#193 - March 2017 by CPI Financial

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MARCH 2017 | ISSUE 193

Fostering continental development Dr. R. Seetharaman, Group CEO, Doha Bank, receiving the Pravasi Bharatiya Samman Award from the President of India, Pranab Mukherjee

14 Tadawul launches Nomu-Parallel Market page 3-4 contents.indd 1

32 Saving Oman

52 Room for improvement

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Dubai Technology and Media Free Zone Authority

Fostering continental development Dr. R. Seetharaman, Group CEO, Doha Bank, receiving the Pravasi Bharatiya Samman Award from the President of India, Pranab Mukherjee

“GCC-India bilateral trade is close to $100 billion in 2015-16 out of which the Qatar-India bilateral trade is close to $10 billion.” – Dr. R. Seetharaman

60 Determining actual value 19/03/2017 11:53

ABK’S AWARD-WINNING CREDIT CARD ABK Emirates Visa Infinite credit card recognised by Banker Middle East Product Awards 2016. • Best Co-Branded Credit Card • Best Credit Card

Simpler Banking

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CONTENTS

MARCH 2017 | ISSUE 193

Editor’s Letter

News analysis

A region with a target on its back

News bites

THE MARKETS 10 Brexit cliff: the scale ahead and the descent next 14 Tadawul launches Nomu-Parallel Market 16 So long, bond bull market LEGAL PERSPECTIVE 22 Staying ahead in the game COVER STORY 26 Fostering continental development COUNTRY SPOTLIGHT—Oman 32 Saving Oman ISLAMIC FINANCE 38 KBW launches Islamic fund www.bankerme.com

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| ISSUE 191

Fostering continental

“We believe the outlook is positive for the Iraqi economy based on better oil price forecasts and improved government spending.”

Bank, receiving

18 A new rule: digital payments and virtual currencies

28 Getting back on track

Fostering conti nental developme nt

Dr. R. Seetharaman the Pravasi Bharat , Group CEO, Doha Bank,

receiving iya Samman Award President of India, from the Pranab Mukherjee

40 The state of MENA

14 Tadawul launches

Nomu-Parallel Market

CPI Financial

32 Saving Oman

52 Room for improvement

60 Determinin g actual value

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Zone Authority

Dubai Technology and Media Free Zone Authority

and Media Free Dubai Technology

Mukherjee

10 Bond markets in acceleration

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of India, Pranab

ng 34 Revolutionisi retail banking

Faisal Al Haimus, Chairman, Trade Bank of Iraq

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Editor

BankerMENA

a 22 Adjusting to new environment

Making strides in Iraq and beyond

from the President

Nabilah Annuar

12 The ﬁnal countdown

Zone Authority

Samman Award

of Alawwal Bank

the Pravasi Bharatiya

Al-Khafrah, Chairman

Nabilah Annuar

10 A tripartite pact

Get the next issue ofEast Banker Middle before it is published. Full details at: m www.bankerme.co

– Dr. R. Seetharam an

Group CEO, Doha

Mubarak Abdullah

frah, k Abdullah Al-Kha Engr. Mubara l Bank Chairman of Alawwa

“GCC-India bilateral trade is close to in 2015-16 out $100 billion which the Qatar-In trade is close toof$10 dia bilateral billion.”

development Dr. R. Seetharaman,

Making strides in Iraq and beyond Faisal Al Haimus, Chairman, Trade Bank of Iraq

Preserving excellence

to “Alawwal speaksthe both our legacy as ﬁrst bank in Saudi, and to our future.”

Preserving excellence

| ISSUE 193

and Media Free

JANUARY 2017

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MARCH 2017

FEBRUARY 2017 | ISSUE 192

Dubai Technology

hile governments implement their respective economic diversification plans, financial institutions have their own “diversification agendas” to address. This year is seen as a prep year for banks as they adjust to a slew of new regulations in the market both domestic and international. Apart from Basel III and IFRS 9, this includes bankruptcy laws, digital payments and virtual currency regulations, VAT rules as well as common reporting standards. In addition to this, financial institutions must also keep ahead of the curve in product and service innovation. In this day and age, banks have access to their customers’ data as well as an insight into the customers’ spending habits and indirectly their lifestyle. With this volume of information, banks should be able to cater to their customers in a more efficient manner, offering them relevant products at the opportune time. The depth and breadth of information on millions of consumers make its highly crucial for financial institutions to possess the competency to secure this data from potential cybercrime risks. This installation of Banker Middle East takes a look at the potential threats this region faces in regards to cybersecurity (pgs. 6 and 56). The cover story of the month features the head of Doha Bank as he stresses on the importance of continental cooperation and how financial institutions should align themselves to the UN’s Sustainable Development Goals (pg. 32). The country focus for March visits Oman to see how the government plans to reign in its finances for the long term (pg. 32). In addition to these, this issue also provides updates on various other concerns including capital markets, branding and real estate. As usual, I wish you a productive read.

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CONTENTS

MARCH 2017 | ISSUE 193

RETAIL BANKING 44 Alawwal Bank launches digital branch, ‘IBDA’ BRANDING 46 The value of a good name 48 M&A deals are on the up but many risk destroying brand value

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Chief Executive Officer ROBIN AMLÔT robin@cpifinancial.net Tel: +971 4 391 4681

IN DEPTH 52 Room for improvement TECHNOLOGY 56 Are banks listening?

REAL ESTATE 60 Determining actual value PERSONALITY 66 Jan-Willem Sudmann, Executive Vice President, Head of International Banking Group at Mashreq

Chairman SALEH AL AKRABI

Managing Editor GEORGINA ENZER georgina@cpifinancial.net Tel: +971 4 391 3728

Sales Director OMER HUSSAIN omer@cpifinancial.net Tel: +971 4 391 5419 EDITORIAL editorial@cpifinancial.net

ADVERTISING sales@cpifinancial.net

Editor - Banker Middle East NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726

JON DESPRES jon@cpifinancial.net Tel: +971 4 433 5321

Editors MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716 WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718 JESSICA COMBES jessica@cpifinancial.net Tel: +971 4 364 2024

NIKHIL NIDHAN nikhil@cpifinancial.net Tel: +971 4 391 3717 DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526 MOHAMED MAKSOUD mohamed@cpifinancial.net Tel: +971 4 433 5320

London Bureau ISLA MACFARLANE isla@cpifinancial.net Tel: +44 7875 429476 Chief Designer BUENAVENTURA R. JALUAG, JR. jun@cpifinancial.net Tel: +971 4 391 3719

44 Log on to www.cpifinancial.net for news, polls, events, analysis, blogs, features, commentary and more.

Caring for your career

Looking for a new position in financial services in the Middle East?

Checkt CPI Financial’s Jobs page

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Senior Designer FLORANTE MAGSAKAY florante@cpifinancial.net Tel: +971 4 391 3724

Creative Designer ANA MAKSIC ana@cpifinancial.net Tel: +971 4 391 3723

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WEBSITE www.cpifinancial.net ©2017 CPI Financial. All rights reserved. No part of this publication may be reproduced or used in any form of advertising without prior permission in writing from the editor. Registered at the Dubai Media City Printed by United Printing & Publishing - Abu Dhabi, UAE

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09/02/2017 17:04 2/9/17 4:17 PM

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NEWS ANALYSIS

A region with a target on its back Cybersecurity issues are on the rise across the GCC. We take a look at the most recent breach and how authorities are addressing the problem

ver the past five years, there have been numerous reports on both cyberattack attempts and actual cybersecurity breaches across the GCC. During an international conference in Saudi Arabia, Saleh Almotairi, Director General of the Saudi National Cyber Security Centre pointed out that financial institutions and government bodies in GCC countries are gradually more susceptible to cybercrime. “There is an increase in targeting GCC countries. If we cooperate we will be able to protect all sectors,” Almotairi reportedly said at the conference. He highlighted that all GCC countries are at risk and must tighten coordination to fight this increasing number of attacks. Just last month, press reports surfaced on the hacking of several websites in Kuwait. An unidentified hacker attacked and succeeded in blocking a number of sites, including the sites of companies and internet banking services. Through a conversation chain on Twitter, it was found that the hacker did it to prove to the Undersecretary of the Ministry of Communications, Hamid Al-Qattan that the electronic protection programmes

6 page 6 News Analysis.indd 6

adopted by the ministry are still weak and fragile in spite an earlier statement by the official affirming that Kuwait is safe and cannot be hacked. The attack reportedly led to the disruption of some services and several sites had to be shut down.

There is an increase in targeting GCC countries. If we cooperate we will be able to protect all sectors. — Saleh Almotairi, Director General, Saudi National Cyber Security Centre

Nevertheless, the Kuwaiti Banking Association (KBA) has denied rumours about the hacking of Kuwaiti banks except for very limited attempts on the accounts of a local bank, with a small number of accounts affected. Majid Al-Ajeel, KBA’s board chairman denied social media reports that applications used by bank clients to make payments using their cards were hacked.

In a local report, Ajeel explained that local banks are very keen on protecting their clients from any financial losses. He affirmed that Kuwaiti banks’ electronic networks and data systems are highly protected by the latest data security technologies and software. The affected bank faced an attempted hacking of a limited number of accounts and immediately took all needed security measures to prevent hackers from accessing clients’ accounts. The bank contacted security authorities reporting the matter so that standard procedures could be followed. The safety of the digital banking system in the country was further avowed by the Governor of the Central Bank of Kuwait (CBK), Dr. Mohammad Al-Hashel. He asserted that there has been no illegitimate entries into the accounts of the Kuwaiti banks except for the Commercial Bank of Kuwait where there have been very limited entries. The CBK is coordinating with banks to contain the irregular act and ensure the sound status of the electronic networks of banks, with a special team from the central bank examining the situation.

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NEWS

BITES Bahrain non-oil growth hits 4.7 per cent

Egypt’s rebalancing continues ahead of a challenging year Rising foreign exchange reserves, a return of private capital inflows and currency appreciation point to further progress in Egypt’s gradual external rebalancing in early 2017, said Fitch Ratings in a recent report. Further fiscal consolidation alongside external rebalancing would lay the groundwork for a broader-based improvement in sovereign credit metrics in 2018. However, challenges, including the risk of social unrest, are substantial. Even if the envisaged reforms progress smoothly, it would take several years to reduce gross general government debt to more sustainable levels.

UAE banks lead the GCC banking sector in terms of asset volume Statistics from the Central Bank of UAE for FY 2016 show that the UAE banking sector has a total asset volume of $711 billion, topping the list of GCC banking sectors in terms of asset volume. This reflects the extent of the sector’s importance, experts and analysts said. In second place is Saudi Arabia with a total asset value of $602 billion, while the banking sector of Qatar came in third place with $349 billion, followed by Kuwait with $198 billion, Bahrain with $193 billion and finally Oman with around $70 billion. The anticipated merger between the National Bank of Abu Dhabi and First Gulf Bank will create the second largest bank in terms of assets in the GCC region, with around $183 billion, while Qatar National Bank took first place with around $198 billion. Emirates National Bank of Dubai (Emirates NBD) came in third place with valued assets of $122 billion, followed by the National Commercial Bank of Saudi Arabia with $117 billion, the National Bank of Kuwait with $79 billion, Ahli United Bank at $34 billion and Bank Muscat at $28 billion.

