic Bank has launched its new Auto Finance offer, available for new cars of all brands and models, with profit rates starting from 2.99 per cent per annum.

Al Islami Auto Finance has a range of payment plans and options designed to suit the needs of individual customers. A statement from the bank confirmed that no salary transfer is required to avail this offer, with finance available up to 60 months and an option for reduced instalments through balloon payments.

Dr Adnan Chilwan, Deputy CEO - Chief of Consumer and Wholesale Banking, Dubai Islamic Bank, said, “Being able to offer such an attractive Auto Finance rate is a reflection of the bank’s strong liquidity position, enabling DIB to play a central role in the continued economic growth of the UAE. As the provider of finance for a third of all cars on the nation’s roads, DIB remains the market leader in offering auto finance solutions.”

“DIB has the country’s largest team of qualified auto finance professionals, many of whom are available directly at dealer locations. The bank offers an unmatched range of Sharia-compliant auto financing solutions - along with value-added services such as insurance finance and service contract finance, catering to a broad cross-section of the UAE population,” the official release added.

‘ME, SE Asian financial sectors should work together’

T DGCX set to launch Indian rupee options

T

he Dubai Gold and Commodities Exchange (DGCX) is set to expand its Indian rupee (INR) product offering with the launch of an INR options contract on September 26, 2011, according to a statement from the exchange.

The contract will be the only exchange-traded INR options product offered to markets outside India. Eric Hasham, CEO of DGCX said the provision of an Indian rupee options contract will enable DGCX to build on the exceptional volume growth achieved by its Indian Rupee futures contract over the last 12 months and meet member demand to further strengthen the INR offering.

“DGCX has been working closely with its members and market participants to develop this additional risk management tool. The new options contract is the result of this interaction and feedback process. Our unique new Indian rupee options contracts will provide our members with more flexibility to hedge risk and trade in the Indian rupee in a transparent, regulated and cleared trading environment,” the DGCX CEO further said.

Each DGCX Indian rupee options contract represents 2 million rupees. Prices will be quoted in US cents per 100 Indian rupees, with a minimum premium fluctuation of 0.000001 US dollars per rupee ($2 per contract).

At launch, the October 2011 expiry month will be available to trade.

DGCX will hold workshops on the INR options contract prior to its launch on September 26. The dates of these workshops will be announced in due course.

Established in 2005, DGCX is the region’s first derivatives exchange and the only one allowing participants to clear and settle transactions within the Gulf region.

The exchange has played a pioneering role in developing the regional market for derivatives.

he financial sectors of the Middle East and South East Asian countries can work together to tap new opportunities arising from the growth of emerging markets, new technology and the issues facing traditional investment markets, according to Philippe Ghanem, Managing Director of Abu Dhabi-based ADS Securities.

A speaker at the Forbes Global CEO Conference in Malaysia, Ghanem said the financial services industries of both the Middle East and South East Asia are at a crossroads, and innovative and entrepreneurial companies can seize the opportunity to not only deliver world-class solutions to their own markets but also to offer high-value financial services alternatives to global investors.

Regional investors are looking for regional solutions.

The recent global financial crisis has made it clear to investors that they should diversify their portfolios and in many cases they are going to be better served by regional providers rather than having to accept the additional costs of managing their investments out of one of the main financial hubs,” said Ghanem. .

ADS Securities provides on and offline trading of FX and commodities. It works with some of the world’s largest and best-known liquidity providers to offer clients the market leading prices and spreads. .

Ghanem feels that the changing economic environment combined with shared business aspirations and cultural affinities have created new financial synergies between the Middle East and South East Asian markets. Over the last few years, Middle Eastern investors have increasingly looked at growing financial ties with South East Asian nations.

He said the potential for East-East relationships in the financial sector has never been better, and the financial sectors of South East Asia and the Middle East can work together to tap opportunities across the world.

ADS Securities provides on and offline trading of FX and commodities.

BANKING & BUSINESS REVIEW

September 2011

7

EXCLUSIVE

Repayment speed of tranche 1 is key to Damas Cash cover test to be conducted on jeweller

T

he repayment efficiency of the tranche 1 of the entire borrowings at Dh3.015 billion is key to Damas Group as it is bound to have a bearing on many key aspects including the dividend distribution to shareholders.

There are specific terms agreed and signed under the Facility Agreement (FA) between the Group and the banks that determine the interest to be paid on the tranche 2 and 3 of

8 BANKING & BUSINESS REVIEW

the borrowings, which together add up to Dh1.922 billion (Dh1.447 billion and Dh475 million).

More importantly, “under the financial restructuring, the Group will have the ability to declare dividend to its shareholders after the repayment of tranche 1 debt.�

Under the financial restructuring agreement, the Group has undertaken to hold physical gold inventory equal to or greater than the out-

September 2011

standing gold loans during the tenure of the agreement; maintain positive net worth; and pass a cash cover test to be carried out half yearly starting from September 30, 2011.

As was reported earlier by the media, the Group has completed restructuring of the entire bank borrowings of Damas amounting to Dh3.015 billion on May 11, 2011.

Negotiations were held between

The entire bank debt currently bears the pricing of the applicable interbank borrowing – Libor or Eibor depending on whether the borrowing is in dollar or dirham - and a margin of 350 basis points.

Under the financial restructuring, the Group will have the ability to declare dividend to its shareholders after the repayment of tranche 1 debt the Group and the banks from October 2009, which concluded with the signing of the new Facility Agreement (FA) and upon completion of the conditions precedent as laid down in the FA. Under the financial restructuring, the total bank borrowings have been segregated into three tranches with tranche 1, amounting to Dh1.093 billion repayable over a period of six years by way of quarterly scheduled installments amounting to Dh45.75 million each.

“The balance of the debt amounting to Dh1.922 billion is segregated into tranche 2 debt amounting to Dh1.447 billion and tranche 3 debt amounting to Dh475 million,” the notes to the recent financials statements released by Damas explains.

Tranche 2 and tranche 3 are revolving in nature with the interest rates to be reviewed at the end of three years. Under the FA, the entire bank debt currently bears the pricing of the applicable inter-bank borrowing – Libor or Eibor depending on whether the borrowing is in dollar or dirham - and a margin of 350 basis points.

However, tranche 3 carries a discounted rate of the applicable interbank borrowing rate plus a margin of 262.50 basis points.

But, the agreement states that the Group will have to service additional interest on tranche

3 until the repayment of tranche 1, which will provide the lenders an internal rate of return of 10 per cent (enhanced return) on the debt outstanding under tranche 3.

Subsequent to the full repayment of tranche 1, the discounted rate and enhanced rate of return applicable to tranche-3 facility will cease and accordingly, the cost of borrowings will be in line with the rates applicable to tranche 2.

Under the financial restructuring, the repayment of tranche 1 borrowings amounting to Dh1.093 million is to be made from the operating cash flows of the Group. This repayment will be accelerated by application of mandatory pre-payments to be made by the Group, from the funds received from sources other than the normal operations, like the sale of assets, exit from investments and distributions received from the Abdulla Brothers under the cascade agreement.

Damas statement explains that these mandatory pre-payments could lower the repayment period for tranche 1 and also reduce period for payment of the Enhanced Return under tranche 3.

Under the financial restructuring, the entire bank debt has been secured by providing a commercial mortgage over the real estate, guarantees provided by the Group and some of its associate companies, as well as by the individual guarantees of the Abdulla Brothers; and also by the assignment of rights under the insurance policies held by the Group in favour of the banks.

There were media reports that Damas had alreeady repaid Dh200 million of the tranche 1 during May itself. However, Damas management refused to give an update so far on the repayment to Banking & Business Review (BBR). “We cannot make a comment on this right now. We will inform you when we have proper information on the same,” a Damas statement to BBR added.

Earlier, on May 1, 2011, as a condition precedent to the completion of the financial restructuring, a Cascade Agreement (Cascade) was signed between the Abdullah Brothers, the Group and the other bank creditors to the Abdulla Brothers. “The Group signed the Cascade after obtaining advice from independent legal and financial advisors. Under the Cascade, the Abdulla Brothers have agreed to repay Dh614 million to the Group,” Damas has stated.

BANKING & BUSINESS REVIEW

September 2011 9

EXCLUSIVE deposits at this point in time,” said a financial analyst on condition of anonymity.

Though there are unconfirmed reports that Amlak is finalising plans to re-launch Islamic home financing, an official confirmation has yet to come on this. The notes to the six-month financials state that the governmental committee for Amlak’s affairs continues to explore the possibilities of a balance sheet restructuring of the company.

“This has entailed a full review and assessment of the company’s business operations and liquidity position and providing guidance to the company’s management and regulators where necessary with a view to making recommendations to the UAE Government on the company’s long term stability, liquidity and assets and liabilities management requirements,” the notes added further.

As at the end of June 2011, the company’s net loss stood at Dh106 million, compared with the same period loss of last year at Dh4 million, due to mainly falling revenues and higher provisioning. Revenue from financing and investing activity fell by 17 per cent in the first half of 2011, compared with the same period last year, as a result of, no new business origination over the past two years continuing into 2011, and further mortgage rate cuts offered to existing customers.

Total operating costs also fell by 6 per cent to Dh273 million (including Dh212 million distribution to depositors) in the first half of 2011. Meanwhile, total provisioning on the mortgage book was up by 96 per cent to Dh120 million for the first six months of 2011.

Amlak’s total assets, excluding off balance sheet commitment, as at the end of June 2011 stood at Dh12.8 billion, falling from Dh13.8 billion in H1 2010, due mainly to overall effect of decreasing mortgage portfolio.

