#209 - August 2018 by CPI Financial

AUGUST 2018 | ISSUE 209 MIDDLE EAST

AUGUST 2018 | ISSUE 209

A BANK FOR BANKS KORHAN ALEV, CEO, Bahrain Middle East Bank

A CPI Financial Publication

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EDITOR’S NOTE

t’s the beginning of the second half of the year; and welcoming you back from the summer holidays, our August edition will put you back on track with developments that have transpired over the last few weeks and ongoing themes that continue to shape banking and finance in the Middle East. Thus far, the thematic issue for 2018 has been pressure in trade relations. We have long standing diplomatic stand-offs between the US and Iran, the US and China, and most recently with Turkey. As a result of bold political shifts within the Turkish government, the lira has weakened significantly, losing about 30 per cent of its value this year, a currency crisis which could cause economic pressures that could spill over into other emerging markets and banking systems in Europe. Financial institutions operating in MENA markets with regional and international exposures, have since become weary of the developments in Turkey and have begun to mitigate their risks. Following on from this, the country focus of our issue this month provides you a deeper insight into Turkey’s fiscal and economic state (page 30), an overview

on GCC banks (page 8), as well as a commentary on current operating conditions and interest rates (page 18). Our August cover star (page 24) is an “oldie but goodie”, Bahrain Middle East Bank, a financial institution established in 1982, that has always catered to the needs of other banks, both in terms of investment and day-to-day transactions. In this exclusive interview, its CEO, Korhan Alev, explains how the institution focuses on smaller regional banks and foreign lenders seeking to enter the GCC market. Apart from these, our features in this edition tackle several important aspects for banks operating in this region— retail banking and customer experience, retaining the millennial customer demographic, wealth management, as well as AI and automation—more details in the table of contents on next page. As usual, we aim to deliver exceptional thought leadership content in every issue. Till the next one, have a productive read.

Nabilah Annuar EDITOR, BANKER MIDDLE EAST

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CONTENTS

AUGUST 2018 | ISSUE 209

NEWS

8 The health of GCC banks 14 News highlights

THE MARKETS 18 Trade tensions, interest rates and the like: the bane of 2018 21 Revitalising an economy

21 COVER INTERVIEW 24 A bank for banks

COUNTRY FOCUS 30 Borrowed time?

RETAIL BANKING 38 When it comes to millennials, GCC banks must be paranoid 42 Canâ&#x20AC;&#x2122;t get no satisfaction?

CRYPTOCURRENCIES 46 Cashless or useless?

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AUGUST 2018 | ISSUE 209

48 P.O. Box 502491, Dubai Media City, UAE Tel: +971 4 391 4681 Fax: +971 4 390 9576

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CHAIRMAN Saleh Al Akrabi CHIEF EXECUTIVE OFFICER TONY LONG tony.long@cpifinancial.net Tel: +971 4 391 4681

WEALTH MANAGEMENT 48 The Middle East’s promising wealth landscape

IN DEPTH

GET THE DIGITAL EDITION OF BANKER MIDDLE EAST ONLINE.

52 Bullish and confident

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SALES DIRECTOR OMER HUSSAIN omer@cpifinancial.net Tel: +971 4 391 5419

EDITORS MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716

BUSINESS DEVELOPMENT MANAGERS DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526

WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718 WEB EDITOR JESSICA COMBES jessica@cpifinancial.net Tel: +971 4 364 2024

AUGUST 2018 | ISSUE 209

A BANK FOR BANKS KORHAN ALEV, CEO, Bahrain Middle East Bank

56 Personalising service for digital natives 58 Challenges and opportunities in a new payments landscape 62 Automation is coming

MIDDLE EAST

TECHNOLOGY

EDITOR - BANKER MIDDLE EAST NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726

EDITORIAL ASSISTANT KUDA MUZORIWA kuda.muzoriwa@cpifinancial.net Tel: +971 4 391 3729

AKASH AMBALE akash.ambale@cpifinancial.net Tel: +971 4 433 5320 ADVERTISING sales@cpifinancial.net

EDITORIAL editorial@cpifinancial.net

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

SENIOR DESIGNER FLORANTE MAGSAKAY florante@cpifinancial.net Tel: +971 4 391 3724

DIGITAL MANAGER SIYAMUDHEEN PAINAYIL siya@cpifinancial.net Tel: +971 4 391 3722

EVENTS MANAGER NATALIA KAILA natalia.kaila@cpifinancial.net Tel: +971 4 365 4538

FINANCE & DATA EXECUTIVE KHALED TAHA khaled.taha@cpifinancial.net Tel: +971 4 433 5322

EVENTS MARKETING MANAGER CRIS BALATBAT cris.balatbat@cpifinancial.net Tel: +971 4 391 3725

A BANK FOR BANKS KORHAN ALEV, CEO, Bahrain Middle East Bank

A CPI Financial Publication

Dubai Technology and Media Free Zone Authority

JULY 2018 | ISSUE 208 MIDDLE EAST

JULY 2018 | ISSUE 208

MIDDLE EAST DIGITISATION Ahmed Al-Faifi, Senior Vice President and Managing Director at SAP Middle East North

FINANCE & DATA MANAGER SHAIS MEMON, ACCA, CMA Shais.memon@cpifinancial.net Tel: +971 4 391 3727

A CPI Financial Publication

MIDDLE EAST DIGITISATION

AHMED AL-FAIFI, Senior Vice President and Managing Director at SAP Middle East North Dubai Technology and Media Free Zone Authority

MAY 2018 | ISSUE 206 MIDDLE EAST

MAY 2018 | ISSUE 206

THE SAUDI INFLUENCE SAMER ABU AKER, Acting CEO of SEDCO Capital

EMBRACING THE NEW NORMAL Middle Eastern markets are adjusting well to current realities

RIPE FOR THE PICKING

ADMINISTRATION & SUBSCRIPTIONS CAROL BASA carol@cpifinancial.net Tel: +971 4 391 3709 enquiries@cpifinancial.net

HR & OFFICE MANAGER RIZZA INFANTE rizza@cpifinancial.net Tel: +971 4 391 4682

Global macroeconomic climate bodes well for investment

THE HOLISTIC APPROACH Tackling the changing trend in private banking

A CPI Financial Publication

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THE SAUDI INFLUENCE SAMER ABU AKER, Acting CEO of SEDCO Capital

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PUBLISHED BY CPI FINANCIAL FZ LLC REGISTERED AT DUBAI MEDIA CITY, DUBAI, U.A.E.