RATINGS REVIEW Entity

Abu Dhabi

LT IDR/LT ST IDR/ST Rtg (FC) Rtg (FC)

F1+

Bahrain

BB+

Lebanon

B-

Egypt

LT IDR/LT Rtg (LC)

ST IDR/ST Rtg (LC)

F1+

BB+

B-

Country Ceiling

AA+

BBB+

B-

Country

UAE

Bahrain Egypt

Lebanon

F1+

AA+

Kuwait

AA+

UAE

BB-

BBB-

BBB

Saudi Arabia

AA-

F1+

AA-

F1+

AA+

Qatar

F1+

AA+

Turkey Saudi Arabia Qatar

Kuwait Ras Al Khaimah Turkey

KEY

Positive Negative Evolving Stable

Under Review

8 page 8 News Bites.indd 8

OUTLOOK

WATCH

The non-oil sector of Bahrain’s economy reached an annual growth rate of 4.7 per cent in the third quarter of 2016. This marked a clear acceleration from the 3.6 per cent pace seen during Q2, according to the latest figures published in the Economic Development Board’s Bahrain Economic Quarterly. Overall, during the first three quarters of 2016 the Bahraini economy expanded by a real 3.6 per cent over the corresponding period in 2015. This compares to headline growth of 2.9 per cent during 2015 as a whole. A key factor underpinning the momentum in the non-oil economy remains an unprecedented pipeline of large-scale infrastructure projects, the implementation of which has accelerated over the last year. Key projects include a $3 billion project for ALBA’s sixth pot line, an associated $800 million power station deal, a $1 billion contract for the airport modernisation programme and a new $355 million Banagas gas plant.

Dubai Financial Market launches region’s first ETF trading platform Dubai Financial Market (DFM) has launched a new trading platform for exchange-traded funds (ETFs). The platform, the first of its kind in the region, is designed to offer better levels of integration and provide ongoing support to the ETF industry, particularly market makers, authorised participants and liquidity providers. The new ETF system is also governed by a world-class regulatory framework. Afkar Capital listed the first ETF fund on DFM platform and announced that it signed Al Ramz Capital as a new Authorised Participant (AP) for the fund, bringing the total number of APs to four. The firm has also appointed Beltone Financial as a Foreign Liquidity Provider, marking the first time a foreign market maker has been appointed as liquidity provider for a domestically listed fund in the Middle East. DFM’s licensing of Al Ramz as an AP and of Beltone as a market marker came under a new regulatory framework announced as part of DFM’s commitment to optimise its ETF trading platform, the first of its kind in the region to offer a high level of integration between its regulatory frameworks and operating mechanism.

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Brexit can only be speculated at the moment, however it is clear that once outside of the union, the UK would be free to engage trade pacts on its own terms, instead of being directed through Brussels. This is one of the main perceived benefits for bravely leaving the EU.

THE CURRENT SCENARIO

Brexit cliff: the scale ahead and the descent next Mihir Kapadia, CEO and Founder of Sun Global Investments sheds light on the implications of the Brexit vote and its prospects for investments in the MENA region

Having clocked a year on year growth of 2.2 per cent, the UK is actually the fastest growing economy amongst the G7 countries in 2016, very different from the gloomy forecasts given during the Brexit vote. In fact, since the first six months of the Brexit vote, the UK experienced an annualised growth rate of 2.5 per cent without any evidence of slowing down as we begin the process of leaving the EU. Strong consumer spending, supported by the financial and services sectors, has been doing much of the heavy lifting for the economy, countering a slump in production, construction and agriculture. Though Britain’s economy continues to defy the experts, we will be going into 2017 with caution as more clarity emerges

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THE MARKETS

cont. on page 12

ritain is on the verge of undertaking phenomenal change, the likes of which no country from the EU has had experience in handling. As the UK prepares to break free from the union, opponents are wary of what they see as a step towards its isolation. Historically, the UK has been one of the global powers, economically and politically for a reason—if the world ever was reduced to a roundtable—you would most certainly find Britain right in the centre of it having a significant voice or vote. The fear amidst them is that the UK would now be excluded from the executive member club, and would be left alone to fend for itself.

The very development of the European Union as a political and economic partnership began after World War II with the belief that countries which worked together and traded together are more likely to avoid going on to war with each other. While the UK has been a member of the single market, it has its own currency and is significantly independent from the EU parliament. However, in the same sense it was also disadvantaged by the fact that it was bound by EU regulations as well as requiring EU approvals for any trade pact or socio-economic, and to a fair extent political relations it wanted to forge. The larger effects of

Mihir Kapadia

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THE MARKETS

cont. from page 10

on the path ahead for UK, away from the shadows of the EU. There certainly will be changes in the way businesses operate, but overall the economy should be able to recalibrate. The challenge would be to prevent this familiarity turning into complacencyâ&#x20AC;&#x201D;sluggish wage growth and rising inflation may mean we no longer may be able to depend on consumers for keeping the economy buoyant.

THE SCALE AHEAD

The ideal situation is for the UK to leave the EU exactly two years after triggering Article 50. However, since the negotiations will be between the UK and 27 other countries, we have to act quickly to be on course with the target. Sticking to the timeline of negotiations is really important as the UK will be in a state of limbo until everything is settled. As this is the first time a country is leaving the EU there is no precedent to go on. It is now up to the politicians on all sides to amicably resolve the breakup.

LOOKING EAST INTO MIDDLE EAST

While the UK is yet to provide a formal notification of exiting the EU, by triggering the Article 50, the country has already set its sights on potential and prospective partners outside the EU. Prime Minister, Theresa May has undertaken visits to countries like India, Bahrain, UAE, US and Turkey. While there have not been any concrete agreements yet (EU rules prohibit countries from negotiating trade relations before leaving) the UK did receive reciprocal interest for free trade partnership. The MENA region is one of the key focus areas for the UK, with British exports to the region reaching $18 billion in 2014, apart from cooperation in defence, security and development. The region possesses

among the best scope for mutual partnership with a faster and robust growth rate, outpacing the developed markets in Europe and US. Countries including the UAE, Qatar, Kuwait and Bahrain are rapidly transforming their economy and expanding market dynamics to make it easier for foreign investments and partnerships. The most important factor is that the region has also recognised and commenced working on a post oil economy and diversified the market structure. The growth rate and the scope in the region, combined with the UKâ&#x20AC;&#x2122;s new post-Brexit future mean that the Middle East and Britain have a new era waiting ahead. We are certainly in an interesting period and are sure to witness phenomenal change.

UK recorded a

2.2% growth and was fastest growing economy amongst the G7 countries in 2016 British exports to the MENA reached

$18 billion in 2014

UK visitors to MENA region 2.5

1.9

mn visitors

bn GBP

2.4

1.7

2.3

1.6 1.5

2.2 2.1

1.8

1.4 2011

2012

2013

UK visitors to MENA (LSH)

2014

2015

1.3

UK spending to MENA (RHS)

Source: Office of National Statistics, Emirates NBD Research

UK investment in Dubai real estate (2015 - USD billion) Others, 8.1

UAE, 7.1

Chinese, 0.7 Iranian, 1.3

Indian, 5.4

Pakistan, 2.2 Other GCC, 2.4

Non GCC, 4.4

Saudi Arabian, 2.5 UK, 2.7 Source: Dubai Tourism and Commerce Marketing, Emirates NBD Research

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THE MARKETS

Tadawul launches Nomu-Parallel Market In a bid to provide additional source of funding for issuers to access capital, increase diversification and deepen the capital market, Tadawul has launched Nomu, a parallel equity market with lighter listing requirements that serves as an alternative platform for companies to go public

ollowing the Capital Market Authority’s (CMA) announcement of issuing the Parallel Market Listing Rules in December 2016, Tadawul launched the Nomu-Parallel Market in February 2017. Nomu is a new market with lighter requirements, with the possibility for companies to transition to the main market after a new filing process with the CMA. According to industry reports, seven companies have already received the CMA’s approval to list on the new bourse. The launch of Nomu-Parallel Market is a step towards fulfilling Tadawul’s plans to further develop the capital market. It is also in alignment with the objectives of the 2030 Vision which stress the importance of developing a more advanced capital market open to the world, allowing greater funding opportunities and stimulating economic growth. This will in turn generate more diverse investment

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opportunities and instruments for all capital market participants. Nomu-Parallel Market is expected to open new investment opportunities to all types of companies—including SMEs—which play a key role in leveraging the national economy and accelerating development. Potentially growing companies are expected to benefit from listing in the capital market with less listing requirements compared to the main market in terms of market value, number of shareholders, and offered shares’ percentages. Nomu-Parallel Market is also aimed to enhance business growth for listed companies through diversifying financial resources of expansion plans, applying governance and disclosure standards, and adopting best management practices. Ultimately, this will uplift the company’s profile, increase brand equity and market value, as well as raise public interest in its offerings.

LISTING REQUIREMENTS

Proposing a less stringent application process for issuers, the admission requirements allows the offering to Qualified Investors to take place first, then the listing is conducted. According to Tadawul, the issuer must be a Saudi joint stock company or a joint stock company which the majority of its capital is owned by citizens of a member state of the Cooperation Council for the Arab States of the Gulf and enjoys a nationality of one of them. The issuer must have a minimum market cap of SAR 10 million, with a one year minimum of operational and financial performance. A financial advisor is mandatory for the listing company, however a legal advisor is optional. The company must be able to produce annual audited financial statements as well as quarterly reviewed financial statements, in addition to a disclosure of material information. No profitability track record is required for a listing on Nomu.

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According to the listing requirements, at least 20 per cent of shares should be owned by the qualified public, with no single investor owning more than five per cent. There is a lock up period for 100 per cent of pre-offering investor shares for one year. If the expected aggregate market value for all shares to be listed exceeds SAR 40 million, at least 50 public shareholders are required. If the expected aggregate market value for all shares to be listed is less than SAR 40 million, at least 35 public shareholders are required. The investment in this market is restricted to Qualified Investors, therefore Authorised Persons (APs) must determine the eligibility of investors as stipulated under the Nomu-Parallel Market rules. Retail investors (who are not classified as Qualified Investors) can access Nomu through investment funds with diversified investment strategies, which mitigate any risks of direct investment on individual investors. The continuous obligations for a company on the Nomu-Parallel Market is lighter (in regards to time permissible to disclose) than those on the Tadawul main market. Disclosure of quarterly financial statements within 45 calendar days from the end of the period and year-end financial statements within 90 calendar days from the end of the period. Daily fluctuation limits for stocks on the main market is ±10 per cent, while the Nomu-Parallel Market allows for ±20 per cent. The transition to Tadawul’s main market requires a company to be listed on Nomu-Parallel Market for at least two years and meet the main market requirements. The brokerage firms for Nomu are currently NCB Capital and Al Rajhi Capital.

Differences between the Main Market and Nomu – Parallel Market

MAIN MARKET

NOMU – PARALLEL MARKET

Minimum Market Cap

SAR 100 million

SAR 10 million

% Offered At least 30 per cent

At least 20 per cent (with no single investor owning more than 5 per cent)

Public Shareholders At least 200 If the expected aggregate market value for all shares to be listed exceeds SAR 40 million, at least 50 public shareholders are required. If the expected aggregate market value for all shares to be listed is less than SAR 40 million, at least 35 public shareholders are required. Continuous Obligations

Lighter financial disclosure Standard disclosure requirements. requirements (with regards to time Disclosure of quarterly financial permissible to disclose) statements within 30 calendar days from the end of the period and Disclosure of quarterly financial year-end financial statements statements within 45 calendar within 90 calendar days from days from the end of the period the end of the period and year-end financial statements within 90 calendar days from the end of the period

Daily Fluctuation Limits

±10 per cent

±20 per cent

Source: Tadawul

Who can invest in the Parallel market?

Institutions

e.g.: • Corporates • Government Related Entities (GREs) • Investors • QFIs

Individuals

Individuals can invest in the Parallel Market indirectly via Mutual funds of Discretionary Portfolio Managers (DPMs)

Natural persons are allowed to open an investment account in the Kingdom and an account at the Depository Centre, and fulfill any of the following criteria. a. has conducted transactions in security markets of not less than 40 million Saudi riyals in total, and not less than ten transactions in each quarter during the last twelve months. b. the average size of his securities portfolio shall exceed 10 million Saudi riyals during the last twelve months. c. holds the General Securities Qualification Certificate which is recognised by the Authority.

Natural persons

Source: Tadawul

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THE MARKETS

Bonds should be watched closely by investors in 2017.