Amlak Finance faces Dh9.8b liquidity gap Govt committee exploring ways to restructure balance sheet

M

ore than the loss Amlak Finance posted for the six-month-period ending June 30, 2011, the real concern before the company would be the huge net liquidity gap (contractual) to the tune of Dh9.877 billion that is due on or before September 30, 2011.

The investment deposits and other Islamic financing facilities maturing

10 BANKING & BUSINESS REVIEW

on or before September, 30, are to the tune of Dh9.139 billion against a cash balances with the banks of Dh722 million and Islamic financing & investing assets of Dh140 million falling due on or before September end.

“Not only that the liquidity gap is huge at Dh9.9 billion compared with the total asset base of just Dh12.85 billion, it is almost impossible for the company to attract fresh corporate

September 2011

Deyaar defaults on finance obligations Financiers refused to revise developer’s repayment plans

D

eyaar Development, the Dubai Financial Market (DFM)-listed property company, has defaulted on certain Islamic finance obligations that are payable within five years, as the company’s financiers refused to revise the repayment plans, according to Deyaar financial statements.

“These finance obligations are payable between one and five years. The management [of Deyaar] is in the process of negotiating revised repayment plans for these obligations. At the balance sheet date [June 30, 2011], the revised repayment plans were not agreed and the group was in default; the related borrowings have therefore been classified as current,” Deyaar has stated in the notes to financials statements for the sixmonth-period ending June 30, 2011.

The Islamic finance obligations represent Ijarah and Mudarabah facilities obtained from Dubai Islamic Bank (DIB) and from other local Islamic banks and financial institutions. These facilities are used to finance the properties under construction. The Islamic finance obligations carried an effective profit rate of 4.5 per cent to 7.4 per cent per annum.

Deyaar, which posted a loss of Dh344 million for the six-month-period ending June

30, 2010, has come out with a net profit of Dh44.4 million for the first half of the current year. The revenue for the first half was Dh480 million, which was about Dh155 million more than that for the similar period last year.

“The Islamic finance obligations include an amount of Dh417.825 million obtained from the majority shareholder,” the company has stated. Analysts told Banking & Business Review (BBR) that this ‘majority shareholder referred here is none other than Dubai Islamic Bank (DIB) which owns 40.98 per cent in Deyaar Development.

The notes also stated that other Islamic borrowings include an overdraft facility amounting to Dh128.400 million with a local Islamic bank, and that carries an effective profit rate based on EIBOR. “They also include loans obtained to finance the purchase of motor vehicles and equipment.”

As on the balance sheet date, while the group has non-current borrowings of Dh86.67 million, the current borrowings were to the tune of Dh870.4 million. While the Islamic finance obligations were of Dh461.158 million, the remaining Dh409.242 million worth liabilities were Islamic borrowings.

BANKING & BUSINESS REVIEW

September 2011

11

BBR EXCLUSIVE

DMCC defies recession Dubai Multi-Commodities Centre (DMCC) is close to complete a decade of successful existence. When we take stock of the past decade of DMCC, the first and the only dedicated free zone for commodities in the region, it is proved beyond doubt that the global recession has failed to dampen the course of action in the Centre. Rather, as Ahmed Sulayem, its executive chairman puts it; “Last two to three years were the best period for DMCC since its inception in 2002. It has been free from any impact of the recession.� He said DMCC has been the fastest growing free zone in the UAE which has several free zones spread over the seven emirates. During an exclusive interview with Banking & Business Review (BBR) recently, Sulayem reminisced the journey with DMCC where he took up his first serious assignment. He also shared with BBR his future plans for not only DMCC but also for its subsidiaries and the products launched by the Centre. Following are the excerpts from the interview.

12 BANKING & BUSINESS REVIEW

September 2011

INTERVIEW DMCC was established about 10 years ago. How do you see the Centre’s growth in the past decade?

DMCC was established in 2002 as a strategic initiative of the Government of Dubai to enhance commodity trade flows through the Emirates by providing the physical, market and financial infrastructure required. We offer a fit-for-purpose regulatory framework, modern infrastructure, freehold property, innovative products and value-added services.

DMCC successfully attracts key participants throughout the entire value chain of a wide range of commodities sectors along with other commercial businesses ranging from shipping to recruitment, IT to advertising and many more.

Today, with over 3,300 companies registered, DMCC’s free zone developmentJumeirah Lakes Towers (JLT)- is the fastest growing free zone in the UAE. More than 90 per cent of registrations are now coming from companies that are new to Dubai, including multi-nationals, major regional industry participants as well as small/medium sized businesses and entrepreneurs.

Over 100 companies join the free zone every month. This represents a growth of 65 per cent over the same period in 2010.

As of today, JLT has over 15,000 residents and 60 completed towers The role DMCC plays in the gold trade industry is evidenced in the record numbers achieved over the last few years. In 2010, we have seen the total overall value of gold traded through Dubai reaching a record $41.3 billion, up 18 per cent from 2009. It was driven by the increase in the average price of gold.

How do you feel when you look back to the early days of DMCC?

We have been given a ‘blank paper’ giving us the mandate to create a free zone that would attract commodities trade into the emirate. We were required to create the physical market with all logistics and the financial infrastructure to support the trade.

Our aim was to create a diverse and dynamic market for commodities trade. It was a few weeks ago, we launched the bullion coin,

which has attracted tremendous response though the launch was organised during Ramadan – usually a dull period for businesses.

How far has recession affected the functioning of DMCC?

I am happy to say that the last two to three years have been the best period for DMCC during which period DMCC witnessed maximum activity, and we could launch more number of initiatives during this period. I am sure; the current year’s trade will break all the previous records despite the ongoing recession.

What are your new initiatives in gold and diamond?

Our latest gold initiative is the new gold bullion coin in recognition of the visionary leadership of His Highness Sheikh Khalifa Bin Zayed Al Nahyan, President of the UAE. The coin is a national symbol of the UAE’s achievements and its ascendance to prominence in the global arena – His Highness Sheikh Khalifa and the Burj Khalifa, encapsulate a golden era in the UAE’s history.

Burj Khalifa was not chosen just because it is the tallest tower in the world or because it was named after the UAE’s president. This tower also represents the forward-looking, modern mentality of the UAE society. We are also in discussions with the UAE Central Bank to designate this gold coin as the first legal tender in the country and the Middle East as whole.

At the end of 2010, we launched ‘Loan against Gold’, a joint-venture product with Emirates NBD’s wholly owned subsidiary Emirates Money. The loan, the first of its kind in the GCC, allows customers to borrow up to 80 per cent against the value of the gold they have deposited, at competitive interest rates. The gold, in the form of bullion or jewellery, is stored in our gold vaults here in Almas Tower.

Other value added services we offer include Dubai Gold Securities (DGS) – a stock market-listed product that provides investors with secure, low-cost access to owning gold bullion without the additional costs normally associated with insuring, storing and transacting in physical gold. We also offer Dubai

BANKING & BUSINESS REVIEW

September 2011 13

INTERVIEW Gold Receipt - an innovative tool for accessing trade finance opportunities for the gold and precious metals industry.

How did DMCC help diamond trade?

Just one example of how DMCC has contributed to the UAE economy is the value of the diamond trade in Dubai today. Before DMCC was established, the value of the diamond trade in Dubai was $5 million. Last year, it reached a record $35 billion. Diamond trade through Dubai has now reached record volumes of 268.7 million carats in 2010, up 50 per cent on 2009.

Are there any new initiatives in the offing?

In terms of trade financing, our Global Multi Commodities Receipt (GMR) has over 150 members and has facilitated transactions in excess of $500 million since its introduction in 2004. We are currently looking at investing in and developing our GMR offering further.

How does DMCC help trading of commodities such as tea?

Dubai Tea Trading Center (DTTC) recorded 278 tonnes of tea trade passing through the facility in July. Volumes of tea passing through DTTC in the first seven months of 2011 totalled 4,420 tonnes. Total volumes of tea passing through DTTC reached 10,584 tonnes in 2010, representing a 41 per cent increase compared with 2009.

Are you happy with the performance of DGCX so far?

The Dubai Gold and Commodities Exchange (DGCX) recorded the highest trading volumes of any month since inception, with 310,990 contracts traded in July worth $15.05 billion. This is almost double the number of contracts traded in the first seven months of last year.

This included the highest ever-daily trading volume achieved by the exchange of 21,980 contracts on July 27. Open interest on the exchange also hit a record 23,849 on 27 July. Currency futures remain the key driver of this volume growth, trading 278,269 contracts in July, an increase of 236 per cent from the same period last year. Year-to-date volumes in currency trading rose 98 per cent,

14 BANKING & BUSINESS REVIEW

September 2011

to touch 1,383,942 contracts.

Other than boosting trade through Dubai, what else has DMMC done for gold sector?

We have facilitated the setting up of a few gold refineries within DMCC, and today, Emirates Gold Refinery is one of the most active and trusted names in this region. We have played a big role in making these refineries a reality by offering freehold shed space for the refinery; facilitating the market and banking support for their businesses.

We have made one of the largest gold vaults in the UAE, in Almas Tower. We have created the concept of Dubai Good Delivery, which promotes the gold trade in small bars segment. With the gold price having been soaring in the last few years, the role of Dubai Good Delivery has substantially increased.

The Global Multi Commodities Receipt (GMR) receipts, which replaced the earlier Dubai Commodities Receipt (DCR) and Dubai Gold Receipts (DGR), are working well.

Even there are transactions taking place in diamonds using GMR.

Will you allow more refineries in DMCC?