ANALYSIS

THE HEALTH OF GCC BANKS Banks across the GCC may face a period of subdued lending growth and deteriorating asset quality

PHOTO CREDIT: Shutterstock/Sophie James

The continued decline in real estate prices in the UAE may reduce the asset quality of Emirati banks.

CC banks are believed to be among the most the most heavily deposit-funded and wellcapitalised financial insitutions globally, both by regulatory and our measures. As they continue to operate in the region’s less-supportive economic environment, S&P in a recent report has projected that lending growth would remain subdued and asset quality indicators may deteriorate. S&P currently rates 24 banks across the GCC and the rating agency’s outlook on the majority of GCC banks it rates are stable. The outlooks that are negative are primarily placed on banks in Qatar because of the potential impact of the boycott on the government’s creditworthiness and capacity to support the banking system, as well as pressure on Qatari banks’ funding profiles, asset quality, and profitability indicators.

Gulf banks were found to have approximately

2.7 times

more problem assets than their NPL ratios suggest at the end of 2017 But the NPL coverage ratio dropped by almost

50% 69.5% 140.6% to

from

at the end of last year

NPL RATIOS TO HIKE UP According to S&P, non-performing loan (NPL) ratios across GCC banks witnessed a slight deterioration over the past 12-24 months. This is something that the agency views somewhat surprising, considering the severity of the economic shocks in their home countries over that period. There is a visible increase in past-due but not impaired loans and restructured exposures over the past couple of years, as banks prefer to readjust their payables to changes in their clients’ cash flows rather than classify loans as being in default. Gulf banks were found to have approximately 2.7 times more problem assets than the NPL ratios suggest at the end of 2017. In the same vein, the NPL coverage ratio on that date dropped by almost 50 per cent to 69.5 per cent from 140.6 per cent.

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ANALYSIS

3.5

160

3.0

140 120

2.5

(%)

80 1.5

1.0

0.5 0.0 2013

(%)

100

2.0

20 2015

2014 NPLs/Total loans (left scale)

2016

0 2017

New LLP/Total loans (left scale)

Loan loss provisions (LLP)/NPLs (right scale) Source: S&P Global Ratings

RATED GULF BANKS: COMPREHENSIVE QUALITY METRICS 20

180

160

140

100

(%)

120

4 2

Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Bank 8 Bank 9 Bank 10 Bank 11 Bank 12 Bank 13 Bank 14 Bank 15 Bank 16 Bank 17 Bank 18 Bank 19 Bank 20 Bank 21 Bank 22 Bank 23 Bank 24

IFRS 9 AND ITS IMPACT ON COST OF RISK The implementation of International Financial Reporting Standard No. 9 (IFRS 9) will result in a higher, but still manageable, cost of risk for Gulf banks. According to S&P’s estimations, on average, the additional provisions needed represented 1.1 per cent of rated banks’ total loans as of 1 January 2018, or 5.3 per cent of their total adjusted capital. The highest impact was in Qatar and the lowest in Kuwait. The main reason for the overall limited impact is banks’ conservative approach to loan loss provisioning, which is also sometimes the result of conservative regulatory requirements, such as in Kuwait, where banks are required to set aside a flat provision on their performing on- and off-balancesheet exposures. S&P expects credit losses to increase slightly between 2018-2019 from their current level of around 100 basis points.

RATED GULF BANKS: ASSET QUALITY INDICATORS

(%)

S&P suggests that some pastdue but not impaired or restructured loans will shift to the NPL category in the next 12-24 months (with an NPL ratio not exceeding five per cent), but believes that the overall size of problem assets will remain stable. This is on the back of a stabilising economic environment in spite of the pockets of risk real estate, construction, and hospitality sectors. The continued decline in real estate prices in the UAE may reduce the asset quality of Emirati banks, similarly, with the deterioration remaining contained. Saudi Arabian banks’ NPL formation on the other hand will continue to depend on the health of the contracting sector. Following the continued boycott on Qatar, the asset quality of banks in the country remain under increasingly pressure on the back of dampening domestic economic activity, including the real estate and hospitality sectors.

Total stock of problematic assets (left scale)

Coverage including IFRS 9 provisions (right scale)

Source: S&P Global Ratings

CONCENTRATION RISKS The 20 largest loans across the banks that S&P rates averaged about 30 per cent of the banks’ loan books at the end 2017. This gives a rough indication that such exposures leave rated Gulf

banks vulnerable to unexpected events. These concentration risks mirror the narrowness of the GCC’s economies and the dominance of a few large private-sector groups or governmentrelated entities.

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ANALYSIS

GEOGRAPHIC EXPANSION AND ITS IMPLICATIONS GCC banks have generally included regional expansion in their growth strategies over the past decade. This was typically done either organically or through acquisitions, with the latter being the most favoured route. The main aim of this strategy is to diversify their asset and income bases and reduce vulnerability to their oil-dependent home nations. Egypt and Turkey were the main expansion destinations within the region, while some went further into Europe and Asia. Depending on the stability of the economies these banks have expanded into, the bank’s credit-worthiness ultimately depends on their capacities to back external acquisitions with sufficient capital injection. Geographical expansion holds minimal bearing on the complexity of risks GCC banks face as they thus far appear to have the capabilities to manage their subsidiaries effectively. SOLID CAPITAL BUFFERS AND GOOD EARNINGS The strong quantitative and qualitative capitalisation of GCC banks largely holds the fort.

RATED GULF BANKS: LOAN CONCENTRATIONS 250.00 200.00 150.00 (%)

In the past, some corporate groups experienced significant difficulties and defaulted on their financial obligations, triggering a spike in banks’ cost of risk; the most recent example of this is the default of a large contractor in Saudi Arabia. Concentration by economic sector is also high and a source of banks’ exposure to cyclicality risk. The most prominent example is Gulf banks’ lending to the construction and real estate sectors, which accounted for about 21 per cent of total exposures on average at yearend 2017, ranging from an extremely high 49 per cent to a mere 1.5 per cent, depending on the bank.