So long, bond bull market Key drivers shaping bond markets have changed. Keeping a global perspective and knowing which macro signals to watch for can help you prepare for changes in bond yields, writes Jim Cielinski, Global Head of Fixed Income, Columbia Threadneedle Investments

uring an unprecedented period of political change across the globe, from the UK referendum on EU membership to the election of Donald Trump and the Italian referendum, 2016 was a year where the key drivers shaping markets irrevocably changed. It was a year of two halves. The bond rally in the beginning of the year was bigger than expected, with deflationary pulses continuing to hit the market, reminding investors that

16 page 16-20 The Markets.indd 16

geo-political risk was alive and well. This led to an impressive rally where, capped off by Brexit, ten-year gilt yields rallied from two per cent at the beginning of the year to nearly 0.5 per cent in July, before moving back to 1.5 per cent at year-end. In hindsight, the extra dose of post-Brexit quantitative easing looks increasingly like the last hurrah for monetary policy. The odds are high that the sell-off in the latter half of the year was an inflexion point that marked the

end of the long-running bull market in bonds, triggered by a combination of extreme over-valuations colliding with the expectation that the rules going forward will be different. In our view, the bond bubble was likely to burst, not because of a sudden acceleration in growth or inflation, but because a change in policy would change the rules and shatter the complacency. The world is slowly adjusting to the idea that monetary policy will transition to stimulative cont. on page 18

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THE MARKETS

cont. from page 16

fiscal policy. Trump’s victory appeared an unlikely place for this trend to start, but it has set down a marker that will be difficult to contain. The disenfranchised middleclass has voted—negative rates and quantitative easing are inadequate ways of raising their living standards. They want a new rule book. If the current political establishment is unwilling to rewrite the rules, they will soon be voted out of office in favour of someone who will. For some time, markets have become accustomed to thinking that any disappointing data on growth and inflation would be met by lower rates or quantitative easing. But these tools have been increasingly used as last-ditch efforts to spark economic growth. As we reach the end-game for monetary policy, there is now an acknowledgement that central INVESTMENT banks soaking up a dwindling supply

Growth and inflation, if combined with deregulation (which we expect with a Trump presidency), spurs corporates to spend more and that can create a virtuous circle that is very bond-negative. — Jim Cielinski, Global Head of Fixed Income, Columbia Threadneedle Investments of bonds has a number of detrimental side effects. More spending and tax cuts appear to be the way forward, yet fiscal stimulus is inflationary. This would be negative for bonds in a normal environment. Coming from a bubble-like starting point, it’s even more ominous. With the collapse of long-dated interest rates in mid-2016, bond markets had been pricing in little inflation risk for at least the next decade. But with the rule change we expect, term premia is likely to normalise and the idea that investors

should price-in permanent disinflation will fade into obscurity. In that environment, a continued sell-off in bonds is likely. If all of Trump’s agenda becomes law, the bear market will have much further to run. With this in mind, we believe investors should look out for three key signals that might tell us just how far bond yields might rise.

INFLATION EXPECTATIONS

If fiscal stimulus becomes the policy lever of choice, we would expect an inflationary reaction. cont. on page 20

10 year core Government bond yields

Source: Thomson Reuters

cont. from page 21

EUROPE AND GEO-POLITICS

What happens in Europe, from a geopolitical point of view, will be critical. In 18 www.bankerme.com 2016, we have already seen the UK vote to leave the EU and the electorate reject the Italian prime minister Matteo Renzi’s page 16-20 The Markets.indd 18 referendum proposal. In 2017 we have

Ironically, in Europe, this is a recipe for higher rates overall, rather than lower rates. The bond bubble is bursting. How spectacular will the sell-off be? That remains to be seen, as there are many deflationary forces still bubbling just beneath the surface, and a plethora of

Trump and the Italian referendum). Nonetheless, the previously unthinkable is now possible. We believe inflation expectations will continue to rise from what are still depressed levels. The US economy is nearfull employment. Wage inflation coupled

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THE MARKETS

cont. from page 18

‘Fiscal’ means more spending, which should boost growth as well as increasing deficits. Growth and inflation, if combined with deregulation (which we expect with a Trump presidency), spurs corporates to spend more and that can create a virtuous circle that is very bondnegative. But inflationary expectations are also a function of wage pressures and trade protectionism. We’re at close to full employment in the US, and wage gains could start to push higher given that labour markets are tight and a high number of people that have left the workforce are not coming back. Wage pressures, along with fiscal stimulus and a more protectionist agenda (which is itself inflationary through trade tariffs and immigration), will see inflation expectations continue to rise from what are still depressed levels.

CHINA

China should be watched very closely. Long-dated global rates reflect a decade-long series of capital outflows from China. The central bank has purchased hundreds of billions of foreign bonds. This bondbuying programme is a function of years of over-investment in plants and equipment, which itself led to over-production and excess capacity. China’s capital outflows put immense downward pressure on global real rates and term premia. China’s economy has been slowing. A savings glut, sluggish business investment and worries over potential devaluation in the yuan have all provided the impetus to move money offshore. But if the Chinese economy were to merely stabilise, it would provide yet another catalyst for bonds to sell off. A surprise reacceleration in China would force foreign flows to rapidly recede, leaving global government bonds without a

20 page 16-20 The Markets.indd 20

A savings glut, sluggish business investment and worries over potential devaluation in the yuan have all provided the impetus to move money offshore. But if the Chinese economy were to merely stabilise, it would provide yet another catalyst for bonds to sell off. — Jim Cielinski, Global Head of Fixed Income, Columbia Threadneedle Investments key source of demand. Somewhat worrying is that there are some signs that this is happening, just as Donald Trump is set to enact some of his policy proposals, though this is something of a coincidence.

EUROPE AND GEO-POLITICS

What happens in Europe, from a geopolitical point of view, will be critical. In 2016, we have already seen the UK vote to leave the EU and the electorate reject the Italian Prime Minister Matteo Renzi’s referendum proposal. In 2017 we have elections in France and Germany, not to mention Article 50 being invoked. A continued political shift to the right would imply that more populist policies will continue to be enacted. There are limits in Europe as to the scale of any tax cuts and increases in spending that can be delivered, because fiscal policy is limited by the Maastricht Treaty, which caps member state government deficits to three per cent of GDP (and public debt levels to 60 per cent). However, if populist parties who claim they will breach these rules are elected, this raises the risks surrounding the Euro zone project. Ironically, in Europe, this is a recipe for higher rates overall, rather than lower rates. The bond bubble is bursting. How spectacular will the sell-off be? That remains to be seen, as there are many deflationary forces still bubbling just beneath the surface, and a plethora of policy uncertainties. Trump will almost certainly succeed

in getting tax cuts through and a scaled down version of his defence and infrastructure spending package passed. China is stabilising and with it comes less of a reliance on their easy monetary policy. Capital outflows will likely diminish as the yuan reprices and the powerful force of central bank buying—either through investment or QE channels—will recede. With respect to Europe is very difficult to forecast, but it would be wrong to extrapolate what happened in the UK with Brexit (as well as the election of Donald Trump and the Italian referendum). Nonetheless, the previously unthinkable is now possible. We believe inflation expectations will continue to rise from what are still depressed levels. The US economy is near-full employment. Wage inflation coupled with even modest protectionism and the prolonged recovery should create elevated inflation expectations. We envisage policy rates staying lower for some time in Europe as there is still enough uncertainty—not just geo-political risk, but also concerns over the strength of some economies in the region—for central banks to continue with a ‘lower for longer‘ policy. Rate rises are also unlikely in Japan, which leaves the US as something of a focal point. On the back of increasing wage pressures and fiscal spend, we expect rate hikes in 2017 to follow the December Fed hike. The tide has turned.

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08/03/2017 12:55

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LEGAL PERSPECTIVE

Staying ahead in the game Arjun Kalra, a Principal in Crowe Horwath Risk Consulting, discusses the antimoney laundering landscape in the UAE and how it compares on a global platform

escribe the AML landscape in the UAE and how it compares to the rest of the world.

Overall, the UAE is comparatively advanced in selecting principles from outside jurisdictions to develop a comprehensive list of rules and regulations applicable to the banking and financial services industries. One of the most interesting global comparisons I notice is that the United States is universally more focused on anti-money laundering (AML) compliance penalties and enforcement actions than anywhere else in the world, including the UAE. This situation is globally unique: while itâ&#x20AC;&#x2122;s not unusual to see institutions in the US get hit with high dollar fines in failing to comply with law, the number and severity of penalties is unparalleled in other jurisdictions. From a regulation perspective, however, the UAE witnesses stringent expectations that do not necessarily apply to other jurisdictions, including the US. For instance, the US is only just beginning to roll out rules and regulations regarding beneficial ownership, collecting beneficial ownership information for owners on accounts at a level of 25 per cent ownership. In contrast, the requirements in the UAE are more stringent and thoroughly enforced, where there is already an expectation for collection requirements to decrease to five per cent.

Arjun Kalra

Commonalities can be drawn between the UAE and other global jurisdictions in the components of an AML programme. Regardless of operating jurisdiction, our clients are trying to understand, verify, and monitor their customers while identifying and reporting suspicious activity to authorities. Similarities can be drawn worldwide to the development and implementation of a risk-based approach to manage AML risk.

What kind of financial institutions are most susceptible to these illegal activities?

Weâ&#x20AC;&#x2122;ve seen criminals attack all kinds of institutions using all kinds of means. Criminal methods continue to evolve with the products developed by financial institutions: the bad guys will constantly adapt their money laundering methods. With that in mind, one of the major risks involved in the UAE is trade-based cont. on page 24

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LEGAL PERSPECTIVE

cont. from page 22

money laundering and the challenges of managing and monitoring trade finance activities. Financial institutions transacting in and with the UAE are particularly susceptible to these risks. Our clients are faced with the need to implement manual processes to monitor for trade finance activity, which can cause inefficiencies and operationalisation challenges. Another susceptibility I see in the region is related to terrorist financing. As scrutiny from global organisations outside of the region escalates, expectations surrounding counterterrorist financing measures and connecting funds to legitimate sources are increasing. Identifying terrorist financing activities causes more challenges than money laundering activities, as terrorist financing can occur in a lower transaction amounts to avoid detection.

provided services, and emphasised compliance culture. Seeing strong culture come from the top-down will help any size institution manage their risk effectively.

There is a fine line between banking secrecy and AML compliance. How would you suggest financial institutions tread this path?

I think that there is a shift in the secrecy of banking. Banking secrecy is increasingly becoming a thing of the past, as it is unsustainable over the long term. Ultimately, there has been a revolution in the global AML regulatory landscape. Significant issues such as the Panama Papers last year helped shed a light on shell and shadow banking practises, creating an urgency to correct such issues. This is achieved not only by management of AML risks, but also by truly keeping

One of the major risks involved in the UAE is tradebased money laundering and the challenges of managing and monitoring trade finance activities. — Arjun Kalra, Principal, Crowe Horwath Risk Consulting Does size matter?

I do not think size matters: I think it’s more about the controls in place at the institution and the institution’s compliance culture. We’ve seen some of the largest institutions in the world doing very questionable things and subsequently incurring significant fines. It’s easy to think that because smaller institutions have smaller budgets to manage their AML programmes they are more susceptible to AML risk; however, we see time and again that developing a strong institutional compliance culture enables appropriate prioritisation of AML controls, regardless of size. It’s about balancing the institution’s resources with their risk appetite,

an eye on the potential of corruption and misappropriation of funds at the highest level of people holding public office. The problem is that there is no global regulation on such practises. Regulation exists only on a jurisdictional basis, creating pockets of jurisdictions where some practises can occur that cannot elsewhere. The increasing ability to move funds globally has made this even more challenging. I do not know if we will see true global regulations in the near future that would really help these issues. With that in mind, I think there are a number of things that need to occur, foremost of which is addressing the ease in setting up shell accounts and corporations. Additionally, the global

legal landscape needs to be addressed to pave the way for increased global communication and monitoring. This could be further addressed by placing emphasis on a global coalition to really drive the conversation forward.