Two are functional now – Emirates Gold and Al Ghurair Giga Gold Refinery. There are many other enquiries pending with DMCC and I am not in a position to reveal their names until their application and business plan are reviewed. We will approve these applications very selectively as DMCC doesn’t want Dubai market to be flooded with too many refineries.

You mentioned about Dubai Gold Securities. How active is its trading?

Dubai Gold Securities were listed on NASDAQ Dubai, on March 2, 2009. DGS is the first physical gold-backed product to be listed on the exchange and in the Middle East, and this offers investors an innovative, cost efficient and secure way to access the gold market. There are trades taking place, but we believe that DGS needs to get greater focus in order for the trade to take place in desired volumes.

So what are your plans to boost trade in DGS?

We are planning to put the gold securities on the trading platform of DGCX, which is majority owned by DMCC and delist the same from Nasdaq Dubai. I hope the listing of these securities on DGCX will take place by the end of the year itself. We will be introducing a technology that can cater to the gold securities trading on DGCX. This is not to antagonise anyone, but we want to make sure the volume of trade in DGS grows.

Will you be taking DGS to any other exchanges outside the UAE?

Yes, we are exploring the possibilities of listing DGS on Singapore or Hong Kong or Tokyo, or any of the eastern exchanges.

Are you ruling out Indian exchanges?

Not at all; I am not opposed to that idea, if they allow me there.

What is the scene on diamond exchange?

Dubai is now one of the top four diamond centres in the world. The first step we did as the first Arab member of Kimberley Process was to initiate steps to raise the credibility of diamond trading in the UAE. The industry and the diamond trade now trust Dubai and the UAE Government so much that the volume of trade has grown substantially all these years. Dubai Diamond Exchange (DDE) has become the member of world body of diamond exchanges in 2004. We are having a lot of auctions and tenders taking place in the premises of DDE. More than trading, DDE is playing a much bigger role in arbitration process aimed at solving disputes in the industry and trade with regards to payment and delivery, which has proved to be a relief to the participants in the industry.

DGCX is all set to launch rupee options. Do you intend to have more options?

As of now, our plan is to launch the Indian rupee options on DGCX. Option con-

tracts are there in gold, but volumes are not sufficient for the trade to take place in that commodity.

Though there are several futures contracts listed on DGCX, steel and fuel oil are hardly trading. Will you continue to have them listed?

We will not de-list them. We will wait and see demand grow in those contracts. People may use them for price discovery and I am sure, they will add value to the market one day. We will be re-looking at them and do necessary adjustments, if necessary, in the future. Steel futures are not successful in any of the markets, except, maybe, in China, which has sufficient volumes to support the steel futures trading.

Will you have new futures contracts?

Yes. We are seriously looking at Dubai Oil and Oman oil futures contracts to be listed on DGCX. I think we will see the listing of Dubai Oil and Oman Oil during the first half of 2012 itself. Though both WTO and Brent futures are listed on DGCX, Brent is not giving sufficient volumes whereas WTI is doing much better. We are also looking at ways to improve the Brent trading on DGCX. The question before us is whether we should have a delivery mechanism or go in for the settlement in cash (cash settlement).

Why did you create gold bonds?

We created the first-ever shariah-compliant gold bonds in order to finance the construction of Almas Tower, Gold Tower and Silver Tower. Almas Tower, as you know, is unique in many respects. We did not use any brokers or sought the help of Nakheel or any other property companies to sell units in Almas. We deployed our own team, established the system to support the sales. We decided not to open the project to brokers first and instead decided to offer it to the end-users directly so that they get the real value.

Almas Tower is one of the first freehold properties in the country constructed for office space. It is also the tallest diamond tower in the world currently. Only members of the DMCC were able to buy office space in Almas Tower and this was done without

BANKING & BUSINESS REVIEW

July-August 2011 15

the intermediation of brokers. In fact, leading developers had approached me to help DMCC sell this property, which we refused to receive. The units were sold out within a few hours of the launch of the sale. I can tell you that the Almas incident has prompted managements of leading developers and brokerage houses in Dubai to change their style. Arabian Radio Network (ARN), Dubai’s largest radio network is moving into the Almas Towers, which has 68 floors.

Coming to the gold bond, DMCC raised $200 million through this bond on the condition that the payback could be done either in cash or gold, and this was totally paid back in May 2010. We didn’t want to burden Dubai Government for the construction work and that was the only reason why we went for the gold bond to raise $200 million.

Any diversification plans for DMCC?

Not for the time being. We want to focus

16 BANKING & BUSINESS REVIEW

September 2011

more on the current activities of DMCC. I don’t know if DGCX wants to do something on those lines.

What is the status of the DMCC’s plan to set up an LNG storage facility in the UAE? The project is still on, but in the current scenario, with the activities having slowed down, we are working on different options, the details of which cannot be revealed now.

I can tell you conclusively that the LNG storage project has not been dropped and will be completed by DMCC.

Any plan to list LNG futures contract?

Once there is storage facility and once there is spot rate for LNG here, we can think of listing futures contract also.

Facts one needs to know while investing

By Alan Durrant

U

nderstandably, as stock markets around the world have been battered in recent weeks, the newspapers have been filled with both bullish and bearish analysis from stock market commentators. What struck me most was the attempted level of accuracy with which some forecasters were attempting to identify likely turning points in the market using fundamental analysis. For those of you who aren’t involved in the day-to-day business of investing money, you may believe that it should be possible to pick when stock markets are going to turn. You may argue that by applying enough intellect, information, computer power and data, there should be a scientific way of achieving every investor’s goal of buying low and selling high. To me, there are many similarities between forecasting stock markets and the weather. Both can give you a pretty good idea of major changes and what actions you should take but both have an element of art as well as science and can be influenced by a multitude of exogenous factors that are simply impossible to put into a forecast. I accept that a weather forecaster can tell us that it will be a bit cooler, dryer or windier next month but I don’t believe that they are accurate enough to predict that it

will begin raining at 3.30pm on February 3 next year. Neither do I believe it when I read stock market predictions that attempt to capture the billions of interdependent variables around the world and turn them into a prediction that a stock market will hit a single level. Quite simply, there are too many unknowns and unknowables to make such predictions with any degree of accuracy.

To see why pinpoint forecasting is impossible, let’s look at the best-known stock market barometer in the world, the S&P 500 Index.

This index covers 500 of the largest stocks in the United States; stocks such as IBM, Goldman Sachs, Johnson & Johnson, and Microsoft. In the last month this index has fallen from around 1350 to 1120, a fall of some 17 per cent. I am now reading comments that the index will hit a particular level; 1050 by year end, 1600 by year-end, 2230 in 3 years etc. To the casual reader, these forecasts appear plausible but some simple arithmetic quickly demonstrates the folly of making such laser guided predictions.

As the graph below shows the total earnings per share (EPS) for the S&P 500 currently stands at $91.42 and next year’s estimated profits are $99.77. With the S&P 500 index at a level of 1120, this means that the his-

BANKING & BUSINESS REVIEW

September 2011 17

2010

97

136

83

316

2011

80

72

46

198

P/E ratio 10

P/E ratio 15

P/E ratio 20

Assuming 10% EPS growth

1472

2209

2945

Assuming 5% EPS growth

1167

1750

2334

Assuming -5% EPS growth

707

1061

1415

toric price/ earnings ratio (P/E) is 12.25x (1120/91.42) and that the market is trading on a forward P/E ratio of 11.22x (1120/99.77). For the sake of simplicity, I will focus on the forward P/E for the rest of this article as this is the one that the market mostly looks at.…

If someone is forecasting that the S&P 500 Index will be at 1050 or 1600 by the year-end, what are they really saying? Using our simple math, it is clear. If we assume that EPS forecasts do not change, then for the Index to be trading at a level of 1050, the forward P/E ratio will need to fall from 11.22x to 10.5x. Similarly, for the Index to be trading back up at 1600, the forward P/E would need to trade at 16x. Both seem entirely reasonable levels, well within any historic norms. The market was on well over 20x in December 2009 and on just over 10x in March 2009. This clearly shows the problem with forecasting using just P/E valuations. It is possible to make or lose a lot of money from here without the market getting either outrageously cheap or expensive.

Of course, it is not just the P/E that could change. If, as is likely, forecast EPS starts to fall, then that will have a significant impact on the level of the S&P. Reversing our model and assuming that the P/E ratio doesn’t change, how far would earnings have to change to reach the targets suggested by some forecasters? To reach 1050, forecast EPS would need to fall from $99.77 down to $93.25. To reach an Index level of 1600 by EPS growth alone would require a probably unrealistic jump in earnings to $142. I think we can safely discount that. However, there is every

18 BANKING & BUSINESS REVIEW

reason to believe that $93.25 is within reach once analysts start cutting their forecasts. Remember, through the power of operational gearing, a 6 per cent fall in EPS is relatively simple.

Throw in some margin pressure and we could easily be back at $60 as we were in 2009.

If we think that pinpointing where the S&P 500 Index might be at the end of this year is tricky, it becomes ever more so if you try to extrapolate further out. In the table below, I have shown the effect of relatively small changes to the EPS and the P/E ratio over the next 5 years. If you believe that the United State’s biggest companies are capable of growing their earnings by 10 per cent per annum and that we will witness P/E ratios of 20x again, the market is a screaming buy as you will enjoy 162 per cent capital growth on top of the 2.3 per cent dividend yield. If you feel that tougher times are ahead and earnings declines of 5 per cent per annum are more likely and that nervous investors will give only a P/E of 10x then the S&P 500 Index will be trading at a level of just over 700, nearly 40 per cent down from even these depressed levels.

So what does this mean for investors? For me, the clear lesson is that you can’t hope to be too accurate.