100.00 50.00 0.00 Real estate and construction/total loans Minimum

Top 20 loans/total loans Average

Top 20 loans/reported equity

Maximum

Source: S&P Global Ratings

RATED GULF BANKS: RISK POSITION IMPACT ON STAND-ALONE CREDIT PROFILE Positive (4%)

RATED GULF BANKS: COMBINED CAPITAL AND RISK IMPACT ON STAND-ALONE CREDIT PROFILE Negative (17%)

Negative (33%)

Positive (42%)

Neutral (63%)

Neutral (42%)

Source: S&P Global Ratings

The average risk-adjusted capital ratio of the rated banks reached 11.8 per cent at the end 2017 and the capital bases of banks comprise mainly of common equity instruments. Gulf banks also continued to display healthy earnings last year, with the return on assets averaging 1.5 per cent. S&P expect earnings across GCC banks to stabilise at lower levels

this year and through 2019 due to the combination of higher provisions because of IFRS 9, the introduction of value-added tax, and muted loan growth. However, the rating agency projects that banks will continue to generate sufficient returns to cover their risks. This, among other factors, is the reason why their outlook on GCC banks is stable.

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NEWS HIGHLIGHTS

Saudi sovereign wealth fund raises $11 billion loan Saudi Arabia’s Public Investment Fund (PIF) has raised an $11 billion loan from banks, as it seeks to boost its financing of the Kingdom’s economic transformation plans, reported Reuters. The loan which was increased from an initial guide size of $6 billion to $8 billion, comes after the Kingdom postponed Aramco’s initial public offering. This is the first commercial loan for the PIF, the Kingdom’s vehicle to deliver the Vision 2030 reform plan announced in 2016. The sovereign wealth fund has made substantial investments in technology companies, including a $45 billion agreement to invest in Japan’s Softbank as well as $20 billion to an infrastructure investment planned with Blackstone. The loan proceeds will be channelled towards general corporate purposes and the debt raising is set to diversify PIF’s sources of funding, which in the past were capital injections and asset transfers from the Government.

Saudi reforms to boost economic growth, says IMF The IMF said that Saudi Arabia is moving ahead with economic reforms and growth in its non-oil economy despite the delay to the planned initial public offering (IPO) of Aramco. The International Monetary Fund (IMF)’s projections are based on expectations of continuous broad range of economic reforms. Tim Callen, IMF’s mission Chief for Saudi Arabia, said that Aramco was one part of the reform programme, but other parts are moving ahead fairly well. The Kingdom’s real GDP growth is expected to increase to 1.9 per cent in 2018, with non-oil growth strengthening to 2.3 per cent and growth is expected to pick-up further over the medium-term as the reforms take hold and oil output increases. Additionally, the IMF expects profitability in Saudi banks to increase as interest margins widen as well as to as well as to remain well capitalised and liquid. The IMF cautioned the Kingdom against boosting spending in the wake of rising oil prices, emphasising that a rise in spending would expose its budget if there was an unexpected drop in oil prices. Saudi Arabia’s revenue increased by 67 per cent in Q2 2018 due to a sharp rise in oil income, during the same period public spending surged 34 per cent.

ADIB’s shareholders approve proposed rights issue ADIB’s shareholders have approved a proposal by the bank’s Board of Directors to raise capital through a AED 1 billion rights issue. The proposed rights issue will increase Abu Dhabi Islamic Bank (ADIB) issued capital from AED 3.1 billion to AED 3.6 billion through the issuance of 464 billion new shares. The capital plan seeks to support the bank’s continued growth and its objectives in achieving its strategy while meeting regulatory requirements. In a statement, ADIB said that the general assembly approved the board’s proposal to issue a $750 million (AED 2.75 billion) perpetual Tier 1 Sukuk as well as the repayment of its $1 billion Sukuk that was successfully issued in 2012 as the world’s first Shari’ahcompliant Hybrid Tier 1 Sukuk. ADIB reported a three per cent increase in net profit in H1 2018 amounting to AED 1.16 billion. The lender will announce the timetable for the rights issue, including the ex-rights date, rights trading period as well as subscription period after the approval of the Central Bank of the UAE and Securities and Commodities Authority.

Abu Dhabi Investment Council increases Al Hilal Bank’s capital Abu Dhabi Investment Council has increased the share capital of Al Hilal Bank by AED 400 million, a timely boost for the lender which is pursing growth in branch network and investment in technology, reported local daily, The National. The AED 400 million capital increase will boost Al Hilal Bank’s share capital to AED 3.5 billion from AED 3.1 billion. Alex Coelho, the Al Hilal Chief Executive, said that while the increase will strengthen the bank’s balance sheet and capital base, it will also allow the lender to meet the growing demand for Islamic finance by investing in areas with the greatest prospects. This came on the back of the Central Bank of the UAE’s revised projection of the country’s economic growth forecast, which was raised to 2.7 per cent from its previous projection of 2.5 per cent. Non-oil GDP growth is forecast was also increased to 3.9 per cent this year from 3.4 per cent in 2017.

SOVEREIGN RATINGS AS OF 1 AUGUST 2018 Issuer

Foreign Currency Rating

Last CreditWatch/Outlook Update

1 Bahrain

B+/Stable/B

1-Dec-2017

2 Central Bank of Bahrain

B+/Stable/B

2-Dec-2017

3 Egypt

B/Stable/B

12-May-2018

4 Iraq

B-/Stable/B

03-Sep-2015

5 Jordan

B+/Stable/B

20-Oct-17

6 Kuwait

AA/Stable/A-1+

20-Jul-2011

7 Lebanon

B-/Stable/B

2-Sep-16

8 Morocco

BBB-/Stable/A-3

16-May-2014

9 Oman

BB/Stable/B

11-Oct-2017

10 Qatar

AA-/Negative/A-1+

25-Aug-2017

11 Saudi Arabia

A-/Stable/A-2

17-Feb-2016

12 Abu Dhabi

AA/Stable/A-1+

02-Jul-2007

13 Ras Al Khaimah

A/Stable/A-1

21-Jul-2018

14 Sharjah

BBB+/Stable/A-2

27-Jan-2017

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NEWS HIGHLIGHTS

REIT listings dominate deals across GCC As investors continue to tread cautiously in the GCC equity markets, Tadawul saw eight REIT listings in H1 2018, together with a $13 million listing of an insurance company in Oman. These deals have generated total proceeds of $893 million across GCC in H1 2018, compared to $610 million raised from 15 IPOs in H1 2017. The increase in proceeds is mainly due to the two REIT IPOsâ&#x20AC;&#x201D;Sedco Capital REIT ($173 million) and Bonyan REIT ($174 million). According to a report by PwC, in terms of stock market performance, Tadawul remained the best performing stock exchange with Tadawul All Share Index (TASI) recording a 12 per cent improvement compared to the same period in 2017, followed closely by Abu Dhabi Securities Exchange (ADX), contrasting with the flat volumes and negative returns experienced by Dubai Financial Market (DFM) and Muscat Securities Market (MSM) in H1 2018. The recent approval of Tadawulâ&#x20AC;&#x2122;s inclusion in the MSCI Emerging Markets index which is to be completed in June 2019, is expected to attract foreign investment and provide a positive boost to the Tadawul equity market.