Looking forward what challenges do you anticipate in preventing money laundering activities in this region?

I anticipate a number of challenges. As the global environment continues to become more and more accessible, regulation will continue to evolve. Institutions must stay at the cutting edge of managing the escalating and emerging risks they face in an increasingly challenging environment. Additionally, the risk of cybercrime and cybersecurity continues to be a rising threat to our clients. The rise of financial technology presents a continued challenge, where services such as blockchain, bitcoin, and other payment methods make the movement of funds quicker and easier. As accessibility to global payments increases, the money laundering risk in the industry will similarly escalate and require institutions to implement heightened controls. A further consideration for our clients both now and in the near term is how they leverage technology. We’re seeing new technology developed in the AML space to help with compliance. More and more vendors are enhancing solutions and thinking about how artificial intelligence and machine learning can support AML and financial crime compliance. Our clients should take a close look at how they can enhance their technology capabilities to manage AML risks as better products become available. As technology becomes more complex, you need to get smarter to understand not only the challenges presented to your institution by increased globalisation, but also the opportunities to better manage risk with enhanced solutions.

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14/12/2016 15:55 14/12/2016 17:06 14/12/2016 15:55 15:55

COVER INTERVIEW

Fostering continental development In an exclusive interview with Banker Middle East Editor, Nabilah Annuar, Dr. R. Seetharaman, Group Chief Executive Officer of Doha Bank provides an insight on the bankâ&#x20AC;&#x2122;s performance and direction for 2017

Dr. R. Seetharaman, Group Chief Executive Officer of Doha Bank, receiving the Pravasi Bharatiya Samman Award (PBSA), the highest honour conferred on overseas Indians by the Government of India in recognition of their achievements both in India and abroad, from the President of India, Pranab Mukherjee, at the Pravasi Bhartiya Divas Convention in Bengaluru.

26 page 26-30 Cover Story.indd 26

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escribe Doha Bank’s performance for 2016. What are the bank’s biggest achievements last year?

The net profit of the Bank for the year 2016 is QAR 1.05 billion while total assets were recorded at QAR 90.4 billion. Loans and advances were QAR 59.2 billion while the Bank’s total deposits accounted at QAR 55.7 billion in 2016. The return on average shareholders’ equity was 12.1 per cent and the return on average assets was 1.21 per cent respectively. In line with its international expansion strategy, Doha Bank inaugurated its 13th representative office in Bangladesh during Q4 2016. Doha Bank also inaugurated its relocated Kochi Branch at Lulu Mall in 2016. In addition, the Bank entered into a Memorandum of Understanding with Centrum Group, India, to facilitate the development of GCC business for Centrum with its network while Centrum will reciprocate with the same in India for Doha Bank. As a first in Qatar, Doha Bank also launched ‘Biometric Access’ for mobile banking application. Doha Bank became the first bank in Qatar to achieve accredited certification for ISO 9001:2015. As a step to improve customer convenience, Doha Bank undertook multiple initiatives such as—opening its dedicated ‘Card Delivery Centre’ at City Centre, relocating its City Centre branch to the ground floor within the same Mall, and inaugurating a state of the art branch in Al Gharafa.

Doha Bank has in built the sustainable development process in various activities which will contribute in areas such as Climate Action, responsible consumption, Industry, innovation and infrastructure as well as inclusive and sustainable economic growth.

Dr. R. Seetharaman is conferred with the Doctor of Philosophy (Honorary) by Arts, Science and Technology University Lebanon (AUL) during their Annual Graduation Ceremony which was held on 2 August 2016 under the patronage and the presence of HE Gebran Bassil, Lebanese Minister of Foreign Affairs at AUL.

Dr. R. Seetharaman receiving the Green Economy Visionary Award at the UAB Summit 2016.

— Dr. R. Seetharaman, Group CEO, Doha Bank What is bank’s focus for 2017? And how does this fit into Qatar’s financial and economic landscape?

The key strategy themes of Doha Bank for 2017 is to maintain credit quality through conservative and cautious approach to underwriting to certain sectors. The bank also aims to improve efficiency by leveraging on strong distribution channels to expand balance sheet size and generate revenues. Apart from continuing a targeted cont. overleaf

Dr. Seetharaman & his family while receiving the Pravasi Bharatiya Samman Award award.

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COVER INTERVIEW

cont. from page 27

GCC-India bilateral trade is close to $100 billion in 2015-16 out of which the Qatar-India bilateral trade is close to $10 billion. We are also seeing an increase in diplomatic relationships between GCC and India with the visit of Indian Prime Minister Shri Narendra Modi‘s visit last year to Qatar and to UAE in 2015. — Dr. R. Seetharaman, Group CEO, Doha Bank

expansion and further leveraging on our trade finance business, we also plan to consolidate our position in local market by focussing on the diversification story of Qatar. Qatar continues to follow its non-hydrocarbon diversification model and prudent fiscal management amidst low oil prices. The total allocation for key sectors such as health, education and infrastructure was nearly 44 per cent of the total expenditure in the 2017 Qatar budget, out of which 12.3 per cent is for health, 10.4 per cent is for education and 21.2 per cent is for infrastructure segment respectively. There is a clear focus on health, education and infrastructure development respectively.

Abu Dhabi and India recently signed an oil storage deal, amongst many others. What are your views on the current state of the GCC and India’s bilateral relationship?

GCC-India bilateral trade is close to $100 billion in 201516 out of which the Qatar-India bilateral trade is close to $10 billion. We are also seeing an increase in diplomatic relationships between GCC and India with the visit of Indian Prime Minister Shri Narendra Modi‘s visit last year to Qatar and to UAE in 2015. HE Sheikh Abdullah Bin Nasser Bin Khalifa Al-Thani, the Prime Minister and Minister of Interior of the State of Qatar also visited India in 2016. The Emir of Qatar, HH Sheikh Tamim Bin Hamad had visited India in March 2015. Similarly, Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces also visited India early this year. These developments are going to promote more strategic partnerships between GCC and India on various segments including the latest oil deal between Abu Dhabi and India.

How does Doha Bank contribute to the strengthening of this relationship?

Doha Bank, having deep rooted links with the (nonresident Indian) NRI community in the GCC, can initiate schemes that would enable NRIs to channel investments for

28 page 26-30 Cover Story.indd 28

The net profit of the Bank for the year 2016 is

QAR 1.05 billion while total assets were recorded at

QAR 90.4 billion Loans and advances were

QAR 59.2 billion while the Bank’s total deposits accounted at

QAR 55.7 billion in 2016 cont. on page 30

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Where banking is more personal

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COVER INTERVIEW

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various projects in the state. Doha Bank with its presence in all major GCC countries, will be able to help NRIs to fulfil their dream projects in the state by giving project advisory services, loans and above all confidence. With the advent of state of the art technology in the banking space which are available in developed markets, Doha Bank can bring ease of banking to its customers in the state. Additionally, with the help of two full-fledged branches in Mumbai and Cochin and also through the network of its associate company DBFS spread across the state, Doha Bank will be able to offer complete range of value added services to the customers.

The UN has laid down its 2030 Sustainable Development Goals. What has the bank done to align its objectives to these goals?

Doha Bank advocates and practises green banking, which is one of the core business philosophies that would support the sustainability into the future. Doha Bank is also active in supporting the youth of the nation from a human development perspective and conducts numerous programmes to help develop indigenous talent. Doha Bank also supports social integration across various areas of society and actively participates in key economic events, keynote sessions, and other major local and global programmes.

We will also take into consideration the economic growth across various geographies and the relevant sustainable developments pertaining to them.

Congratulations on winning the Pravasi Award. How has this recognition affected your strategies for the future?

India today is poised for a giant leap from the ranks of developing countries to developed countries. Indian citizens living outside India also have a responsibility on this progress and hence should look forward to contribute to the welfare of India. This can be done through remittances, investments, trade and other routes as well. I believed that the Indian diaspora in GCC can play an important role on above areas and thereby promoting bilateral relationships between GCC and India. This award further inspires me to contribute to the strengthening of bilateral relationships betweenGCC and India.

What is your outlook on the financial landscape in Qatar and the wider Middle East this year?

The major areas which require attention in financial landscape in Qatar are challenging liquidity conditions and slowdown in economic growth as recovery in oil prices is still modest after the OPEC commitment in 2016. — Dr. R. Seetharaman, Group CEO, Doha Bank The bank has worked on ‘ECO-Schools Programme’ which partners with educational institutions to build awareness of key environmental issues and create action plans that are school-specific to help mitigate the overall impact on the environment. Doha Bank has in built the sustainable development process in various activities which will contribute in areas such as climate action, responsible consumption, Industry, innovation and infrastructure as well as inclusive and sustainable economic growth.

In respects of UN’s SDGs above, what are the bank’s plans for the next 13 years?

We plan to enhance the scope of work in all the above areas taking into consideration our plans to grow both inside and outside Qatar and across various banking verticals.

30 page 26-30 Cover Story.indd 30

deposit mobilisation and quality of the loan book. Qatar’s Government sector and service sector witnessed significant lending in 2016. However, sectors such as real estate, retail and contract witnessed significant slowdown in lending growth when compared to previous year. The liquidity conditions may also be challenged on account of monetary tightening expected from the Federal Reserve. The GCC liquidity stress remains, although it has come down in last couple of months. The net interest margin is under pressure due to high cost deposits and the risks prevail from NPLs. The restructuring challenges can also come up. There will be pressure to sustain the ROAE and ROAA. Banks expanding overseas can face execution risks on account of global headwinds and challenges in respective geographies. In addition to these, cybersecurity is also a key challenge for GCC banks.

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16/03/2017 11:07

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COUNTRY SPOTLIGHT

Saving Oman With macroeconomic conditions slow to improve, the impact of low oil prices continue to create dents in the balance sheets of hydrocarbon-reliant sovereigns

man is one of the economies in the Gulf that has taken a hard hit from the decline in oil prices. A recent bulletin published by the Central Bank of Oman (CBO) stated that the economy witnessed a nine per cent decline in nominal GDP in the first nine months of 2016 compared to the corresponding period in 2015. Local industry reports have suggested that the decline was reflected primarily in the petroleum sector with a fall of 29.4 per cent and a marginal drop of 0.2 per cent in the non-petroleum sector. For 2017, market figures suggest Oman will witness a GDP growth of 2.5 per cent.

Average annual inflation for the year remained moderate at 1.1 per cent. While manufacturing and wholesale and retail trade were adversely affected, value addition showed positive growth, mainly in construction, agriculture and fishing, as well as in real estate services. The sharp drop in oil prices last year and spending slippage have led to a large widening in the 2016 fiscal deficit. The consolidated government fiscal balance recorded a deficit of OMR 5.2 billion ($13.5 billion, 22.6 per cent of GDP) in 2016, widening from OMR 4.2 billion ($10.8 billion, 16.9 per cent of GDP) in 2015, according to a report by Bank of

America Merrill Lynch (BofAML). On the revenue side, this was due to a substantial fall in hydrocarbon revenues, only partially offset by an increase in non-oil revenues. Total expenditures dropped by four per cent y-o-y, and came 6.4 per cent above the budgeted target. Depressed oil prices also led to a large widening in the current account deficit in 2016 despite continued import contraction (20 per cent y-o-y). According to BofAML, 3Q16 current account deficit data annualises at $12.8 billion (21.4 per cent of GDP), versus a deficit of $10.8 billion (16.9 per cent of GDP).

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(Photocredit: TravelNerd/Shutterstock.com)

to $13 billion (22 per cent of GDP). Boosted by external debt proceeds and non-resident deposits, CBO foreign assets stood at $20.3 billion in 2016 (33.9 per cent of GDP). As such, liquid foreign assets likely represent 2.5 years of external financing needs, providing near-term cushion.