Tiny changes in your assumptions can make a massive difference to what level the market should be priced at.

This is without even throwing in oneoff events such as tsunamis, terrorism, pandemics, political regime change etc, which are the black swans in these calculations. You shouldn’t hope that markets will turn just because they are cheap or expensive. In particular,

September 2011

you shouldn’t trade just because of a particular valuation level unless it is backed by strong technical signals that suggest that sentiment has gone too far or that selling pressure will soon be exhausted. If you are taking leveraged positions simply based on what you believe is a short-term valuation anomaly, I believe that this is playing a very dangerous game indeed.

Rather than hope to catch indices or individual shares at a level, which is suitable for trading, I much prefer to seek long-term value. There are currently lots of shares around the world that are trading at less than 1x sales, less than 5x free cash flow or with well covered dividends that are in excess of 5 per cent. Will these shares bounce this week? I don’t know. Could they fall further from here? Yes, they could (and almost certainly would) fall much further if markets don’t like what they hear from the Fed and European Central Bank. In this case, I would happily buy more. If you always remember that you are buying little bits of businesses and should be doing so at prices that are attractive in relation to their future profit streams, you will probably be a successful long-term investor. If you obsess about every tick in stock market indices, I suspect that you will have many sleepless nights this year.

(The writer is Chief Investment Officer, Asset Management Group at National Bank of Abu Dhabi (NBAD).

The views expressed are his own and not those of the Bank. He may be contacted at HYPERLINK “mailto:alan. durrant@nbad.com” alan.durrant@ nbad.com)

COVER STORY

T

Top UAE banks take a beating on ROE Small and medium banks better capitalised than large entities

he return on equity (ROE) of the leading UAE banks has taken a beating between 2008 and the first half of 2011 as the equity base of most banks have grown substantially and profit failed to cope with the equity growth during this period.

Analysis of the trend on seven leading banks – National Bank of Abu Dhabi (NBAD), Emirates NBD, First Gulf Bank (FGB), ADCB, Dubai Islamic Bank (DIB), Mashreqbank and Union National Bank (UNB), has revealed that the ROE has fallen markedly for all these banks, except ADCB, between 2008 and first half of the current year, though the fall for Emirates NBD was marginal.

Interestingly, these two banks – ADCB and Emirates NBD, had handsome exceptional income booked from the asset sales during the first half of the current year, and this has helped shore up the ROE of these banks during this period.

While ADCB had additional income of Dh1.314 billion coming from the sale of its 25 per cent stake in Malaysian lender RHB Capital, Emirates NBD, the largest GCC bank in terms of assets, has generated an additional one-time profit of Dh1.813 billion from the sale of 49 per cent stake in Network International to Abraaj Capital, the largest private equity firm in the region.

The return on equity (ROE) of NBAD has fallen from 23.61 per cent on 2008 profit, to 15.42 per cent on an annualised basis during the first half of 2011. While ADCB’s ratio has gone up from 9.93 per cent as of 2008 end to 18.674 per cent (annualised) on current year’s first half profit, Emirates NBD’s return on equity has fallen marginally from 14.46 per cent to 12.55 per cent during this period.

But for these one-time profits, Emirates NBD would have enjoyed an ROE as low as two per cent and ADCB would have seen an ROE of a mere 5.87 per cent on the half-year

BANKING & BUSINESS REVIEW

September 2011 19

profit for the current year. The fall was more pronounced in the case of First Gulf Bank (FGB) and Union National Bank (UNB) – dropping from 22.41 per cent to 14.237 per cent and from 20.01 per cent to 14.37 per cent respectively

Small & medium banks better capitalised

The analysis of the capital base has also revealed that small and medium banks in the UAE are better capitalised than their larger counterparts, with the seven larger entities together accounting for more than twothirds of the total assets versus only a little over half of the total equity in the banking system.

These seven large local banks alone hold more than 67 per cent of the total assets in the country’s banking system and close to 69 per cent of the total loans, but they together account for only just over 52 per cent of the aggregate equity base of the 50 odd banks, the analysis reveals.

Further, these seven banks together account for only 63 per cent of the total deposits as of June 30, 2011. The analysis draws the conclusion that the remaining banks in the country, including foreign banks, together control less than onethird of the total assets whereas they account for about 48 per cent of the equity in the system.

The largest three banks in terms of assets, Emirates NBD, NBAD and ADCB, alone control close to 42 per cent of the total banking assets in the UAE whereas they account for just over 30 per cent of the aggre-

20 BANKING & BUSINESS REVIEW

September 2011

Key bank indicators drop in July

gate equity base of the UAE banks.

The month of July saw the overall banking system in the UAE that constitutes about 50 banks, both local and foreign, contract with all key parameters – assets, deposits and loans dropping marginally compared with the previous month.

Since the start of 2010, only two times the assets have dropped before this, once in December 2010 and the second time in April 2011. There has been a drop of about Dh10 billion or 8.2 per cent in the value of certificates of deposits (CDs) held by the banks during July.

While the drop in total assets was marginal at 1.2 per cent – from Dh1.707 trillion to Dh1.686 trillion, that of bank deposits was 1.1 per cent, whereas the loans and advances dropped by just 0.4 per cent – from Dh1.056 trillion to Dh1.052 trillion.

However, there has been a marginal increase in the capital and reserves (shareholders’ equity) during July, thus increasing the chance of a rise in the capital adequacy ratio (CAR) further.

BANKING & BUSINESS REVIEW

September 2011 21

PROPERTIES

Cross-border deals dominate realty transactions Comprise half of global direct real estate investments in Q2

C

Global, US and Singaporean investors emerge as the most active cross-border sources of capital 22 BANKING & BUSINESS REVIEW

ross-border transactions rose 50 per cent to comprise half the $103.5 billion of global direct commercial real estate investment transactions completed in the second quarter of 2011, according to Jones Lang LaSalle’s new Global Capital Flows, released recently.

Given the strong start to the year, Jones Lang LaSalle still expects market volumes to reach its full year forecast of $440 billion, so long as current market volatility and uncertainty abates and there are no further significant economic setbacks.

In an era of instability, good quality commercial property will benefit, but deals, particularly larger ones, will take longer to complete. “In the first half of this year, we saw firms investing domestically and the private equity and unlisted funds investing across borders,� said Arthur de Haast, Head of the International Capital Group at Jones Lang LaSalle.

He said funds are being more cau-

September 2011

tious with a focus on investing primarily at home and trusting experienced managers with their cross border investments, adding that this trend should continue through the second half of the year if the economic environment remains uncertain.

In net investment terms, global funds were by far the most active investors with net purchases of more than $13 billion. Singapore was the next most active with $2.1 billion and Sweden third with $800 million of activity.

Alongside the global funds, which by their nature led net crossborder activity, Singapore was the second most active net cross-border purchaser in the second quarter of the current year as investors looked abroad for returns due to the capital appreciation occurring domestically.

The report said Kazakhstan and Indonesia both accounted for around $550 million of net pur-

chases in the quarter; the latter was almost exclusively made up by the purchase of Aviva Tower in London.

The top ten markets globally which attracted the most investment included four markets in Asia (Hong Kong, Seoul, Shanghai and Singapore); three in the Americas (New York and Washington, D.C. and Toronto) and three in EMEA (London, Frankfurt and Paris).

Top 10 Cities in the second quarter, 2011 – investment volumes (excluding portfolios) are New York City $6.3 billion), London ($6 billion), Toronto ($2.7 billion), Hong Kong ($2.4 billion), Singapore ($2.2 billion), Seoul ($ 2 billion), Washington DC ($1.8 billion), Shanghai ($1.8 billion), Frankfurt ($1.7 billion) and Paris ($1.6 billion).

De Haast added, “Risk aversion has risen over the past few months, meaning large deals are taking longer to close. While we’re seeing more transaction flow, in the second quarter there was a notable absence of big ticket, single asset transactions. There were fewer than ten $500 million-plus single asset sales this quarter, which is roughly the same number as the second quarter of 2010.

There were over 20 big deals in the first quarter and while a significant number of large transactions are in the pipeline for the second half, the volatility of markets could cause further delay.”

Sources of Capital

Top 10 US cities in the second quarter of 2011 (excluding portfolio transactions) are New York City, Washington DC, Los Angeles, San Diego, Chicago (new entrant to the list), San Francisco, Seattle, Boston, Houston (new entrant) and, Miami (new entrant).

In addition to the surging US capital, the second quarter saw a doubling of acquisitions by the global funds to $20.6 billion and significant jumps in British, Canadian and German-sourced capital, according to Jones Lang LaSalle research. Interestingly in these three countries, most of the new capital was also spent domestically.

In the second quarter there was a total of $38 billion in cross-border purchases, up from $22.9 billion in the first quarter representing a 66 per cent increase. “This was driven by a doubling of foreign-bound Singaporean capital, led by several major acquisitions in China, and by a huge surge by the global funds. Purchase levels by the other top cross-border investors (the US, Germany, Canada and the UK) were broadly unchanged,” the report added.

Preferred Sectors

The study also found that the office sector was dominant in the second quarter, accounting for just over 40 per cent of total volumes, down from 45 per cent in the first quarter 2011. Retail’s share rose to 33 per cent from 28.5 per cent. “The upsurge in hotels volumes (including casinos) led that sector to overtake industrial as the third most liquid sector globally with a share of eleven percent,” the report said adding that the industrial meanwhile accounted for ten per cent.