The future trajectory of GCC equity markets is projected to depend on geopolitical developments, stability of oil prices and the implementation of ongoing government reform policies and related privatisation initiatives across the GCC region. Despite the challenging market conditions and the resultant reduction in deals volume by 25 per cent, global IPO proceeds were up by seven per cent. In total, 300 IPOs raised $58.1 billion in Q2 2018 (2017: 398 and $54.1 billion; 2016: 253 and $35.2 billion). As for bond issuances, PwC findings show that it is led by the Saudi Arabia and Qatar. The GCC sovereign bond market witnessed proceeds of $22.9 billion during the Q2 of 2018 from its two largest sovereign bond issuers. The $12 billion sovereign bond issued by Qatar represents the largest placement by an emerging market sovereign so far this year. Corporate debt activity, however, has been relatively slow. Given the recent recovery in oil prices and easing of government fiscal deficits, sovereign debt issuances are expected to taper in the second half of 2018.

GCC IPO ACTIVITY SINCE 2013

11,000 10,500

30 25

3,500 3,000

20 16

2,500

2,000 1,500

9 6

1,000

10 5

500 0

702

10,750

1,439

782

3,300

2013

2014

2015

2016

2017

Value (USD m)

Source: PwC

Volume

610

893

H1'17 H1'18

Volume of IPOS

Value of IPOS (USDm)

4,000

HSBC and Credit Suisse to valuate AUB and KFH shares ahead of prospective merger

Turkey inflation to increase by 20 per cent, says S&P

Following the disclosure confirming a possible merger, HSBC and Credit Suisse have been appointed to govern the valuation, due diligence as well as other technical requirement, all of which are prerequisites to a possible Ahli United Bank (AUB) and Kuwait Financial House (KFH) merger. If the tie-up materialises, it would join a number of several recent tie-ups to create bigger and stronger lenders in the MENA region, creating a merger with total assets amounting to $90.57 billion, making it the sixth largest bank in the Gulf. In a bourse filing, AUB has announced that HSBC and Credit Suisse are currently undertaking the necessary valuations studies to assist both parties to arrive at a fair share exchange ratio. These steps were deemed necessary to obtain regulatory approvals in the Bahrain and Kuwait among other concerned countries.

S&P Global Rating has projected that Turkey may face an increase in inflation this year as well as a sharp tightening in its economic growth in 2019, as the country’s currency crisis continues. The lira gained slightly, but the long-term effects of the crisis are still emerging. In a report, S&P said that the exceptional volatility of the lira exchange rate over the past two weeks and a significant tightening of both external and domestic financing conditions, as well as a broader decline in confidence will undermine the Turkish economy. The Turkish economy is expected to contract by 0.5 per cent in 2019, with investments reducing sharply by a projected six per cent. Also, the rating agency projects the inflation to peak above 20 per cent, with the unemployment rate to rise to 12 per cent in 2019. S&P among other credit rating agencies downgraded Turkey’s creditworthiness to ‘junk’ status before the crisis intensified with the US spat which raised concerns about the resilience of the country’s banking system among investors.

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THE MARKETS

TRADE TENSIONS, INTEREST RATES AND THE LIKE:

THE BANE OF 2018

Jerome Powell, Chairman of the US Federal Reserve at a news conference PHOTO CREDIT: Bloomberg

following a Federal Open Market Committee (FOMC) meeting in Washington, where officials raised interest rates for the second time this year and upgraded their forecast to four total increases in 2018.

Diego Würgler, Head Advisory Solutions (Distribution) Middle East at Julius Baer, provides an exclusive commentary about current operating conditions and his projections for the second half of the year

THE MACROS ulius Baer remains constructive on the global macroeconomic picture for 2018. If it is true that some areas are slowing down in terms of ‘momentum’, we still benefit from a global, synchronised economic growth around the world. The US economy remains in a good shape, as shown by the healthy numbers coming both from the labour and real estate market. The risk here is more of the economy to overheat due to the pro-cyclical measures taken by the Trump’s administration (tax reform, infrastructure spending), thus requiring the Federal Reserve (FED) to continue increasing interest rates. Therefore, a (mild) recession in 2020 should not be excluded. The European economies have lost some momentum and political challenges remain serious. That said, we continue to believe that the macro picture is going to gradually improve in the long run. Emerging markets are challenged by US dollar interest rate hikes but are fundamentally much more resilient than in the past. At the same time, the rebounding oil price has helped big economies like Brazil and Russia to exit recession. All in all, the global macroeconomic picture is in fact healthier than news headlines currently suggest.

ASSET CLASSES Reality is that the MSCI World (a proxy for the global equity market) in US dollar terms has gained +2.8 per cent in 2018. On the other hand, only the US market has performed well (+4.6 per cent for the S&P500). Europe (-3.9 per cent), Japan (-0.4 per cent) and Emerging Markets (-6.1 per cent, all numbers in USD terms) did not. Therefore, only investors exposed to the US-market have enjoyed some capital gain in 2018 so far.

EMERGING MARKETS ARE CHALLENGED BY US DOLLAR INTEREST RATE HIKES BUT ARE FUNDAMENTALLY MUCH MORE RESILIENT THAN IN THE PAST.