EXTERNAL FINANCING NEEDS

Total gross foreign assets, including CBO, the State General Reserve Fund (SGRF), the Petroleum Reserve Fund (PRF), the Infrastructure Project Finance Account (IPT), and Oman Investment Fund (OIF), have reportedly declined to $38.8 billion (64.9 per cent of GDP) at end-2016, from a peak of $51.5 billion (66 per cent of GDP) in 2013. The PRF, IPT and OIF foreign asset balances are now near-exhausted and hold $0.6 billion versus $11.5 billion in 2013. SGRF foreign assets declined by $6.1 billion in 2016 to $18 billion in 2016 (30 per cent of GDP), but BofAML assumes that liquid assets are closer

Reports have suggested that Oman needs to borrow up to $10 billion to pay for this year’s forecasted deficit. “The continued large twin deficits imply a need for material external financing to prevent sustained erosion in foreign assets and to defend the USD peg. Availability of foreign financing is key to avoiding a hard landing near term. Still, further borrowing is likely to pressure external debt, especially if a downgrade to non-investment grade removes a source of technical support as debt levels increase further,” said Jean-Michel Saliba, MENA Economist/ Strategist at BofAML. He explained that in the absence of material fiscal consolidation, debt dynamics remain adverse and unanchored, despite the low starting level for government debt. The potential GCC (Gulf Corporation Council) support to Oman would be credit-positive, if it were to materialise, although it may not alter credit fundamentals.

The 2017 budget targets narrowing of the fiscal deficit (excluding net grants) to OMR 3 billion ($7.8 billion and 11.9 per cent of GDP), based on an oil price assumption of $45/bbl. — Jean-Michel Saliba, MENA Economist/Strategist, Bank of America Merrill Lynch

Oman witnessed a

decline in nominal GDP in the first nine months of 2016 It is expected to experience a GDP growth of

2.5

in 2017 Although it is unclear, BofAML suspects that Oman may have benefited from official support in 2015. Nonetheless, it is sceptical that any potential ongoing support talks could be concluded near-term in the absence of political concessions. “We expect the fiscal to narrow this year on higher oil prices, but hover around 2015 levels. The 2017 budget targets narrowing of the fiscal (excluding net grants) to OMR 3 billion ($7.8 billion and 11.9 per cent of GDP), based on an oil price assumption of $45/bbl. Spending is targeted 7.5 per cent y-o-y lower, with lower defence spending offsetting potentially higher current spending. GCC-wide sin taxes are likely to be implemented in 2Q17, and, while yet unbudgeted for, are unlikely to bring in material proceeds,” added Saliba. To plug this gap, local industry reports have revealed that Hamoud Sangour Al Zadjali, executive president of the CBO has announced plans to auction OMR 450 million worth of government development bonds. cont. overleaf

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COUNTRY SPOTLIGHT

cont. from page 33

They will be sold in separate issues to partly cover in the nation’s budget for 2017 and repay a maturing bond issue. This, in addition to a OMR 150 million bond issue recently, takes the total issue size to OMR 600 million this year. Al Zadjali highlighted that such government development bonds in Oman are generally subscribed to by institutional investors, especially pension funds, banks and high net worth individuals. In terms of inflation, Al Zadjali believes that it is still under control. He expects inflation over the course of 2017 to be between two and three per cent. As for credit growth, Omani banks are expected to achieve an eight to 10 per cent growth this year. According to the CBO, total bank credit in Oman grew year-on-year by 9.6 per cent to OMR 21.9 billion by the end of November 2016. Credit to the private sector alone increased by 11 per cent to OMR 19.7 billion by end-November 2016.

ISLAMIC BANKING

The three largest Omani banks are facing dual profitability pressures from slowing economic growth and from the rapid penetration of Islamic finance. According to a report by Moody’s in January, Bank Muscat (Baa1 stable, baa2) is best positioned to withstand the pressures, followed by National Bank of Oman (NBO) (Baa2 stable, ba1) and Bank Dhofar (Baa2 negative, ba1). All three banks are said to share broadly similar business models, with a focus on domestic corporate and retail banking lending, but they are pursuing different strategies, which will affect the resilience of their profitability to the common challenges they face. These different strategies also contribute to the divergence in their credit ratings and rating outlooks. According to Moody’s, Bank Muscat is best positioned to cope with slowing credit demand. Low oil prices are

External financing needed to minimise drain on foreign assets US$bn 60

Central Bank of Oman Petroleum Reserve Fund Oman Investment Fund

State General Reserve Fund Infrastructure Project Finance Account Total (% of GDP, rhs)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Haver, BofA Merril Lynch Global Research

Credit growth expected to slowdown Oman real GDP and consolidated credit growth (2011 - 2017F) 8% 6% 4% 2% 0% 8% 6% 4% 2% 0%

2011

2012

2013

2014

2015

2016F

2017F

Source: IMF; national authorities; Moody’s Investors Service; Central Bank of Oman Statistitical Bulletin

Bank Muscat’s larger size supports the financing of major projects Market share in terms of total assets (Q3 2016) Other Banks 10.0% Ahli Bank 6.3% Bank Sohar 8.3%

Bank Muscat 36.3%

Oman Arab Bank 6.9% HSBC Bank Oman 7.6% National Bank of Oman 11.7%

Bank Dhofar 13.0%

Source: Central Bank of Oman Statistics Bulletin, Conventional and Islamic assets; Banks Financial Reports

cont. on page 36

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15/03/2017 10:59

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COUNTRY SPOTLIGHT

cont. from page 34

Growing demand for Islamic finance products among Oman’s population is constraining conventional lending growth. — Moody’s Investors Service All three banks have effective strategies to help them manage rapid penetration of Islamic banking. Growing demand for Islamic finance products among Oman’s population is constraining conventional lending growth. Bank Dhofar and Bank Muscat have rapidly built up Islamic windows to sell their own Islamic financial products, which are helping to manage the penetration of Islamic finance. In contrast, NBO, who has a smaller Islamic window, is supporting its asset base through strong expansion into the UAE and solid conventional growth domestically. Bank Dhofar’s loan book composition exposes it to higher provisions in this weaker environment. Its rapid growth over recent years has limited the seasoning of its loan portfolio, which increases its asset risk. In addition, Bank Dhofar has the highest exposure to the cyclical construction sector. NBO’s expansion into the UAE poses risks given the competitive nature

Islamic banking is growing faster than conventional banking Total assets growth rate, conventional vs Islamic (2014 - 2016 YTD) 80% 70% 60% 50% 40% 30% 20% 10% 0% -10%

Conventional Banks Total Assets Growth Rate Islamic Banks and Windows Total Assets Growth Rate

2014

2015

2016* *2016 YTD growth figure is the year-on-year

Source: Central Bank of Oman Statistical Bulletin

growth from Q3 2015 to Q3 2016

The penetration of Islamic assets in Oman remains relatively low Size and markets of Islamic financing in GCC and Asia (H1 2016) Total Islamic Financing

$ billion

continuing to pressure government revenues and weigh on business and consumer confidence. This will lead to lower public and private spending in Oman and will slow economic and credit growth. In this environment the rating agency expects a higher proportion of private financing for government projects, with Bank Muscat, Oman’s largest bank by assets, set to benefit from its larger capital base and solid expertise. We also expect the bank’s higher fee income to moderate interest income pressures from lower credit growth, resulting in better earnings stability.

200 180 160 140 120 100 80 60 40 20 0

Oman

UAE

KSA

Market Share of Islamic Financing

Kuwait

Qatar

Bahrain Malaysia Indonesia

Turkey

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Source: Central bank data for Qatar, Bahrain, Oman, Malaysia, Indonesia and Turkey; Bank’s annual reports on Moody’s Banking Financial Metrics data for rated banks in UAE, KSA, Kuwait. Bank’s annual reports for non-rated banks in UAE and KSA; Islamic windows assumptions included in Islamic financing for UAE, KSA and Bahrain; Data as of H1 2016 for all banking systems except Bahrain and Indonesia.

of that market. Bank Muscat has the lowest asset risk given its exposure primarily to government-related entities, large corporates and the public sector workforce, although its Saudi Arabia exposure poses downside risks.

RATING

There is a market expectation that Oman’s average sovereign rating could approach or fall to non-investment grade over the next 24 months. At the current pace of build-up of government debt, Oman’s public sector debt level may no longer compare much favourably to its BBB peers in two years’ time.

Oman is currently rated Baa1 with a stable outlook by Moody’s, BBB- with a negative outlook by S&P, and BBB with a stable outlook by Fitch. Oman’s investment grade rating is a key anchor for foreign investors. The bulk of the holders of sovereign debt are typically indexed investors or ratingssensitive investors. A downgrade to non-investment grade could thus remove a source of technical support, especially as external debt supply continues to increase further. The next ratings reviews for Oman are scheduled for 17 March (Moody’s) and 12 May (S&P).

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page 32-36 Country Spotlight.indd 36

15/03/2017 11:00

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2/15/17 1:55 AM 15/02/2017 15:03

ISLAMIC FINANCE

KBW launches Islamic fund In an exclusive interview, HRH Prince Khaled bin Alwaleed bin Talal reveals the full story behind his investment firm’s jump into the Shari’ah space

ell me about the history of KBW Investments.

I founded KBW Investments four years ago with the idea that it would act as the vehicle for most of my corporate investment activities, and that it would later act as the holding company or ‘parent’ company for entities that would work well in the Group overall portfolio. KBW’s Group CEO Ahmed Alkhoshaibi proposed that we begin with investing in manufacturing via acquisition, and from there we began developing the schema that the Group follows until the present day. In mid-January we launched our newest company, ARADA, in partnership with Basma Group and we will be announcing ARADA’s first development project shortly. Outside of KBW Investments, I have my private investment activities in an angel capacity, and I’ve also solely founded KBW Ventures.

When did you start considering getting into the Shari’ah-compliant investment space? What interested you?

C r e s t m o u n t C a p i t a l i s K BW ’ s first movement in the Shari’ahcompliant investment space.

38 page 38-42 Islamic Finance.indd 38

I find the opportunities in Islamic finance interesting—there is a lot to discover both professionally and personally. On a professional front, I found the fairness of it most appealing. The extensive work that we’ve done in preparation of launching Crestmount Capital with Amanie Advisors has been really educational. Everything from the issuances of Fatwas for funds and other Islamic financial instruments, to the process behind Shari’ah-compliance assessment to the recommendations on best practises—it was an exciting arena for me to be in as there was a learning curve in terms of processes and procedures; it was pretty much a new frontier altogether for our business. From a personal perspective, it’s also about meeting new investors who I previously had no interaction with in a business respect. Even the entities that we went with to help us hone our specialisation in best-inclass Islamic finance were different than who we typically work with. Crestmount Capital’s development, launch and successful execution served to really expand my knowledge base, and at the same time really hooked me on Islamic investing potential.

This interview first appeared as the cover story of Islamic Business & Finance, Issue 101.

cont. on page 40

www.bankerme.com

08/03/2017 12:57

Crestmount Fund I, a closed-ended Shari’ahcompliant real estate private equity fund, is structured as a Cayman Islands entity. It will fund five identified under-development residential projects in Sydney, Australia, through Shari’ah-compliant commodity Murabahah agreements. — HRH Prince Khaled bin Alwaleed bin Talal

HRH Prince Khaled bin Alwaleed bin Talal

www.bankerme.com

page 38-42 Islamic Finance.indd 39

39 08/03/2017 12:57

ISLAMIC FINANCE

cont. from page 38

How did you settle upon this particular plan?

We decided to move forward on Islamic financial instruments when formulating plans on how best to diversify the KBW Investments portfolio. We already work in what is considered the more ‘mainstream’ investment arenas, so this gave us an additional value-added facet while providing a fresh avenue for overall company growth, diversification, and expansion. We decided on Crestmount Capital as the vehicle for our new Shari’ah-compliant investment fund so that it could operate as a standalone entity with autonomy, and simultaneously be fully in-line with the specific principles and needs of Islamic finance. Crestmount’s Shari’ah Supervisory Board, all of whom are renowned scholars across various disciplines in Islamic economics and finance, are the widely-acknowledged architects of the actual Islamic financial structures. We feel that having such strong figures vetting Crestmount operations and instruments is key, and to successfully go that route we needed to have a full enterprise dedicated solely to it.