Capital around the globe is targeting both domestic and foreign investments. This quarter, the United States was once again the greatest source of capital purchasing $27.1 billion in direct commercial real estate, up $7 billion from first quarter, but the increased Historic Global Direct Commercial Real volume was mainly spent doYear Americas EMEA mestically. The United States was also the third most ac2004 185 162 tive cross-border purchaser at 2005 216 212 $2.6 billion. The booming US investment activity is largely 2006 283 322 home-grown with more than 2007 304 333 110 US cities appearing in the firm’s database in the second 2008 126 167 quarter versus less than 90 in 2009 45 98 first quarter and just 60 in the second quarter of 2010.

2010 97 136

2011

80

72

Estate Volumes in $billion Asia Pacific

Total

46

393

67

495

95

700

121

759

85

378

66

209

83

316

46

198

BANKING & BUSINESS REVIEW

September 2011 23

FINANCIAL SERVICES

‘Dunia aproach’ proves crisis-proof Innovative back-to-basics strategy helps company turn in creditable performance

Rajeev Kakar

24 BANKING & BUSINESS REVIEW

September 2011

The company is set to launch a subsidiary that will offer its call centre infrastructure to other banks and financial institutions In 2010, Dunia achieved a revenue growth of 132 per cent, while the expenses grew only 2 per cent

I

f you have the right strategy, no time is a bad time to launch a company, whether you are in the middle of a fiercely fought war or at the peak of an all-pervading financial crisis. More strikingly, this is true even when the company in question is one that deals in financial products, like Dunia.

Dunia, which describes itself as a finance company with a new customer-centric approach, opened its doors in 2008, when the market conditions were in a most turbulent state and uncertainty was stalking every business activity in the country and the region.

People were losing jobs by the thousands and companies were closing down by the hundreds, as defaults became the order of the day. For the financial sector, the conditions were particularly bad as its mine-filled terrain kept erupting at regular intervals, derailing even the most established players off course.

The situation took a heavy toll of the bottom lines.

Given the inhospitable field that lay ahead and all the odds of an over-saturated banking market, Dunia really had a task cut out.

Questions began to be asked about the timing of the company’s entry into the market, and these questions didn’t quite appear misplaced as the experience of other companies with similar circumstances only confirmed such fears.

But today, three years later, it goes to the credit of the management of Dunia that its approach has worked and the company is turning in profits with solid quarter-to-quarter growth against all odds.

“We did not just operate to survive. We

took the tougher route to innovate and strategize to succeed,” says Rajeev Kakar, Executive Director and CEO. “Although it is less than 3 years since inception, experientially it seems like a much longer journey that has been through a full business cycle of creation, growth, realignment, challenges, stresses and successes,” he points out.

In successfully navigating the company through the turbulent times, Rajeev has had the benefit of his solid ‘man for the crisis’ track record. In his quarter-century long banking career, most of it with Citibank, Rajeev has headed the bank’s regional operations through a number of crises, including the Turkey default crisis, Afghanistan war and the War on Iraq. His last assignment with Citibank was as Regional Head and CEO, managing the rapidly growing and complex markets of Turkey, Middle East, Pakistan and Africa, a position that he left in 2006.

Rajeev attributes Dunia’s success to a ‘back to basics’ approach, which most institutions had forgotten as they put all the emphasis on greater ‘sophistication’ in products and service delivery. “Our wholesome dedication and ardor to change the way customers were treated injected a surge of fresh appeal to people in ways that they had never dreamed of. We made our mark and earnestly treated everyone to an unparalleled experience of world-class service, comprehensive solutions, supported reliably by workflow and technology, delivered with excellence, which is what we call the Dunia difference,” he points out.

He explains the ‘Dunia difference’ as a unique approach where the customer always comes first.

According to him, the dictates of the difficult and demanding economic environment made the company rethink and realign itself to suit the prevailing fiscal trends. “The new changing order meant that many institutions had cut back on their exposure, and were unable to serve or were extremely conservative and cautious thus adversely affecting their customers and employees.

“Dunia, and its unique and talented team of professionals, then made a conscious decision to provide ‘more with less’ to combat the stress of the times. We worked even harder and smarter. We innovated, renegotiated, cut costs and worked with greater focus and passion to continue providing the best of services and products to our customers,” Rajeev explains.

BANKING & BUSINESS REVIEW

September 2011 25

FINANCIAL SERVICES Having launched the business at the inception of the global crisis, the company’s early focus was on right customer selection and a strong risk management approach and, according to Rajeev, this paid strong dividends. For instance, by 2010, the cost of credit was brought down to a low level of 15 per cent as compared to the previous financial year, which had seen a higher credit loss cost of 26 per cent in the wake of the global and local crises in the macro-environment.

While all the banks and financial institutions kept cutting staff numbers to reduce operational costs, Dunia followed the opposite approach and recruited more people. Today, the company has more than 700 people on the rolls, backed by state-of-the-art operational platform and infrastructure, which has accorded it the capability to take up additional tasks. In fact, the company is set to launch a subsidiary that will offer its call centre infrastructure to other banks and financial institutions on the lines of Network International, which, though a part of Emirates NBD, offers its services to third parties.

All this is part of the company’s strategy of improving the quality of revenues by adding new products, diversifying earnings and creating new fee opportunities and a granular portfolio mix to avoid any concentration risks, says Rajeev. Simultaneously, the company followed a spend-smart approach to reduce operational costs.

This approach has had a solid impact on the numbers. In 2010, the company achieved a revenue growth of 132 per cent, while the expenses grew only 2 per cent. Similarly, the profitability showed strong improvement, enabling the company to close the year better by Dh28 million. The quarter-to-quarter improvements were even stronger, with the revenues continuing to grow, followed by an improvement of Dh18 million in net income in the last quarter of 2010.

According to current indications, the company is set to achieve the goal of full profitability this year, which in the context of the continuing economic crisis is indeed a remarkable feat.

26 BANKING & BUSINESS REVIEW

September 2011

Barclays opens Islamic window in DIFC

B

arclays Bank has received approval to operate an Islamic Window in the Dubai International Financial Centre (DIFC), enabling it to base its global Islamic products team in the DIFC, and to offer Islamic financial products and services from there.

Well-established as a global leader in Islamic finance, Barclays has been active in promoting the Islamic banking sector for well over a decade. A statement from the bank said this licence endorsement, granted by the Dubai Financial Services Authority (DFSA), positions the global bank to further expand, its already diverse offering, in the Sharia-compliant financial services space.

“We are extremely pleased to hold an Islamic window licence from DFSA,” said John Vitalo, Chief Executive Officer, Barclays, MENA, “and we look forward to continuing to introduce innovative Shari’ah-compliant solutions from the DIFC”.

“As a long-standing international pioneer in Islamic finance, we have always recognised the importance of this industry,” Vitalo added.

Abdulla Mohammed Al Awar, Chief Executive Officer of the DIFC Authority, emphasised the importance of the Barclays licence to the ongoing development and diversification of the emirate’s onshore financial centre and the wider regional economy.

“During this period of renewed financial stability and expansion, and at a time when the Islamic finance sector continues to experience especially notable growth, we are confident that Barclays will continue to make a unique contribution to the industry by providing world-class Shari’ah-compliant solutions from the DIFC,” he added.

Dr Dominic Selwood, Head of Islamic products at Barclays said that operating from a DIFC Islamic platform would greatly enhance the bank’s ability to meet the needs of its regional and international clients seeking Shari’ah-compliant products and services.

“Based on our global track record and unique local insights, we will continue to focus on providing bestin-class customised Islamic solutions,” he added.

BOS H1 net profit drops 45% to Dh152m

B

ank of Sharjah, the largest Sharjah-headquartered bank, has witnessed a 45 per cent drop in its first half net profit when the bank closed the first half with a net income of Dh152 million compared with Dh276 million for the same period last year.

The drop was mainly due to Dh92 million impairment charges the bank incurred for the first half. The bank’s total assets as of June 30, 2011, reached Dh21.3 billion compared with Dh18.7 billion at the end of the same period in 2010, an increase of 13 per cent.

As of June 30, 2011, the bank’s total deposits stood at Dh15.4 billion compared with Dh13.4 billion as of the same period in 2010, an increase of 15 per cent. Loans and advances stood at Dh12.6 billion compared with Dh11.9 billion in the same period of 2010, an increase of 6 per cent.

The increase in deposits over loans and advances significantly enhanced the bank’s loansto-deposits ratio, which further reduced during the period to reach 0.82 in June 2011 from 0.89 in June 2010.

The net liquidity surged by 73 per cent in the first half of 2011. As of June 30, 2011, the bank’s net liquidity stood at Dh5 billion versus Dh2.9 billion in the corresponding period of 2010. “This improvement in liquidity, which was driven by the 15 per cent increase in deposits, led to the 12 per cent drop in net interest income, due to the depressed inter-bank interest rates,” a statement from the bank said.

Varouj Nerguizian, Executive Director and General Manager at Bank of Sharjah, said, “The political unrest which erupted in the MENA region at the beginning of the year continued to negatively impact the regional financial markets and economies. This, coupled with the sovereign debt crisis, has revived concerns over global recovery which in turn resulted in a slower than expected recovery of the UAE economy.”

BANKING & BUSINESS REVIEW

September 2011 27

FUTURES

DGCX currency products remained the mainstay of growth in August trading an all-time monthly high of 511,279 contracts, a rise of 561 per cent from last year

DGCX sets new T benchmarks for records Witnesses over half a million contracts in August

28 BANKING & BUSINESS REVIEW

July-August 2011

he Dubai Gold and Commodities Exchange (DGCX) saw a significant rise in trading activity in the month of August, with the exchange breaking volume records in four products, in addition to setting all-time monthly and daily average volume records.

The exchange reached its highestever monthly volume of 548,566 contracts valued at $27.83 billion, a massive increase of 393 per cent from last year. This surpasses the previous record of 310,990 contracts set in July 2011.