Gold has not acted as a safe haven asset class, with YTD (year to date) performance at

-5.4%

whereas crude oil has nicely rebounded by

16.6% (WTI) this year

bankerme.net

THE MARKETS

The fixed income market (in US dollar) has been much more challenging because of the rising interest rates. Unfortunately, it’s not uncommon to see 2018 performances for this segment at— three to five per cent—even for higher quality papers. So far in 2018, gold has not acted as a safe haven asset class, with YTD (year to date) performance at -5.4 per cent, whereas crude oil has nicely rebounded by 16.6 per cent (WTI) this year. For the remaining of 2018, we believe that the market environment will remain challenging for bonds. We tend to be on the prudent side as well for the commodity market. On the other hand, we are more constructive on equities, where we forecast positive returns (on average) for 2018. We continue to see a big interest for real estate assets from Middle East investors, which probably has some cultural roots. At the same time, we see some request for geographical diversification given some perceived uncertainty for the MENA region. On the listed market, the preferred vehicle for local investors remains bonds, as they now pay a decent coupon and therefore offer a more attractive yield. Bonds summarise best the basic requirement for MENA investors which includes the simplicity, and generation of a yield with minimum capital risk. Over the last few years, we also saw some interest for the international equity markets. In our view, this was probably due to a lack of better alternatives rather than a paradigm shift in terms of local investors’ mindset. CHALLENGES IN CURRENT MARKET CONDITIONS Among the commonly discussed threats for financial markets, we can point out the trade disputes, the flattening of the US dollar yield curve and more broadly, the US Federal Reserve’s interest rate hikes. The latter is particularly relevant

interest rate environment. This creates a distortion in investors’ behaviour as they still target high single-digit returns. To achieve their (higher) objectives, they tend to increase their equity exposure. We believe that a portfolio’s strategic asset allocation should be defined by an investor’s risk-profile only. That way, we can ensure a client’s portfolio always mirrors their ability and willingness to take investment risks.

Diego Würgler, Head Advisory Solutions (Distribution) Middle East, Julius Baer

EMERGING MARKETS ARE CHALLENGED BY US DOLLAR INTEREST RATE HIKES BUT ARE FUNDAMENTALLY MUCH MORE RESILIENT THAN IN THE PAST.

for investors as higher rates make bonds look relatively more attractive. Therefore, this might generate some changes in the asset class allocation, for instance, from stocks into bonds. But even if you take all this into consideration, the current market remains driven by a global ultra-low

NAVIGATING INTO 2019 Julius Baer currently over-weights four sectors namely, IT (technology), financials, energy, and industrials. The IT sector is by far our preferred one. We like technology companies as they continue to offer high growth rates (something that is difficult to find in other sectors). In addition, IT stocks are much cheaper that commonly perceived, so that irrespective from their superior fundamentals they only trade in line with historical valuations. Finally, the IT sector has a low financial leverage, which means that the average debt level is very low; this is relatively positive in a context of rising rates. Financial shares should benefit from any steepening of the yield curve. In addition, the Trump’s administration is pushing for less regulation in the financial industry which could open-up business opportunities at lower costs for US banks. Energy stocks are the ultimate ‘value play’ in the current market. The sector is extremely cheap and discounts a crude oil price that is way below the current level. High dividends for energy companies should also support the sector. Industrial shares tend to outperform later into the economic cycle, we believe we have already reached that stage. In addition, a more aggressive fiscal policy (think about infrastructure spending in the US) should naturally benefit industrial companies. The recent correction in the sector which was due to a negative rhetoric around the trade tension topic, could offer attractive entry points.

REVITALISING AN ECONOMY A market report by Ehsan Khoman, Head of MENA Research and Strategy at MUFG, deliberates on Saudi Arabia’s economic transformation agenda

ECONOMIC DEVELOPMENTS merging from technical recession, real GDP in Q1 2018 grew by 1.2 per cent year-on-year compared with -1.2 per cent year-on-year in Q4 2017 (and a decline in GDP of 0.7 per cent for 2017 as a whole).The breakdown suggests that the rebound was primarily driven by the oil sector (0.6 per cent yearon-year in Q1 2018 against -4.3 per cent year-on-year in Q4 2017).

Saudi Arabia’s real GDP in Q1 2018 grew by

1.2% year-on-year

Introducing a comprehensive bankruptcy law is the latest development of a string of reforms under Vision 2030 to further encourage foreign direct investment into the Kingdom. PHOTO CREDIT: Bloomberg

bankerme.net

THE MARKETS

Meanwhile, there was also positive momentum from the non-oil sector (1.6 per cent year-on-year in Q1 2018 against 1.3 per cent year-on-year in Q4 2017) buttressed by strong growth in the manufacturing industry. Looking ahead, four years after oil prices began to precipitously fall, we continue to witness signs that Saudi Arabia has begun to structurally adjust to the lower energy earnings environment and we expect growth to gather further pace in the near-term. The Kingdom’s new bankruptcy law will act as a conduit to investment growth. Saudi Arabia introduces its first comprehensive bankruptcy law on 18 August. This is the latest development of a string of reforms under Vision 2030 to further encourage foreign direct investment (FDI) into the Kingdom by structuring the business legal framework. Specifically, the law details provisions related to the liquidation, settlement and financial reorganisation since the current applied legislations are not sufficiently governing the procedural and judicial aspects of these essential matters. In addition, the law will protect creditors’ rights, reduce the costs and timeframe of the bankruptcy procedures and encourage SMEs to invest in the commercial market. POLITICS AND DIPLOMACY Saudi Arabia is expected to switch Bahraini support to from unconditional/ implicit to conditional/explicit. Saudi Arabia, Kuwait and the UAE have announced a financial support package for Bahrain after an acute sell-off of the country’s bonds and currency. However, we view that Saudi support which was historically unconditional/implicit in nature will shift to being conditional/ explicit with the Bahraini authorities expected to front-load the delivery of fiscal consolidation (spending cuts and non-oil revenue expansion) pledges.

WE VIEW THAT THIS WILL REPRESENT A FURTHER FILLIP TO THE COUNTRY’S VISION 2030 PLANS TO MAKE ITS FINANCIAL MARKET MORE INTERNATIONALLY TRADEABLE, AND IN TURN LOWER THE SOVEREIGNS COST OF FUNDING, SUPPORTING THEIR DEBT ISSUANCES AND CLEARLY DEEPEN THE BREADTH OF THE FINANCIAL SECTOR, AND IN-TURN RAISE THE SHARE OF NON-OIL GDP.