Tell me more about PietyTHP Developments.

PietyTHP Developments is based in Australia, and will be delivering the projects that Crestmount Fund I will be investing in. The projects targeted for the capital are new high density, residential developments developed by Piety Investments, the largest Shari’ah compliant developer outside of the GCC and Asia. PietyTHP Developments is a joint venture between Piety and the property arm of Lembaga Tabung Haji of Malaysia. Lembaga Tabung Haji, Malaysia’s largest Islamic fund manager, has more than 50 years of experience in deposits, Hajj services and operations, and investments.

40 page 38-42 Islamic Finance.indd 40

Crestmount Fund I is expected to generate a return ranging between

15-20% per annum.

What work went into setting it up?

To launch Crestmount, first we had to justify launching Crestmount. That meant some heavy research into whether or not it was viable, sustainable, and worthwhile. After the initial research was undertaken and that we were sure we could clear the barriers to entry and add value, we became confident market-wise. We then began to look into respective fund structures and what avenues best suited our existing knowledge base and access levels. Once we had a working model, we went into deep legal and financial preparations, and sought out Amanie Advisors based on their extensive industry recommendations and demonstrated delivery with both theoretical and practical experience.

Tell me more about the Fund itself. How is it structured, and what kind of returns can investors expect?

Crestmount Fund I, a closed-ended Shari’ah-compliant real estate private equity fund, is structured as a Cayman Islands entity. It will fund five identified under-development residential projects in Sydney, Australia, through Shari’ahcompliant commodity Murabahah agreements. Crestmount Fund I is expected to generate a return ranging between 15-20 per cent per annum.

In terms of the company parameters, and the Fund itself, every base was analysed to ensure that we had our investors’ best interests at the forefront of our value proposition. We’ve engaged KPMG as Crestmount’s auditors, given their respected stance in the Islamic financial marketplace, to ensure full transparency and detailed externallygenerated overviews. Out of the ‘Big Four’, we felt that KPMG would be the most suitable for our present needs, and that they would see to Crestmount’s business meticulously. Legally, we’ve taken extra steps by bringing King & Spalding on board to assist us with the overall structure—this was one of the best decisions we’ve made thus far as it really helped us hone our position. We also engaged an additional firm, King & Wood Mallesons, to help us shape and define our structure as a best-fit scenario within Australian legal framework as Fund I’s capital is deployed in that market. We’ve opted for heavy-hitters across the board for Crestmount, as we’re in this for the long-term.

How has the market responded to the fund thus far?

We were very comfortable going to market and privately circulating Crestmount Fund I. The response was a very quick and simple confirmation of our initial findings: there is interest in Islamic investment instruments so long as the Fund itself looks to deliver on its promises and at an advantageous rate within a better-than-average turnaround time. We’re very happy with this early success, but we will be taking our time before we take on a second leg—we will not be rushing. With Fund I, we were able to deploy the capital into a project that was secure and promised good results that more than satisfied our investors. cont. on page 42

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08/03/2017 12:57

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14/03/2017 09:20

ISLAMIC FINANCE

cont. from page 40

Are you certain to have more Islamic activities in the future? What ‘consistent milestones’ are you aiming to hit?

We launched a full company dedicated to pursuing our ambitions in the Islamic finance arena. Crestmount Fund I was a great experience, and gives us a good platform to build on. We’d like to continue to source the right opportunities matched with the right investors.

about Islamic financial hubs, and when and how the deal flow itself is actually occurring.

What have you found to be the main benefits of the Shari’ahcompliant structure?

The main benefit to participating in the Islamic financial marketplace is the fairness and ethics involved, in my opinion. By not investing in prohibited areas, you aren’t contributing to

We then began to look into respective fund structures and what avenues best suited our existing knowledge base and access levels. Once we had a working model, we went into deep legal and financial preparations, and sought out Amanie Advisors based on their extensive industry recommendations and demonstrated delivery with both theoretical and practical experience. — HRH Prince Khaled bin Alwaleed bin Talal

What did you learn about the Islamic investment space through the process of setting up this fund?

A salient takeaway is that not only is the appetite for Islamic investment opportunities strong, it’s much more pervasive than we first thought. Initially, the idea was floated that it was a ‘niche’ which it isn’t. I think in investment circles an echo chamber exists—the type of investors you end up interacting with are based on the types of investments you make. So, if you’re into a certain type of fund or a certain investment class, you typically meet those who echo your existing interests. Through launching Crestmount, and subsequently Crestmount Fund I, we were exposed to a different set of market players and market influencers. We learned a great deal

42 page 38-42 Islamic Finance.indd 42

potential pitfalls in society—that is always a plus. Is it a benefit? Sure, you’re able to put your money into businesses that still turn a profit while remaining aligned with your own personal moral compass; that, to me, is a win-win situation from both commercial and ethical perspectives depending on what value system you choose to adopt.

What do you feel the Islamic finance space most needs to improve upon in the future?

While standards and guidelines do exist for Islamic financial instruments, presently some aspects are positioned more as recommendations rather than absolutely binding. It’s true that certain parameters must be followed, but others are suggested as a best practise scenario. One codified source of requirements and

recommendations that would act as the formal global ‘rule book’, so to speak, would be optimal. This, developed by a global governing body incorporating the opinions of the established Islamic economics and finance experts, could also perhaps archive the respective Fatwas in the financial space. It would be really useful and help to promote more integration, in my opinion. Last year, the UAE announced the launch of the country’s Shari’ah Authority. We’ve been told that UAE’s governing Shari’ah body would likely be similar to the Malaysian model, functioning primarily for standardisation of Shari’ah application purposes in the country and potentially also see to dispute resolution. The Malaysian Central Bank, BNM, introduced the Shari’ah Governance Framework in 2010 which governs Islamic financial affairs only for Islamic banking institutions, not funds or capital market products per se. One overall entity, again, based on a global consensus, issuing and standardising Islamic financial instruments and acting as the main reference and go-to point, would be in everyone’s best interests. I would really like to see that happen.

How great are the opportunities for Islamic finance and investment, in your view?

In my opinion, the activity is really very attractive and the potential for growth is limitless. We are committed to Crestmount for the long-term, and we have gone the extra mile to work with the strongest and most relevant entities across industries to ensure that it made a surefooted market entry, together with a stable future roadmap. If we thought there was a ceiling to where Crestmount could go and what it could do, we would not have created a standalone company with its own structure and resources.

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08/03/2017 12:57

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14/03/2017 09:24

RETAIL BANKING

Alawwal Bank launches digital branch, ‘IBDA’ IBDA offers digital banking facilities in a café style setting, teaming up with Costa Coffee

BDA offers customers a unique banking experience designed to create a seamless and personalised service, benefitting from the latest digital technology in a relaxed café style setting. It provides customers an integrated lifestyle experience, and a new way to do banking in a comfortable setting. Over a coffee customers can browse for banking products, apply for, and instantly open an account and receive their debit or credit card before finishing their coffee. Self-service interactive video banking facility enabling customers to conduct their advance banking needs. “Technology in banking is well beyond an option. Customers are looking to do banking on the move, reducing face time with banking advisors. IBDA is a new way to integrate a digital environment with the ability to build relationships with our customers.

The first IBDA branch in Nakheel Mall.

44 page 44 Retail Banking.indd 44

Integrating state-of-the-art technology with traditional services will help us effectively serve our customers,” said Mubarak A. Al-Khafrah, Chairman of Alawwal Bank. Alawwal Bank held an opening ceremony in Riyadh to launch its first digital branch ‘IBDA’. The ceremony was attended by the bank’s Chairman, members of the board, the Managing Director and other guests. Soren Nikolajsen, Managing Director of Alawwal Bank said, “Our customer’s dynamic lifestyles continuously puts pressure on the bank to adapt in order to deliver financial services that are relevant and accessible at all times. IBDA is an exciting and innovative new way to redefine the banking experience for our customers where the latest technology and traditional banking services can coexist. Customers are of course also welcome to just come in for a chat and a coffee.”

IBDA features various zones designed to cater to customer’s needs. The integrated structure of the branch is equipped with advanced interactive tables allowing customers to apply for, and instantly open an account and receive their debit or credit card and navigate through the bank’s offerings, view demonstrations and apply for products. The bank staff will also be available on site to provide customers with advice and services. The new branch is located in Nakheel Mall, a flagship shopping development in Riyadh and will be open seven days a week with extended working hours. Last year Alawwal Bank (formerly Saudi Hollandi Bank) unveiled a new brand identity, which reflected the banks’ recognition of the evolving banking landscape. The rebrand is also part of a wider strategy at Alawwal Bank to continue meeting the demands of existing customers, while also reaching out to the next generation of Saudis. Millennials have emerged as a powerful force for market transformation in the Kingdom, with over 65 per cent of the populace under 30 years old. This tech-savvy and well-travelled audience is increasingly looking for simple, on-demand brand experiences from the comfort of their palms.

(L-R): Eyad Abdulrahman Al-Hussain, Board Member; Majed Al-Ghanemi, COO; Engr.Mubarak bin Abdullah Al-Khafrah, Chairman; Soren Kring Nikolajsen, Managing Director, Sami Al-Rowaithy, Marketing, e-Business and Channel Management; and Ali Imran, Personal Financial Services General Manager, all of Alawwal Bank.

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20/03/2017 09:06

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The value of a good name Independent branded business valuation and strategy consultancy Brand Finance has released its latest annual report on the world’s most valuable banking brands, Banking 500 2017

Middle East QNB

3,826

Emirates NBD

3,406

National Bank of Abu Dhabi

2,497

Abu Dhabi Commercial Bank

2,186

Al-Rajhi Bank

2,133

NCB

1,972

Dubai Islamic Bank

1,882

First Gulf Bank

1,861

NBK

1,592

Bank Pasargad

rand Finance calculated the values of brands through a royalty relief approach that estimates likely future sales attributable to a brand and calculating a potential royalty rate that would be charged for the use of the brand if it were not already owned. Why is a strong brand so important? According to David Haigh, CEO of Brand Finance, in his foreword to the report, “Brand Finance’s recently conducted share price study revealed the compelling link between strong brands and stock market performance. It was found that investing in the most highly branded companies would lead to a return almost double that of the average for the S&P 500 as a whole. Acknowledging and managing a company’s intangible assets taps into the hidden value that lies within it…” The report notes that this year’s analysis sees a major milestone with, for the first time ever, a non-western brand topping the table. Brand Finance names Chinese bank ICBC as the world’s most valuable banking brand and notes that total Chinese banking brand value now outstrips that of the US. UAE-based Shari’ah-compliant institution Dubai Islamic Bank

46 page 46 Branding.indd 46

makes headlines too, showing the fourth largest increase in brand value 2016-2017 across the whole table, behind three Chinese banks. In fact, this year also marks the first time that Brand Finance has provided a ranking of Islamic banking by service brand value although the consultancy does say, “Though the most valuable contributions of Islamic banking are dwarfed by those from other areas, the industry is rapidly growing and will make an ever-increasing contribution to banks from the Middle East and the rest of the world too. “Dubai Islamic Bank currently has the largest brand value contribution from Islamic banking: $580 million of its $1.9 billion total brand value. This has helped the bank to register the fastest growth rate in the Middle East and one almost unmatched globally of 136 per cent year-on-year.” Elsewhere among banks in the Middle East, Qatar National Bank (QNB) remains the region’s most valuable banking brand overall, showing growth in value of 56 per cent, matched by second-placed Emirates NBD. National Bank of Abu Dhabi (3rd) and Abu Dhabi Commercial Bank (4th) rose 62 per cent and 77 per cent respectively.