The exchange recorded an average daily volume record of 23,851 contracts worth $1.21 billion for the month of August. The exchange also recorded its highest-ever daily volume of 35,796 contracts on August 4, 2011.

DGCX currency products remained the mainstay of growth in August trading an all-time monthly high of 511,279 contracts, a rise of 561 per cent from last year. The cur-

rency segment also established a new monthly value record of $25.63 billion. Four currency futures recorded their highest-ever monthly volume.

Speaking about the exceptional performance in August, Ahmed Bin Sulayem, Chairman of DGCX said, “The records set by DGCX demonstrate the increased trading interest in DGCX products not only in the region but also globally. The fact that this significant growth has been achieved during the Holy month of Ramadan, which is generally considered a slow business phase in the region, is testimony to the fact that DGCX offers some of the best tools for managing currency and commodity price risk in the region.”

Indian rupee futures recorded its highest-ever monthly volume of 392,045 contracts valued at $17.26 billion, a significant increase of 800 per cent from last year. Indian rupee futures also recorded its highest-ever average daily volume and value of 17,045 contracts and $750 million respectively. The product also saw its highest daily volume of 27,406 contracts on August 19, 2011.

Meanwhile, euro futures reached its highest-ever monthly volume of 96,202 contracts valued at $6.87 billion while Australian dollar futures set monthly volume records of 5,737 contracts valued at $297.1 million and Swiss franc futures recorded its highest-ever monthly volume of 6,454 contracts valued at $420.4 million. In addition, the euro, Australian dollar and Swiss franc futures recorded their highest-ever daily volume of 12,377; 662 and 841 contracts on August 5, August 11 and August 4 respectively. The three currency futures together contributed a total of 14,093 contracts valued at $813.87 million during August.

Among other products, DGCX gold futures increased 18 per cent year-on-year to reach 29,285 contracts while silver futures rose 226 per cent year-on-year to end the month with 3,380 contracts. WTI futures fell 44 per cent to reach 4,622 contracts.

Air Arabia posts Dh51m Q2 profit Turnover up 22 per cent to reach Dh592 million

A

ir Arabia’s net profit for the three months ending June 30, 2011, rose to Dh51 million, an increase of 2 per cent compared with Dh50 million in the corresponding period in 2010.

This increase in profitability exceeded analyst expectations, showing the strength of the airline’s core business amidst tumultuous market conditions, said a company statement.

In the second quarter of this year, Air Arabia posted a turnover of Dh592 million, an increase of 22 per cent compared with Dh485 million in the same period of 2010.

The airline served 1.162 million passengers in the second quarter of 2011, an increase of 5 per cent compared with 1.108 million passengers in the same period last year. In the three months ending June 30, 2011, Air Arabia’s average seat load factor – or passengers carried as a percentage of available seats – maintained its impressive rate and stood at 82.5 per cent.

“Air Arabia has consistently shown its resilience to dynamic market conditions,” said Sheikh Abdullah Bin Mohammad Al Thani, the Chairman of the airline. “Despite the challenging market conditions, Air Arabia has achieved steady growth and solid profits for the second quarter, thanks to our focused business model and appealing product,” he added.

Air Arabia recently announced that it has welcomed onboard its 20 millionth passenger, demonstrating the enormous appeal of the first and largest low-cost carrier (LCC) in the Middle East and North Africa.

Air Arabia commenced operations in October 2003 and currently operates a total fleet of 27 new Airbus A320 aircraft, serving 66 routes from three hubs in the UAE, Morocco and Egypt.

BANKING & BUSINESS REVIEW

September 2011 29

MARKETS BANKING

BofA Merrill Lynch survey forecasts slowdown Cash holdings have soared to their highest levels since the depths of the credit crisis as investors have moved out of equities, notably cyclical stocks Global asset allocators have departed cyclical stocks en masse over the past month 30 BANKING & BUSINESS REVIEW

But investors say recession will be avoided; Cash holdings close to credit crisis highs in wake of equities sell-off

I

nvestors believe that the global economy will slow significantly in the coming 12 months but will avoid dipping back into recession, according to the BofA Merrill Lynch Survey of Fund Managers for August.

A net 13 per cent of respondents to the global survey believe that the world economy is headed for a period of weaker growth. The reading represents a significant swing since July when a net 19 per cent were confident the economy would improve. Investors’ forecast for corporate profits shows the biggest downwards swing in the

September 2011

survey’s history. A net 30 per cent of the panel expects the profit outlook to deteriorate in the coming 12 months. In July, a net 11 per cent forecast an improvement in profits.

However, a net 42 per cent of investors still hold the view that a global recession is unlikely in the coming year. The survey took place from August 5 to August 11, when world equities fell by 12.3 per cent.

Cash holdings have soared to their highest levels since the depths of the credit crisis as investors have moved out of equities, notably cyclical stocks. Cash balances have climbed close to

their high of 5.5 per cent in December 2008. Global investors hold an average of 5.2 per cent of portfolios in cash, up from 4.1 per cent in July. A net 30 per cent are overweight cash compared with their benchmark. Both numbers are at their highest level since March 2009.

Asset allocators have scaled back equity positions faster than in any previous month in the survey’s history. A net 2 per cent remain overweight equities, down from a net 35 per cent in July. Asset allocators have also reduced their underweight positions in bonds and reduced holdings in commodities and alternative investments.

“Flows out of equities into cash have reached capitulation levels, especially in the US, but it’s significant that a revival in optimism towards China has survived the global correction,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. “Investors are waiting for convincing, coordinated action from governments before recommitting their cash to equities,” said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research.

US sentiment down sharply Asset allocators have reduced their positions in the US more aggressively than in any other region and at the sharpest rate the survey has ever recorded. Asset allocators responding to the global survey moved slightly underweight US equities. A net 1 per cent of the panel is underweight this month [August], compared with a net 23 per cent overweight in July.

At the same time, US fund managers have demonstrated a U-turn in economic sentiment. A net 14 per cent of the US panel believes their economy will weaken, in contrast to the net 29 per cent predicting a stronger economy in June.

Eurozone is one region to have avoided the global equities sell-off. The panel remains underweight eurozone equities, but the net percentage underweight the region has fallen to 15 per cent in August, from 21 per cent in July. Within Europe, however, the story has darkened. A net 71 per cent of the regional panel expects the European economy to weaken, up starkly from a net 22 per cent in July, although a strong majority rejects the idea that Europe will go into recession.

More positive towards China Asset allocators have reduced their overweight position in global emerging market (GEM) equities.

A net 27 per cent of the global panel is overweight the region, a fall of 8 percentage points month on month. GEM fund managers are slightly less optimistic than a month ago, but the shift in sentiment is far less pronounced than their colleagues in the US and Europe.

That could reflect a view from GEM fund managers and their counterparts in Japan and Asia-Pacific that China’s outlook is brighter. A net 11 per cent of fund managers from these regions believe that China’s economy will weaken, but that is down from a net 24 per cent in July and a net 40 per cent in June.

Big sale of cyclicals; gold overvalued Global asset allocators have departed cyclical stocks en masse over the past month. Allocations towards industrials suffered a negative 27-percentage point change from July to August. A net 16 per cent of global allocators are underweight Industrials, compared with a net 11 per cent overweight in July. The proportion of respondents overweight energy stocks declined to a net 14 per cent from a net 27 per cent a month ago. While a large majority of allocators remain underweight banks, the month-on-month swing in the sector was a modest 4-percentage points.

The move out of cyclical stocks reflects how three-quarters of investors this month identified business cycle risk as the number one risk to market stability – up from 42 per cent in July.

Investors have taken the view once more that gold is overvalued. In July, the net percentage taking this view dipped to a net 17 per cent. But with gold hitting new highs, a net 43 per cent of August’s panel believe it is overvalued.

[An overall total 244 panelists with $718 billion of assets under management participated in the survey from 5 to 11 August. A total of 176 fund managers, managing a total of $551 billion, participated in the global survey. A total of 136 managers, managing $359 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS.]

BANKING & BUSINESS REVIEW

September 2011 31

EXPORTS

Dubai exports sustain growth trend Gold accounted for 56 pc of direct exports value in 2010

E

xports from Dubai sustained the continuous growth trend in 2010, while imports to Dubai & Free Zone as well as re-exports have reversed the decline witnessed in 2009, according to a report released by Dubai Exports, an agency of the Department of Economic Development (DED), Government of Dubai.

The report also revealed that in 2010, the Emirate has been exporting diverse products, such as gold and precious metals, sugar, plastics & food, in various target export markets particularly in South and West Asia.

32 BANKING & BUSINESS REVIEW

September 2011

The Emirate’s top 10 products accounted for 77 per cent of the total value of direct exports, an indication of a relative concentration of diverse product portfolio Gold, the top exported product by value, accounted for Dh38 billion or 56 per cent of direct exports value Among the leading re-exported products were diamonds, worth Dh56 billion or 39 per cent of the total re-exports value of Dh144 billion Dubai export markets by value were highly concentrated in India and Switzerland, comprising 40 per cent and 20 per cent respectively, due to the export of gold to these countries

Another important trend was the continuous growth of direct and Free Zone exports during the past years followed the positive growth trend of the manufacturing sector, indicating that exporting was a main factor in fostering manufacturing growth during the recession.

According to Dubai Export Monitor Performance Highlights, a yearly publication produced by Dubai Exports, the Emirate’s top 10 products accounted for 77 per cent of the total value of direct exports, an indication of a relative concentration of diverse product portfolio. From the total direct exports of Dh68 billion, the top 10 products were valued at Dh53 billion, while other products were to the tune of Dh15 billion.