Indeed, Crown Prince, Mohammed bin Salman (MbS) is more pragmatic, less committed to old norms of solidarity and more importantly, cannot be viewed as providing assistance to an ally (Bahrain) that fails on reform implementation whilst its own population in Saudi Arabia is adhering to austerity measures. This could be the game changer that markets have been waiting for, with investors taking more comfort in the forward guidance type structure of reform execution in Bahrain given the conditionality of Saudiled support owing to the delivery of reform promises. Heightened animosities amongst OPEC+ energy ministers could affect diplomatic ties. There continues to remain a disagreement on the precise magnitude of the increase in oil production amongst OPEC+ members—OPEC+ reached a consensus on 23 June to strive to adhere to the overall conformity level of the agreement for 100 per cent compliance with the overall production ceiling agreed back in January 2017 (1.72 million barrels per day of production cuts). Saudi Arabia and Russia declared that the total increase in output needed would be up to one million barrels per day. Meanwhile, Iran saw no more than 500,000 barrels per day of additional output. Ultimately, it is the opinion of countries that have the spare capacity to produce more that matters, primarily Saudi Arabia and Russia. Last month, Iran warned Saudi Arabia that any breach of OPEC+ oil production ceiling will hamper the effectiveness of the organisation and a violation of the agreement to revive output. Overall, whilst the consensus agreement by OPEC+ was meant to offer clarity on oil market supply-demand balances, we view that considerable risks remain in relation to the oil price trajectory given the deviations in interpretations of the production increases by OPEC+ members. Compliance adherence will remain central to the determination of the front-end of the oil price curve.

MENA MARKET INDICATORS Benchmark Bond Yields (%, Local Currencies) Advanced Countries US Germany Italy Japan MENA Countries Bahrain*** Egypt Qatar** Saudi Arabia** Abu Dhabi*** Dubai***

Maturity

20-Jul

27-Jul

10 yrs 10 yrs 10 yrs 10 yrs

2.89 0.37 2.59 0.04

2.99 0.44 2.77 0.10

Week 9.3 7.1 17.6 6.7

5 yrs 6 yrs 12 yrs 10 yrs 1 yr 2 yrs

6.76 17.57 4.52 3.98 2.55 3.53

6.65 17.56 4.45 4.07 2.55 3.51

-11.1 -1.6 -7.0 8.5 0.4 -1.7

Change in Yield (bps) MTD* YTD* 12.6 58.0 13.9 1.4 8.5 74.9 6.6 5.4 -9.8 -211.3 -20.1 15.7 -6.3 -15.4

136.5 -7.4 42.9 31.4 51.0 76.8

Rising Yields

Heat Map Legend

Falling Yields

Note: * Month to Date and Year to Date; ** 10-year swap rate; *** USD denominated 5 Year USD CDS Spreads MENA Countries Bahrain Kuwait Qatar Saudi Arabia UAE (Abu Dhabi) UAE (Dubai)

20-Jul

27-Jul

367.70 64.57 87.60 87.50 63.68 129.70

352.96 63.03 83.75 83.24 61.00 123.81

Week -14.7 -1.5 -3.8 -4.3 -2.7 -5.9

Change in Yield (bps) MTD* YTD* -32.2 76.4 -6.6 -0.9 -12.9 -17.2 -7.9 -8.7 -4.3 -0.7 -7.8 1.4

Rising Yields Heat Map Legend Falling Yields

Note: * Spot prices or nearest expiring future Source: Bloomberg, MUFG MENA Research

NATIONAL TRANSFORMATION PROGRAMME (NTP) 2020 AND VISION 2030 DEVELOPMENTS Saudi Arabia’s new private sector participation (PPP) law will likely strengthen efficiency gains. In line with Vision 2030 objectives to increase the participation of the private sector to GDP from 40 per cent to 65 per cent, the National Centre for Privatisation (NCP) has announced a draft law aiming to organise partnerships between the government and the private sector in preparation to launch a multifaceted set of projects. In April, the government announced plans to generate between $9-11 billion in revenue by 2020 through a privatisation programme that will create as many as 12,000 jobs. Moreover, the government said that the initiative would target 14 separate public-private investments worth between $6.4-7.4 billion, and will lead to the corporatisation of the Kingdom’s ports, the production portion of the Saline Water Conversion Corporation (SWCC),

SAUDI ARABIA IS ADHERING TO AUSTERITY MEASURES. THIS COULD BE THE GAME CHANGER THAT MARKETS HAVE BEEN WAITING FOR, WITH INVESTORS TAKING MORE COMFORT IN THE FORWARD GUIDANCE TYPE STRUCTURE OF REFORM EXECUTION IN BAHRAIN GIVEN THE CONDITIONALITY OF SAUDI-LED SUPPORT OWING TO THE DELIVERY OF REFORM PROMISES.

as well as the Ras Al Khair desalination and power plant. Overall, we view that this new PPP framework will unlock large-scale investment across a broad spectrum of sectors by offering significant credible assurances to private investors to operate under PPP contracts. Saudi Arabia is expected to be added to the JP Morgan emerging market (EM) bond index. In line with Vision 2030 targets to expand the financial sector and following on from the inclusions in both the MSCI EM and FTSE EM indices, Saudi Arabia is on the verge for a third major success, with the likely inclusion the JP Morgan EM bond index. We view that this will represent a further fillip to the country’s Vision 2030 plans to make its financial market more internationally tradeable, and in turn lower the sovereigns cost of funding, supporting their debt issuances and clearly deepen the breadth of the financial sector, and in-turn raise the share of non-oil GDP.

bankerme.net

COVER INTERVIEW

A BANK FOR BANKS

Cautiously bullish, Korhan Alev, CEO of Bahrain Middle East Bank, reveals his thoughts on current market conditions and the role the bank plays in it

ell us about BMB. The bank was founded in 1982 and started as an investment bank. That was the era of investment banking where the bank was successfully managed. We hold a wholesale bank licence, which also permits investment banking. Nevertheless, with the new shareholder structure and management, BMB has changed its course from investment banking to a wholesale one. BMB now specialises in all aspects of trade finance, treasury and capital markets, asset and portfolio management as well as correspondent banking service. How do you place yourself as a bank? We are majorly the bank for financial institutions. We have a long history and strong presence in GCC. We also have our associates in Europe. This enables us to be the window or the bridge between GCC and Europe. Our clients are our partners, and we mean that as we are there for them as a solution to their needs through the services we provide.

Weâ&#x20AC;&#x2122;re having a good year so far, asÂ year-to-date the bank has been positively performing and has been successful in implementing its upscaling strategy along with its business expansion plan. With its firm network, BMB has been able to recover ground with institutional relationships, reciprocity of business and attracting clients. The bankâ&#x20AC;&#x2122;s presence is getting recognised in the GCC region as well as across Europe and Asia. BMB was able to increase its paidup capital to $100 million, with the change of major shareholders of the bank. The current major shareholders are keen to upswing the bank in its presence and perseverance. Given the strategic support, business and financial foresight provided by the incumbent major shareholder, the bank has been able to nearly double its total assets. BMB now plans to focus on being a bank for the regional smaller financial institutions and for the foreign financial institutions seeking to enter the GCC market and build a cohesive platform for the respective introduction to regional markets.