Brand Value 2017 ($m)

(Photocredit: Ed Samuel/Shutterstock.com)

BRANDING

978

Source: Brand Finance

Islamic Banking

Brand Value 2017 ($m)

Dubai Islamic Bank

580

Emirates NBD

502

Abu Dhabi Islamic Bank

435

Bank Melli Iran

252

Abu Dhabi Commercial

195

NBK

185

Qatar Islamic Bank

161

Sharjah Islamic

Union National Bank

Mashreq

Source: Brand Finance

Africa

Brand Value 2017 ($m)

Standard Bank

1,512

ABSA

1,335

First National Bank

1,160

Investec

1,004

Nedbank

934

CIB

449

Capitec Bank

367

National Bank of Egypt

349

Attijariwafa Bank

323

First Bank of Nigeria

301

Source: Brand Finance

The full Banking 500 2017 may be viewed at http://brandfinance.com/.

www.bankerme.com

08/03/2017 13:01

(Photocredit: Duncan Andison/Shutterstock.com)

BRANDING

M&A deals are on the up but many risk destroying brand value Brand due-dilligence a crucial matter that should be thoroughly assessed in a consolidation exercise, says Sholto Lindsay-Smith, Chief Executive at Industry Partners

ollowing a period of subdued deal flow, merger and acquisition (M&A) activity is now on the cusp of a significant increase in the Middle East and Africa. Due in large part to more relaxed policies for foreign direct investment, the region is becoming a more attractive investment destination and an easier place to do business. In 2015, the UAE climbed to the 28th position on the list of most attractive countries for M&A activity around the world. However, in many instances organisations overpay for synergies that are not realised and do not plan for post-deal integration. In particular brand synergy is often overlooked.

48 page 48-50 Branding.indd 48

While it has become common practise for institutions to carry out financial due diligence prior to the undertaking of a merger or acquisition, many fail to adequately consider brand or culture fit. This can spell failure for newly combined entities without a solid strategy. Many organisations have suffered from trying to join incompatible brands, only to file for bankruptcy protection, or to divest merged businesses further down the line. Take Daimler Benz and Chrysler, for example. The two combined in 1998 with the vision of creating a transatlantic car-making powerhouse. But, ultimately their two brands were worlds apart; one high-end and one run-of-the-mill. The result of the deal

In 2015, the UAE climbed to the

28th position on the list of most attractive countries for M&A activity around the world

was the ultimate sale of Chrysler and a $30 billion write-down for Daimler. So, inadequate assessment of the brand being acquired can be cost big money, but what does robust brand due-diligence involve? cont. on page 50

www.bankerme.com

08/03/2017 13:02

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14/03/2017 09:25

BRANDING

cont. from page 48

Brand due diligence, like financial due diligence, should provide a comprehensive assessment of the potential brand synergies. It should answer some key questions. Will the new brand cannibalise or extend the customer base? Which brand name should you keep or do you need a new one? Will a change to the brand ethos alienate loyal customers? Will employees resist change and demonstrate tribal loyalty to their old brand? Will you be able to square the different brand propositions? The answers will help to plan and carry out assimilation and integration activity. Brand due-diligence not only helps minimise the risk of failure, but also it can speed up integration and realising the benefits of a deal by demonstrating clear leadership and defining a common sense of purpose. Often, the benefits of M&A deals may be in opportunities for rationalisation and efficiency savings. This can extend to brand portfolios, but there is always a risk that assimilation or elimination of brands may unwittingly destroy brand value, by alienating key customer segments. While assigning a fixed value to brands is not an absolute science, they can represent a significant chunk of a company’s intangible assets—mismanaging these can produce unintended consequences. Taking keys steps in the brand integration process before, during and following an M&A deal can help ensure things do not go wrong.

BEFORE THE DEAL

The pre-deal phase should focus on proactively identifying companies with the right brand fit, by carrying out a comprehensive review of the market, including mapping the brand positioning of potential deal partners and competitors. This assessment will uncover both strong potential brand synergies

50 page 48-50 Branding.indd 50

Sholto Lindsay-Smith, Chief Executive, Industry Partners

While it has become common practise for institutions to carry out financial due diligence prior to the undertaking of a merger or acquisition, many fail to adequately consider brand or culture fit. This can spell failure for newly combined entities without a solid strategy. — Sholto Lindsay-Smith (e.g. market coverage and product portfolio) as well as brand fit in terms of reputation, and provide a solid basis to consider the best acquisition strategy—whether the end-game would be to continue with standalone brands, to carry out a bolt-on acquisition, or to pursue a full merger.

DURING THE DEAL

During the deal process, acquirers should carry out a deeper a review and audit of the target company’s brand and brand strategy, making use of research to validate the brand’s reputation, review current perceptions and refine initial assessments. At this stage, scenario planning can be used to consider alternative brand strategies, such as the merits of a single brand versus multi-brand strategy

and opportunities to rationalise the product brand portfolio. Prior to the finalisation of the deal, internal communication of the brand strategy will help to signal intent and build confidence.

AFTER THE DEAL

Post-merger integration is a stumbling block for many companies. Success is not only reliant on a new brand identity, but also on underpinning the brand with a clear set of values and ensuring the company can live up to its brand promise. Carrying employees on the journey is vital. Companies who take these steps, monitor progress and remain responsive will stand a better chance of realising the full value of their brands in the post-M&A world.

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08/03/2017 13:02

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IN-DEPTH

Room for improvement Nabilah Annuar, Editor of Banker Middle East, speaks to Ihab Khalil and Markus Massi, both Partners and Managing Directors at BCG Middle East on the current state of the private equity and venture capital market in the region

escribe the development of the private equity and venture capital landscape in the region. Markus Massi: When it comes to

private equity (PE), the deal activity has dropped considerably, by 60 per cent, between 2009 and 2015 in the MENA region, which indicates an overall shift towards quality deals in the region. The average size of stakes being sold has increased from 40 per cent to 67 per cent during the same period. This provides an opportunity for control buyers to snap up quality companies. As current deal activities and fund raising is at a low, a large number of firms are unable to complete the PE cycle. On a positive note strong market consolidation is underway, with the top five PE funds accounting for 50 per cent of funds raised between 2009 and 2015, and the top 10 accounting for 70 per cent. Within the GCC, private equity is maturing, with third and fourth generation funds leading the way for investments. However, a number of first time funds will not be able to raise successor funds, due to a lack of track records, realisation and returns which is hampering fundraising efforts. In conclusion, now is the time for private

52 page 52-54 In Depth.indd 52

Markus Massi

Ihab Khalil

equity investments as the 2005-2008 funds are exciting the market, the strongest players always benefit from quality and good investment deals. For venture capitals, their deal activity in 2015 was around 50 per cent less than the higher levels observed in 2012. However, the venture capital deals in 2015 was 2.5 times of that

observed on average between 2009 to 2010, indicating an increasing awareness of venture capital as an alternative source of equity funding. The average size of venture capital investment deals in 2015 was also around 50 per cent higher than the averages between 2009 to 2015. During the last two years the size of cont. on page 54

www.bankerme.com

20/03/2017 09:08

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19/03/2017 16:43

IN-DEPTH

cont. from page 52

funds has also been raised compared to the 2009 to 2015 period averages, but it was still 40 per cent below the highest figures observed in 2011. In general, venture capital funds are struggling with fund raising due to the low oil prices. However, there are still great expectations for an overall industry growth in the next few years as regional investors become increasingly familiar with the asset class. Last month a new regulation came out for venture capitals operating in the UAE regarding their reporting obligations, the impact of this regulation is currently unknown.

What are the main markets that investors look at and why? MM: The most active markets in this

region are UAE, Egypt and Saudi Arabia when it comes to private equity investments. Together they cover 65 per cent of total investments in the MENA region between 2009 and 2015. Other markets include Morocco, Jordan and Tunisia who make up an additional 20 per cent of these total deals. The UAE is also a main market for venture capital investments, as well as Jordan and Egypt. Together they cover 75 per cent of these investments in the MENA region between 2009 and 2015. An additional 20 per cent of total deals comes from other markets including Lebanon, Saudi Arabia and Morocco.

Which industries are most popular amongst big-ticket investors and why? Ihab Khalil: For investors, private equity

companies in industrial and consumer goods are the most sought after in the region and cover about 40 per cent of total investments. Other popular industries for private equity investments include business services, healthcare and beauty products who make up an additional 30 per cent. Over the period of 2009 to 2015 the internet was the single largest

54 page 52-54 In Depth.indd 54

Deal activity in the private equity space has dropped by

60%

between 2009 and 2015 across MENA Deal activity in venture capitals was around

50%

less than higher levels that was observed in 2012

investment sector for venture capitals in this region, accounting for 45 per cent of total deals, followed by telecoms at 20 per cent and software at 15 per cent.

Apart from the above, what are the other emerging trends that can be seen in this market segment? IK: Other emerging trends show

that private equities have struggled to achieve good valuation when exiting investments. Furthermore, defensive sectors like healthcare are more attractive to volatile markets in the region.

What are the main issues faced when operating in this market? MM: There are a number of challenges

for those in the market as a venture capital [investor], such as limited deal flows due to lack of awareness and the lack of the maturity of companies. There is limited experience of investors and strong competition by family conglomerates in this region.

Another challenge is the lack of supporting environments for startups as part of the overall agenda and the unavailability of debt/financing support to add to equity contributions. When it comes to private equities there is a deficiency in quality deal flows. However, this is improving. Some legal, regulatory (eg. lack of SPV regime) and tax (Zakat) issues also play a part in hindering these investments.

In your opinion what are the untapped opportunities for PE and VC in the Middle East? IK: There needs to be a push in venture

capital investments and more support from governments, especially for startups. Furthermore, funding classes need to be known more as an alternative source for investments. There seems to be an opportunity with SWFs who are interested to set-up their own venture capital units for local and international investments. Lastly, linking incubators and accelerators with venture capitals is another untapped opportunity.

In your opinion, what developments can the market expect this year? MM: There is a positive outlook for the

market as family conglomerates are divesting and governments are privatising companies that are private capitals. However, the outlook is still quite fragile for venture capitals as the entrepreneurial environment needs development, as well as entrepreneurial culture as there seems to be a lack of it.

What is your outlook on private equity and venture capital in the Middle East over the short term? IK: Increased private equity deal flows are expected in the short term from conglomerates and large companies, as well as stagnant venture capitals. International private equity inflow is also expected only if privatisation programmes are successfully launched.

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(Photocredit: sdecoret/Shutterstock.com)

TECHNOLOGY

Are banks listening? Customers want a secure digital experience, says Marwan Elnakat, Digital Banking Solutions Director for Middle East & Africa at Gemalto

here is no doubt that technological advances in the financial industry are changing the way we bank. With the use of mobile devices for all banking needs being at an all-time high and only expected to increase further, it’s no surprise that digital banking is rising in popularity at a rapid pace. According to Juniper Research, in the MEA region, the value of online banking transactions will reach $1.3 billion in 2017 and will hit over $2 billion by 2020. This, together with predictions that mobile banking users in the MENA region will exceed 80 million by 2017, leaves financial institutions and banks around the world and in the region no choice but to remain competitive by offering digitalised services.

CUSTOMERS AT THE HEART OF THE BANKING STRATEGY

The current banking landscape is defined by one key word ‘digitisation’. Consumers around the world are increasingly opting for online and mobile banking options over visiting local

56 page 56-58 Technology.indd 56

branches, which will soon significantly reshape the way banks do business. Due to the availability of numerous digital platforms such as smartphones, tablets, and mobile applications—today’s customers live in a world of heightened expectations and options. Having real-time mobile access to financial information such as account balance, charges, money transfers and statements has become a baseline expectation today. With such a large push towards digital banking, it’s vital for banks and other financial institutions to invest in strengthening their digital presence, to capture and retain business. Several banks in the region for example, Emirates NBD, have already started to focus on customer experience via instant and user-friendly services. In Saudi Arabia, Al Rajhi Bank enables its customers to renew their banking card using self-service kiosks with instant card delivery. All of this has been made possible due to new partnerships and collaboration between incumbent banks and fintech providers, proposing seamless customer experience to better manage their financial needs;

Marwan Elnakat

aggregating all banking information for the user and offering more personalised services to customers.