Gold, the top exported product by value, accounted for Dh38 billion or 56 per cent of direct exports value.

The other nine products, worth Dh14 billion in total, included waste and

scrap of precious metals; sugar; other plates, sheets, film, foil & strip of plastics; petroleum oils & related products; ferrous waste and scrap; polyacetals, other polyether & epoxide resins; articles of jewellery & parts thereof; chocolate & other food preparations containing cocoa; and unwrought irons.

Meanwhile, direct re-export pattern was significantly different as some products such as motor vehicles and spare parts and electrical apparatus were not in the direct exports list.

Among the leading re-exported products were diamonds, worth Dh56 billion or 39 per cent of the total re-exports value of Dh144 billion, followed by articles of jewellery & parts thereof; motor cars & other motor vehicles; parts of goods of other headings; electrical apparatus for line telephony or line telegraphy; parts & accessories of the motor vehicles; gold; woven fabrics of synthetic filament yarn; parts & accessories suitable for use solely or principally with machines; and motor vehicles for the transports of goods.

Trade pattern for Free Zone exports, valued at Dh143 billion, was also different from both direct exports and re-exports, being characterised by low product concentration; however electrical apparatus, Petroleum products, and data processing machines have relatively higher shares.

“This edition of Dubai Export Monitor report has been compiled to serve as a ready reference to various stakeholders in the four main areas of interest – overall trade trend, regional trade, trade by product and trade by market,” said Saed Al Awadi, Chief Executive Officer, Dubai Exports. “Our direct exports, re-exports and free zone exports were well covered to give us a complete picture as possible of Dubai trade to support the needs of our members and in the agency’s strategy,” he added.

The report covers the latest trade statistics of last year, which was provided by Dubai Customs. The data included in the report depicted the performance of exports by target products and markets. “The report

also gave exporters and investors an analytical evaluation of the trends and composition of exports from Dubai as well as an evaluation of potential opportunities,” Al Awadi added.

Based on the report analysis, top destinations of Dubai’s exports and re-exports in 2010 were in South and West Asia (Dh157 billion); followed by ‘Other Arab Countries’ (Dh48.4 billion); Gulf Cooperation Council (GCC) at Dh47.6 billion; and West Europe at Dh37.5 billion.

Direct exports to South and West Asia were the most diversified with products including gold, sugar, petroleum and aluminium, while exports to GCC were mainly food items. Top products to Other Arab Countries were petroleum, plastics and gold while products exported to Western Europe were precious metals, plastics and ceramics.

Top Free Zone export destinations in 2010 were: South & West Asia (Dh40 billion), GCC (Dh33 billion) and Other Arab Countries (Dh28 billion), while it is to be noted that about Dh0.8 billion worth of goods were supplied by Free Zone to Duty Free Shops in the UAE. Meanwhile, Dubai export markets by value were highly concentrated in India and Switzerland, comprising 40 per cent and 20 per cent respectively, due to the export of gold to these countries, whereas other direct exports go mainly to GCC and the neighbouring countries in small shares. Furthermore, while India still took the biggest portion of 36 per cent of direct re-exports, there was a clear pattern of reexports relative focus in Iran and Iraq with 17 per cent and 5 per cent shares respectively, including a number of other markets in small shares.

Dubai trade with its partners continued to grow, while some new export markets emerged as potentially important for Dubai, including Brazil, South Africa, Kazakhstan and Australia. Also, based on trade flows, the report highlighted some trade opportunities with Free Trade countries that can benefit from free duties.

BANKING & BUSINESS REVIEW

September 2011 33

TAKAFUL

Global Takaful market to reach $25b by 2015 E&Y says Takaful will be default choice for Islamic countries soon

T

he global Takaful market could reach $25 billion (Dh91.75 billion) at the end of 2015, according to Ernst & Young.

Presenting his views at the recent International Takaful Summit in London, Ashar Nazim, MENA Head of Islamic Financial Services, Ernst & Young, said the global Takaful contributions are expected to touch $12 billion at the end of this year while they were at $9.15 billion in 2010.

Terming Takaful “the default choice for Islamic countries” and acknowledging its rapid growth, Nazim said: “If we continue with the 2009 growth rate of 31 per cent or higher, we will clearly touch the $25 billion mark in 2015. We expect that growth will be maintained, as the foundations of the Takaful market in Muslim countries and in emerging markets have already been laid.”

The Takaful market is only 1 per cent of the global insurance market at present, even though Muslims make up 20 per cent of the global population. “In addition to emerging markets, Muslim countries are expected to increase the adoption of Takaful and related instruments in the coming years. We expect Takaful to be the default choice for Islamic countries in the future,” added Ashar.

Emerging markets to lead Takaful growth The Takaful industry today is concentrated mainly in the Middle East and North Africa (MENA) region and in Malaysia, but its future growth markets are the most popu-

34 BANKING & BUSINESS REVIEW

September 2011

lous countries of Indonesia and the Indian subcontinent, followed by the African subcontinent and the CIS countries. Saudi Arabia, Malaysia and the UAE are the top three Takaful markets while Egypt, Sudan, Bangladesh and Pakistan are growing at a rapid pace.

Abid Shakeel, Islamic Financial Services, Ernst & Young who spoke on ‘Takaful – the default option for Muslim countries’ at the summit said: “Legislation in the Islamic countries to make Takaful products the preferred choice among insurance products can place the industry on a completely different level. As we have seen, growth in the GCC is primarily driven by compulsory insurance rather than only voluntary policies.”

Family Takaful will lead growth The Malaysian model, which is widely regarded as more mature and, where the family Takaful dominates, is expected to be increasingly followed by the rest of the world. The family Takaful market remains under-penetrated as it is estimated to currently contribute only 5 per cent in the MENA region compared with 77 per cent in Malaysia. “If we look at contributions per Takaful operator, Malaysia leads the world at $115.8 million. And after Malaysia comes GCC at $63.5 million, the Indian subcontinent at $16 million, Africa at $11.8 million, and the Levant at $4.3 million. There is a tremendous amount of catching up to Malaysia that we could see happen in the future,” added Ashar.

BANKING&&BUSINESS BUSINESSREVIEW REVIEW BANKING

1 July-August 2011 35 September 2011

INSURANCE

Insurers focus more on technical income Takaful players yet to make a mark in a crowded market

W

ith the avenues of investment income shrinking and the recession still posing a threat to the economic growth, the UAE insurance companies have increased their focus on the underwriting business that resulted in better technical profits in the first half of the current year.

In the case of Oman Insurance Company (OIC), the largest player in the market and subsidiary of Mashreqbank, the gross insurance premium revenue has improved marginally to Dh1.460 billion compared with Dh1.432 billion for the same period last year.

It remains a fact that during this period also, the company has ceded more than half of this premium to reinsurance – Dh770 million.

The net underwriting profit for the period after deducting the life insurance fund to the tune of Dh61.116 million, was Dh177.656 million compared with Dh150.704 million for the corresponding period last year.

However, an impairment allowance of Dh70 million on behalf of property and equipment, pulled down the net profit to Dh131.094 million, lower than previous period’s Dh154.415 million.

In the case of Abu Dhabi National Insur-

36 BANKING & BUSINESS REVIEW

September 2011

ance Company (ADNIC), the largest insurer in Abu Dhabi and the second largest in the UAE, the net underwriting income for the first half increased to Dh121 million against Dh110 million, the company turned in for the first half in last year. ADNIC was able to improve its net investment income by more than 15 per cent to Dh44 million during this period from Dh38 million.

The company achieved a net profit of Dh87 million for the first half ending June 30, 2011 against Dh80 million the ADNIC earned for the same period last year.

“We remain committed to our coroprate fundamentals – solid risk underwriting, professional claims management services and effective customer service. We continue on our path of accelerated evolution of ADNIC,” said Walid A. Sidani, chief executive officer of the company.

Both these leading players were able to increase their asset base during the period as Oman Insurance’s total assets inched up from Dh4.820 billion to Dh4.973 billion and ADNIC’s asset base improved marginally from Dh3.596 billion to Dh3.624 billion during this period.

Arab Orient Insurance Company (Orient), another leading player from Dubai where

INSURANCE

Al Futtaim is the largest single shareholder, could witness a decent growth in its insurance premium as the value improved by more than Dh70 million to Dh683.096 million during the period under discussion. While Orient’s net underwriting income improved by a marginal Dh5 million to Dh88.687 million during the first half, the insurer closed the first half with a net profit of Dh121.949 million with the backing of a negligibly small investment income.

The Abu Dhabi-based Emirates Insurance Company also witnessed a good performance during the first half, as its net profit improved from Dh62.022 million to Dh75.089 million between the two periods.

Islamic players face rough weather According to experts, Islamic insurance companies could take a little more time before they could stage a good performance. “Volumes are still small, and moreover, the market is a bit overcrowded. Most companies have relatively small equity base,” said an insurance expert.

Dubai Islamic Insurance & Reinsurance Company (Aman), after generating a takaful income to the tune of Dh226.345 million which was lower than that in the first half of 2010 – Dh276.244 million, ended up the period with a loss of Dh15.334 million.

Dar Al Takaful, another player in the Islamic insurance space, has met with a loss of Dh8.2 million for the first half of the current year, worsening its prospects further from the same period last year when the company ended up with a loss of Dh7.2 million.