WITH ALL COEFFICIENTS REMAINING CONSTANT, WE FORESEE A RESULT WELL ABOVE OUR FORECAST FOR 2018. 2019 WILL BE OUR YEAR TO PUSH BOUNDARIES. bankerme.net

What makes you optimistic about the market you are operating from? The discovery of new oil and gas reserves in the Kingdom of Bahrain, its wherewithal to sustain the tide through rough times and the strong support from neighbouring countries like Saudi Arabia and UAE, are factors that make me optimistic. Also, one key aspect to take into consideration is the highly educated & skillful local workforce who are committed and dedicated, along with the experienced expat workforce that blend well into the commercial and social life of the Kingdom, thus we are optimistic to operate and expand from our Bahrain base.

TARIFF WARS THAT BEAR ON TRADE AND FINANCIAL SECTORS MAY LEAD TO A DOWNTURN IN THE GLOBAL ECONOMY.

We see huge opportunity in the trade finance business within the region and across other parts of the world. We also see opportunity in the regional debt issuance from sovereigns and the flourishing capital markets, which are likely to provide an opportunistic play. Looking into the future, what would you say is the biggest threat to financial institutions? Trade wars, currency manipulations and unregulated cryptocurrencies are the focal concerns to an otherwise smooth global economy. Central regulators of certain nations are required to be prudent to take

BMB focuses on being a bank for regional smaller financial institutions and for foreign financial institutions seeking to enter the GCC market.

bankerme.net

COVER INTERVIEW

In light of the tariff wars, Alev is adopting a prudent and an on-guard approach for the near-term.

the global economy along with them, rather than to run ahead. The fintech revolution is bringing lots of opportunities and efficiencies to financial institutions, emphasising institutions to shed fat and increase energy.

of the Government, provides an extensive guidance for the banks to mark their tracks and succeed well. The government also promotes ease of doing business, which has made the Kingdom a banking hub.

How do you view the present regulatory environment? Banks in Bahrain are well regulated by the Central Bank of Bahrain and the Ministry of Industry and Commerce. Compliance and financial reporting are fervently reviewed by the central bank. This, along with other arms

How has IFRS9 impacted financial institutions? And looking forward, how do you see IFRS 16 affecting the market segment? As was anticipated, the overall impact of IFRS 9 appears manageable. Classification and measurement under IFRS 9 had little influence on the

overall impact, owing to the banksâ&#x20AC;&#x2122; good investment quality, limited trading activities, and largely holdto-collect or hold-to-collect and sell, business models. IFRS 16 is a new era of lease accounting. First time application of the new standard is likely to be challenging and early engagement to determine the most appropriate option for the business circumstances is critical. Most businesses in the region are behind the curve and they must speed up their efforts and get ready for IFRS 16.

Up-close and personal Why did you choose to become a banker? A very good question. My parents were both bankers and I remember my dislike of a banking work day, as it kept them away from me, as back then there was no digitisation and they had to work late hours. But I still became a banker. I received a full scholarship from Türk Ekonomi Bankası (TEB) to undertake my MBA, in return for an employment bond with the bank. My plan was to work for the bank for the asked period. Nevertheless, once I started, I began to realise my love for the job. And ever since, I found myself to be very passionate about banking.

TRADE WARS, CURRENCY MANIPULATIONS AND UNREGULATED CRYPTOCURRENCIES ARE THE FOCAL CONCERNS TO AN OTHERWISE SMOOTH GLOBAL ECONOMY.

How long have you been in the banking business and which areas have you worked in? I have been in banking for 25 years. I started my career as a Management Trainee for TEB Turkey which is currently a JV with BNP Paribas. After the training, I joined the Corporate Marketing Department of the main branch, where I worked for five years. Thereafter, I worked at a few banks and ended up at Bahrain Middle East Bank (BMB). I have worked in Treasury, Branch Management, Financial Controlling, Credit, Credit Restructuring as well as Credit Marketing. Prior to joining BMB in late November 2017, I was working in Frankfurt, Germany. This must have been a big change for you. What were your thoughts? In terms of climate, I would say yes. From a colder country to a quite warm country. But, as you can see, I am easily adaptable. I lived in various parts of the world, such as USA, UK, Netherlands, and Germany. Therefore, it did not take me too long to get adapted to a new region, to be honest. On the other hand, in terms of cultural change, being Turkish, it was easier to assimilate into the regional culture quickly. I try to attend as many social events as possible. This helps me network with friends and colleagues in the industry.

What are your projections on your market segment for the rest of the year and going in to 2019? With all coefficients remaining constant, we foresee a result well above our forecast for 2018. 2019 will be our year to push boundaries. Should political and economic factors remain subtle and nature be benevolent, we foresee robust growth in the financial sector and in global markets. However, the tariff wars that bear on the trade and financial sectors may lead to downturn in the global economy. We take a prudent and an on-guard approach in the near-term.

Outside of banking, what are your interests? I am very much into sports—I gym as often as I can. I am very fond of kitesurfing and snowboarding. There are several kitesurfing areas in Bahrain where I frequent, and it has become quite a relief after a busy week. I also do scuba diving and fishing, and Bahrain has numerous areas to explore when we have the appropriate weather. Other than that, I also love travelling and cooking. I also read and watch movies in my free time, specifically history and science-fiction. In our work, we need to think fast, decide fast and act fast. Even after all these years, these create stress. Thus, I believe it is always nice to have some hobbies so that one can refresh the body and the mind. What is your personal management style? An open management system that permits everyone to work through solutions and tap on the management when required. Our work requires to be within the established ethos of the organisation. I strongly believe in teamwork and try to choose the right team members to establish the team. Although I am a professional in the job, I work like an amateur. I try to choose similar team members so that we all can put all our hearts in what we do.

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COUNTRY FOCUS

BORROWED

TIME?