NEW PAYMENT METHODS

It is no surprise that the retail payments sector is growing fast in terms of innovation and adoption of new payment capabilities. Growth in e-commerce in the region has facilitated and encouraged the further development of digital payment experiences. cont. on page 58

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TECHNOLOGY

cont. from page 56

Demand for optimised payments experience—in terms of speed, convenience and multi-channel accessibility is diffusing into the corporate and retail payment arenas. Banks are launching key innovative solutions such as mobile wallets, person-to-person payments, real-time payments, digital currency solutions such as bitcoin, artificial intelligence, biometrics and blockchain ledgers to facilitate faster transactions and operations but also add more security to banking transactions.

SECURITY The value of online banking transactions will reach

$1.3 billion in 2017 and will hit over

$2 billion by 2020

INTERNET OF THINGS

Internet of Things (IoT) and broadband connectivity is without a doubt, one of the biggest technological transformations on the horizon. Banks are now investing increasing amounts into infrastructure that will support a new network of connected devices, creating a world of benefits to reach far beyond the payment process, essentially impacting all areas of banking.

Mobile banking users in the MENA region will exceed

80 million by 2017

With technological advances in the banking sector, financial institutions will have a far more detailed view of the customer and only a multi-layered security approach will ensure that all data on the entire ecosystem—through the network and the cloud—remains safe. — Marwan Elnakat, Digital Banking Solutions Director for Middle East & Africa, Gemalto One key example is the potential transformation in the consumerbank relationship. Machine-tomachine connectivity enables the mass collection and exchange of data from sensors and connected objects or “things” resulting in extensive opportunities for banks to better track and analyse customer behaviours and their wants and demands for financial products and services, allowing for a far more personalised experience with targeted advice, offers and insight.

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Corporate clients and consumers will be able to access a much more holistic and detailed view of their finances— anytime, anywhere and banks will be able to offer far more customised products and solutions to aid customers in making sound financial decisions—it is a win-win situation for all. From a bank’s perspective, being far more technologically-savvy, will help them stay ahead of the curve, achieve better commercial results and also grow and retain their business.

Convenient security is paramount to a user-friendly and safe mobile and digital banking experience. So far, banks have been deploying one authentication method for all customers. However, times have changed and each individual has a unique set of requirements. Banks must adopt a multilayered security approach as a part of their authentication strategy including not only mobile one-time-password but also biometric authentication through facial recognition, finger print or voice recognition, so customers can select the authentication method most suited to their needs and way of life. With technological advances in the banking sector, financial institutions will have a far more detailed view of the customer and only a multi-layered security approach will ensure that all data on the entire ecosystem—through the network and the cloud—remains safe. In addition, rising identity fraud and regulations have resulted in banks implementing processes such as ‘know your customer’ to minimise risk and build trust within the banking ecosystem.

LOOKING AHEAD

Throughout 2017 and beyond, we will see key changes in the banking sector as it continues to embrace technological advances. This can only mean good news for both banks and customers alike—as banks continue to build stronger relationships, offer customers personalised products and services and better guide investment decisions. Technology will continue to reshape the industry putting customers at the epi-centre of the bank’s strategy—a promising change from the banking of yesteryears. From a bank’s perspective, technological investments can only bring more agility and scalability to the business so banks can stay ahead of the game.

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(Photocredit: Tyler/Shutterstock.com)

REAL ESTATE

Determining actual value Simon Townsend, Directorâ&#x20AC;&#x201D;Head Valuation & Consulting, CBRE Middle East clarifies the importance of correct assessments in real estate transactions

iddle East investors were major buyers of commercial real estate in 2015 and 2016, accounting for approximately 15 per cent of all cross regional investment. In the first half of 2016 capital investment from the Middle East was close to $10 billion. The destinations of investment flows from the Middle East are becoming increasingly diverse and no longer concentrate only on London and New York, with cities in US and Asian markets moving up the agenda of international investors.

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The global commercial real estate market faced difficulties in 2016. The relentless growth in the total value of transactions stalled as investors in all asset classes became wary of risk. Despite the increase in uncertainty there was continued pressure on investment activity. Increases in international capital flows has not been restricted to the Middle East investors with strong outbound capital flows being witnessed from Asia/Malaysian investors which has put pressure on the spending of Middle East investors with an increase in competitive capital for many of the same transactions.

Â The changes in this investment landscape has had a positive impact on Middle East investors starting to direct capital to markets closer to home across the MENAT region. Many potential hurdles to investment within the region for these foreign investment vehicles remain whether these are restrictions on investment currency, land-ownership structures, debt availability and market nuances. These investments bring an increased caution from foreign capital and an enhanced diligence requirement, underlying value of the asset and more importantly the determination of this remains at the fore. cont. on page 62

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REAL ESTATE

cont. from page 60

Noting the increasing uncertainty in the real estate markets both locally, regionally and internationally the importance of taking the right independent real estate advice has never been more important. The valuation process is one that serves many purposes and despite the nuances of local laws, customs and real estate practises adhering to best international standards provides an element of protection or even increased certainty in respect of the valuation outcome. The importance of the integrity of the value reported by the valuer is not just relevant for the investor but also the capital sources whether debt or equity—the key premise being that in the event of any default (and legislation permitting) that the lender can take possession and liquidate the asset to recover any debts attributed thereto. The selection of the valuer therefore becomes a key consideration, it is important to ensure that the selected valuer is qualified in accordance with one of the key international organisations such as RICS (to qualify and achieve chartered status the valuer must undergo a prescribed period of relevant training, sit a professional examination and maintain annual levels of competence), be regulated by the relevant local authority and have experience in not only the market but also the subject asset class— noting that the valuation of a retail mall has differing challenges/methodologies than say a large commercial property or a land valuation brings to a hotel appraisal.

In the first half of 2016 capital investment of all cross regional investment from the Middle East was close to

$10 billion

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Simon Townsend

We are regularly asked to explain how the valuation process differs across the MENAT region—the clear answer is that the methodology should not materially change in any of these locations. Adopting international best practises and the methodology for valuing a shopping mall in Rabat would be no different than the same valuation in Paris and the same goes for Dubai

and any other country. Having said that, the market relevance of the inputs will alter by sub-market—whether its rent, discount rates, investment returns, void periods, expenditure recovery and differing tax provisions. The methodologies mentioned vary depending on the asset class—the most common methods rely on a basis of comparison with other transactions or cont. on page 64

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REAL ESTATE

cont. from page 62

components of transactions whether that be investment or occupancy. One of the key challenges to the valuer is the availability and reliability of the market data required by the valuer to benchmark or undertake the valuation—for example, for the US it is possible to quickly obtain details about transactions of real estate in the public domain that can be evidence when considering an appraisal. In the UAE the Lands Department has taken significant steps in increasing its transparency by publishing real estate data that is available to the market to assist in making an informed decision. The remainder of the GCC has yet to follow suit and undertaking valuations in many of these other markets often requires a reliance on data that can not be substantiated. This provides an increased level of uncertainty and as such risk. The risks associated with valuations have been raised across MENAT and in a majority of the regions now initiatives are in place to register and regulate the performance of valuers—in the UAE this is being managed by RERA and in KSA by Taqeem; in Egypt the central bank has a new policy which restricts the undertaking of valuations to only valuers qualified against their criteria. This is already increasing the awareness of international best practise, the risks around valuations and most importantly provides a level of recourse for investors or borrowers against a valuer where a loss has been suffered as a result of reliance on a negligent or incorrect valuation. It is important for the client to ascertain whether the valuer has an adequate level of professional indemnity insurance to provide this protection and under the regulations of RERA within Dubai, to be a qualified valuer you must demonstrate that your organisation has such insurance in place.

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It is expected that investor interest in the region will continue to strengthen as political instability in some of the neighbouring geographies continues and the more established investment markets such as UK and US are in a period of transition following political changes (whether it be Brexit or presidential change). Many regional governments are working on ways to encourage foreign investment into the real estate sectors whether through changing legislation to ensure more transparency or opening financial markets to enable foreign investors to secure capital from the local markets.

need to make based on their view of the market whether it be the proposed use of the land, the costs to construct but also and often more importantly the exit strategies both around pricing but also timing. Despite this limited engagement from foreign groups in the development sphere, several regional developers are expanding their footprints across the MENAT region, notably companies like Eagle Hills from within the UAE who have recently announced a number of major projects across the region. There continues to be interest in large development and infrastructure

We are regularly asked to explain how the valuation process differs across the MENAT region— the clear answer is that the methodology should not materially change in any of these locations. — Simon Townsend, Head Valuation & Consulting, CBRE Middle East There is a continued growth in the REIT markets with established REITs already existing within Dubai and registered on the local stock market, with more recent announcements in Kingdom of Saudi Arabia around several newly established REITs. New legislations has been announced in Morocco that which will further bolster the REIT markets—this not only enables indirect investment into these real estate vehicles but also provides another source of capital interest in the investment markets. We have thus far focused on the investment assets or completed assets, investor appetite and from discussions with lending institutions they have indicated the same selective appetite. The importance of the experience of the valuer in undertaking such appraisals is paramount as these rely on an increasing number of assumptions which the valuer will

projects from several of the state companies particularly in China but despite their obvious track records globally the tightening of export capital is resulting in these groups looking a lot more selectively at these projects and certainly the valuation becomes a very important piece of their consideration puzzle. Finally, it must be said that the valuation is often seen (especially in the financing world) as merely a process piece and more so another document needed to close a mandate. One should never underestimate the importance of this valuation process and certainly always make sure the valuation process is robust and that the valuer is experienced in what is being asked. You would not risk your health with a surgeon who has no experience just because he was the cheapest— why would you do it with your real estate?

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PERSONALITY

Jan-Willem Sudmann

Executive Vice President, Head of International Banking Group at Mashreq

I have been working in the banking sector for 25 years now. Out of them, the last 15 years have been spent in International Corporate Banking and Financial Institutions Business, which are the main areas I am responsible for in Mashreq. The motivation to move into international banking was spurred on by my firm belief that internationalisation and globalisation in principle benefits economies and people. I wanted to be part of this growing sector. The two biggest achievements that come to mind are building of a corporate banking franchise in China and developing the financial institution business globally at two large European banks. This is not necessary a personal achievement but rather being part of a team effort. Managing large groups in banking always means managing people, so I spend a lot of time listening to my teams and provide advise on how to enhance this business. I also dedicate a substantial amount of my time to meeting clients in order to understand their business and their financial needs. In managing an international business, a lot of time is spent in traveling to the 11 countries we have offices in and a number of other markets where we need to meet clients. I enjoy meeting people from all over the world with various cultures, ethnic groups, different backgrounds and thinking. My job offers me the opportunity to interact and learn the business needs of different countries and in return helps us to develop financial propositions that accurately respond to international banking demands. Â I am currently reading a book called Takeover by Adler Olsen. I donâ&#x20AC;&#x2122;t have a favorite book but I do enjoy the books by John Le Carre. I love having dinner with my wife. But should a sports celebrity care to join us for example, Roger Federer (a sports legend who I have always admired), I would be delighted. As the GCC financial sector is rapidly integrating into the global financial world, it needs to continue to adapt to the ever-growing requirements of the regulatory requirements such as IFRS 9, FATCA, and legal requirements throughout the world. The financial industry in the GCC continues to be in good health and has shown solid results in 2016 and the accelerating diversification of the GCC economies over the next years will provide plenty opportunities to grow. Global growth will continue to be driven by Asia, particularly China while the US and Europe will continue to grow moderately.

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