GCC insurance remains untapped: Alpen report Currently, the UAE is the largest insurance market followed by Saudi Arabia contributing 47 per cent and 32 per cent respectively to the total premium in 2010

M

any insurance companies seem to act simply as brokers or front offices, reinsuring most of the business The region has very high cession rates showing a high dependence on re-insurers. At the same time, the investment portfolios of the insurance companies are heavily tilted towards equities and real estate, making them vulnerable in a volatile market, the report said

While the penetration rate in the GCC region increased from 0.6 per cent in 2000 to 1.3 per cent in 2010, it remains significantly lower than the global average of 6.9 per cent, Emerging Markets average of 3 per cent and OECD average of 8.1 per cent in 2010 Comprising approximately 88 per cent of the total gross premiums, GCC non-life premiums were $12.8 billion in 2010

BANKING & BUSINESS REVIEW

September 2011 37

INSURANCE

T

he historically low penetration and density in the GCC’s insurance industry though has always been viewed as the weakness of the insurance industry here, the same attributes are set to drive the future growth of this sector which has got a lot of room for growth. According to a report released recently by the leading investment bank Alpen Capital, the GCC insurance industry is poised to stage a smart growth with premiums expected to increase 20 per cent by 2015 to $37 billion (Dh137 billion) from $18 billion (Dh66.2 billion) at present with the support of a high GDP growth in the region.

ing $18.3 billion (Dh66.2 billion) in four years up to 2015. The report also expects the non-life sector to continue to comprise approximately 86 per cent of total premiums in 2015.

According to the report, for the GGC countries, non-life insurance will comprise 86 per cent of total premium in 2015 while life insurance will be 14 per cent, contributing $5.2 billion in 2015.

Market size

“Non-life penetration is expected to grow to 1.81 per cent in 2015 from 1.12 per cent in 2011. Life insurance density is expected to be $113.5 in 2015 increasing from $50.8 in 2011.

These estimates are based on the current market situation,” the report stated.

The report also said that given the volatile world economy, the GCC region may be affected adversely and the forecasts can change significantly Overall the outlook for the insurance sector in the GCC region is positive. While regional valuations are attractive, low insurance penetration and density reflect the opportunities for companies in the sector to position themselves strategically for periods of high growth, said the investment bank in its GCC Insurance Report.

The UAE insurance sector is expected to grow at 19 per cent reach-

38 BANKING & BUSINESS REVIEW

The UAE and Saudi Arabia will be the two biggest markets in the region garnering 75 per cent of the combined share by 2015, while Qatar is poised to register the fastest growth at 30 per cent from 2011 to 2015.

Currently, the UAE is the largest insurance market followed by Saudi Arabia contributing 47 per cent and 32 per cent respectively to the total premium in 2010.

The size of the global insurance market as of 2010 end was at about $4.339 trillion, having grown at rate of 6.7 per cent between 2001-10. Insurance premiums have strong positive correlation with GDP growth and the emerging and developing markets have been growing faster than the advanced economies. During 2001-10, advanced economies registered a GDP growth of 5.6 per cent.

Stating that the insurance industry in the Gulf has not been immune to the financial crisis, the Alpen Capital research found that the accelerated pace prior to 2007 hit the speed breaker as oil prices troughed on receding global activity and tightening credit markets. While the sector has been resilient and has registered a modest growth when most other markets were in the red, the pace of growth has shifted to a lower gear. As the region recovers from the downturn, diversified economic growth of the GCC countries, supportive government regulations and favourable demographics are creating an environment that is conducive for growth.

September 2011

Strong growth opportunities The GCC insurance industry is relatively small with significantly low levels of insurance penetration and density. While this points to the size of the growth opportunity, GCC insurers continue to face a number of challenges. The region has very high cession rates showing a high dependence on re-insurers. At the same time, the investment portfolios of the insurance companies are heavily tilted towards equities and real estate, making them vulnerable in a volatile market, the report said.

Increasing GDP remains the primary growth driver for the insurance sector. Life insurance will also gain momentum with rising population and increasing per capita income. In addition, as GCC countries continue to diversify and develop new sectors, this will bring in new projects, which will increase the demand for non-life insurance.

“The GCC insurance industry is in a state of transition. The markets have gained critical volume and are evolving from a protected industry to a globally competitive sector. As economies in the region mature and diversification policies of the governments bear fruit, this sector is expected to expand rapidly. However, insurers in the region need to gear up significantly to capitalise on the opportunities and remain competitive in the evolving landscape,” said the report.

Positive outlook The outlook for the region remains buoyant on expected higher oil prices and continued expansionary fiscal and monetary policies. The confluence of economic and structural factors has

INSURANCE

created an environment conducive for steady growth of the insurance sector.

Insurance penetration in the region is much lower than global and emerging market average. While the penetration rate in the GCC region increased from 0.6 per cent in 2000 to 1.3 per cent in 2010, it remains significantly lower than the global average of 6.9 per cent, Emerging Markets average of 3 per cent and OECD average of 8.1 per cent in 2010.

“Given the high correlation of penetration and GDP, the low regional penetration and density underscore the significant growth potential of the rapidly growing economies in GCC,” the report said.

The potential of the insurance market across the GCC, and Qatar in particular, is evident when insurance penetration levels are compared against countries with similar GDP per capita. Low insurance penetration and density suggests major growth potential for the industry, as the market remains largely untapped.

The total gross written premiums in GCC amounted to $14.6 billion in 2010, an increase of approximately 22.7 per cent on a yearly basis. Nonlife insurance and life insurance have grown at 23.8 per cent and 22.9 per cent respectively during 2006-10.

Non-life insurance comprises approximately 88 per cent of the total premiums.

Key contributor The non-life insurance segment is the key contributor to the growth of insurance in GCC, with motor and property coverage accounting for majority of the premiums. Comprising approximately 88 per cent of the total gross premiums, non-life premi-

ums were $12.8 billion in 2010. Life insurance segment premium contribution stood at $1.8 billion (12 per cent) in 2010. This is in stark contrast to the global market share of around 58 per cent for life and 42 per cent for non-life insurance. There is significant growth potential in the region.

mately 8 per cent.

“Non-life segment is expected to continue to dominate during the forecast period as more asset categories are made mandatory for insurance.

Fire and property insurance is expected to increase as the property market evolves further as a result of increased diversification,” the report said.

Life market in Saudi

The trend of increased foreign participation is likely to continue, as growth remains sluggish in developed markets across the globe.

The contribution of foreign insurers was limited till a few years back.

This was on account of market entry restrictions and regulations requiring insurers to invest a large proportion of premiums in the local markets.

However, with entry restrictions being relaxed in countries such as Saudi Arabia and Qatar and legal reforms allowing foreign investment in the sector, the presence of foreign players has increased manifold in the region since then.

The potential for the reinsurance industry in the Gulf countries is significant as most local insurance companies rely heavily on reinsurance. As a result of shortage of underwriting skills, the regional insurers are forced to reinsure significant, if not all, share of the policies written. This dependence is reflected in the high cession rates in the region. In 2009, the aggregate cession rate in the non-life segment was 46 per cent resulting in approximately $4.8 billion in volumes.

The cession rate in the region is higher than prevailing rates in emerging markets with similar levels of wealth and also significantly higher than developed market average of approxi-

Qatar has the highest cession rate of 57 per cent while Saudi has the lowest at 40 per cent due to significant growth of medical business, which is largely retained by domestic insurers.

The UAE has 55 per cent.

In contrast to the other GCC countries, life insurance growth in Saudi Arabia is expected at a much higher rate than non-life at a growth rate of 48 per cent while the non-life sector will grow at a relatively stable rate of 14 per cent. The life insurance density is expected to reach $64.88 by 2015 from the $14.59 in 2011, the report added.

With the GDP registering an annual growth of 10.7 per cent, the insurance sector in Kuwait is expected to grow at an impressive rate of 17 per cent in the next four years. The insurance industry in Oman is expected to grow at 18 per cent and Bahrain at 16 per cent during 2011-15. The non-life segment is expected to dominate in the coming years with a penetration growth of 10 per cent and density growth of 14 per cent in the kingdom. The life segment will lag marginally with a growth rate of 14 per cent, the report noted.

The report also expects the nonlife segments to continue to comprise approximately 86 per cent of total premiums in 2015, as most GCC countries are experiencing rebounding economic activity.

Challenges Although the insurance sector in GCC is rapidly growing, it is still a very fragmented one. There are more than 180 insurance players operating excluding reinsurance companies in the region. As a result, insurance compa-

BANKING & BUSINESS REVIEW

September 2011 39

INSURANCE nies seem unable to generate scale, retain sufficient volume of premiums, build meaningful risk pools and underwriting capacity, and innovate.

Many insurance companies seem to act simply as brokers or front offices, reinsuring most of the business. The volume and levels of human capital also remains weak in most countries, also hindering the sector’s development.

“This is a critical factor for the new players domestic or foreign entering the market. Increased number of players, soft market conditions, and high dependence on reinsurers has taken a toll on the GCC insurance companies and most have reported a decline in their Return on Assets

40 BANKING & BUSINESS REVIEW

(ROA). There is severe price competition in the region as many players are attracting same set of small population. The market conditions are soft in the short to medium term and over-supply could be a potential risk for the industry,” the report warned.

ers’ solvency margins, and ultimately the stability of local industry.

Decovery is the key

With a significant of insurance portfolios invested in real estate, the performance of the sector significantly affects the health of insurers. Soft market conditions continue to depress prices leading to poor portfolio performance. The value of the real estate has lost much ground post the recession and most insurers have reduced exposure to the sector.

Difficult financial markets coupled with slow global recovery continue to challenge insurance companies in the GCC. The volatility of assets and contraction in value of investments remains a risk to growth.

This situation puts pressure on insur-

September 2011

Companies find it difficult to implement a proper investment strategy due to the volatile nature of the investment landscape in the region.