Recep Tayyip Erdoğan has driven up economic growth with some fairly reckless borrowing; now re-elected with sweeping new powers, he could drive Turkey’s economy over the edge

t had all been going so well. Turkey had bounced back from its financial crisis of 2001, weathered the shock of 2008 and soothed investor nerves following 2016 coup attempt. In fact, on the surface Turkey’s growth has been higher than that of nearly all its peers in the wake of the global financial crisis. Real GDP growth averaged a remarkable 7.4 per cent in 2017. “The Turkish economy rebounded very strongly last year with an estimated growth of around seven per cent, placing Turkey among the top performers among major economies,” said Omer Bayar, Alternate Executive Director on Turkey at the IMF. “Continuing its impressive track record postglobal recession, employment generation was robust again in 2017 as 1.62 million new jobs were added throughout the year. “Notwithstanding these impressive outcomes, the magnitude and pace of the economy’s response went beyond what the authorities had envisaged as growth targets.”

However, onlookers have been jittery about Turkey’s prospects for some time. Rapid growth over the past year has been accompanied by a wider current account deficit, inflation well above target, and soaring debts. BALANCING ACT “The economy is showing clear signs of overheating,” the IMF warned. “Monetary policy appears too loose and its credibility is low; and on- and offbudget fiscal policies are expansionary and risk undermining Turkey’s hard-earned fiscal credibility. “As a result, the economy faces internal and external imbalances: a positive output gap, inflation well above target, and a current account deficit of more than five per cent of GDP. Meanwhile, political uncertainty and regional instability remain elevated, and the integration of the many refugees poses challenges.”

Despite a strong export performance and a rapid recovery in the tourism sector, the current account deficit has widened from 3.8 per cent in 2016 to an estimated 5.5 per cent of the GDP in 2017, according to the IMF. The Turkish Statistical Institute suggests that GDP growth in 2017 was about 7.4 per cent, more than double the level of 3.2 per cent in 2016. However, between January and April 2018, the trade deficit also doubled to about $27.4 billion, compared to $17.6 billion in 2016. The current account deficit is expected to widen to 6.1 per cent of GDP this year but should decline to 4.1 per cent next year by the weakening lira, lower oil prices and a growing tourism sector. Fitch said foreign direct investment will remain around one per cent of GDP, meaning that the deficit will be largely debt-financed. Worryingly, this could drive net external debt to 35 per cent of GDP by end of 2018.

PHOTO CREDIT: Shutterstock/Seqoya

BAITING RATING Between July 2016 and March 2017, three credit ratings agencies downgraded Turkey’s sovereign credit ratings, citing concerns about the rule of law and the pace of economic reforms. Turkey retaliated by announcing plans to create its own credit rating agency, damning the existing agencies’ analysis of its economy as unfair, politicised and unrealistic. It is a move which illustrates how government interference is threatening Turkey’s reputation. For a number of years, the credibility of Turkey’s policy institutions has been undermined by the ineffectiveness of monetary policy, partly because of political interference in the policy-making process. Now Erdoğan’s new policymaking powers will give him even tighter control over the country’ purse strings. In Fitch’s opinion, economic policy credibility has deteriorated in recent months and initial policy actions following

RAPID GROWTH OVER THE PAST YEAR HAS BEEN ACCOMPANIED BY A WIDER CURRENT ACCOUNT DEFICIT, INFLATION WELL ABOVE TARGET, AND SOARING DEBTS.

elections in June have heightened uncertainty. This environment will make it challenging to engineer a soft landing for the economy. Investors’ fears were justified when Erdogan signed off on a series of changes to the way the Central Bank’s top leaders are chosen, including scrapping the

requirement that deputy governors must have at least a decade of experience. The government decree also binned the minimum five-year term for central bank governors. Shortly afterwards, Erdogan ushered his son-in-law, Berat Albayrak, into the role of finance minister in a cabinet reshuffle that saw the Turkish lira fall by a further three per cent. Fitch did not waste any time sending Turkey further into junk territory. Just days later, the rating agency downgraded Turkey’s sovereign debt to BB with a negative outlook, citing inflation and the country’s widening current account deficit. “Notwithstanding the simplification of interest rate setting around the one-week repo rate announced in June, monetary policy credibility has been damaged by comments by President Erdogan suggesting a greater role of the presidency in setting monetary policy after the elections,” said Fitch. “Subsequent amendments to the

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COUNTRY FOCUS

Erdogan ushered his son-in-law, Berat Albayrak,

into the role of finance minister in a cabinet reshuffle that saw the Turkish lira fall by a further three per cent.

PHOTO CREDIT: Bloomberg

Central Bank’s articles of association appear to strengthen the president’s influence, notably over key appointments. Monetary policy has persistently been unable to bring inflation near its five per cent target and inflation expectations have become unanchored.” INFLATING PROBLEMS The Turkish economy is still in trouble with annual inflation at 15 per cent, mainly driven by the falling lira, which has lost 27 per cent so far this year. “Inflation is at its highest since 2003, despite the benign global inflation environment, and expectations are well above target,” the IMF noted.

“Initially sparked by the large lira depreciation, inflation has received further impetus from higher demand, rising cost pressures, and rising inflation expectations. Accelerating core inflation replaced food and energy prices as the main inflation driver in 2017.” In Fitch’s view, a sustained reduction of inflation would require an increase in the credibility and independence of monetary policy and tolerance of a period of weaker economic growth. The prospects for this as well as structural economic reform seem rather bleak following the President’s cabinet reshuffle, which banished key figures with reformist credentials.

Moody’s had already put Turkey on review for a downgrade in June, citing the erosion of confidence triggered by the shock early elections, which were called 17 months ahead of schedule. “That decision exacerbated existing investor concerns regarding the negative credit impact of the economic, fiscal and monetary policy settings, and heightened concerns that the next administration would move further down the path of policy options detrimental to economic and financial stability,” said Moody’s. A country deeply dependent on net capital inflows simply cannot afford a negative shift in investor sentiment. Turkey needs to finance annual gross external

bankerme.net

COUNTRY FOCUS

borrowing requirements in excess of $200 billion, according to Moody’s, reflecting the large current account deficit, sizeable short-term debt and maturing long-term debt maturities. The country’s reserves are already low-Moody’s estimates that the Central Bank’s foreign exchange reserves cover less than half that amount. Even if the current account deficit narrows in the second half of the year due to the impact of the weaker lira and a slowdown in domestic demand, the deficit will remain large in absolute and relative terms. Moreover, external debt risks have increased, hitting a record high of $453.2 billion at the end of 2017—equivalent to 53.3 per cent of GDP—compared to $408.195 billion in 2016, according to Future for Advanced Research and Studies. The authorities have made limited progress in addressing Turkey’s structural economic problems, most notably its structural external deficits, in recent years. “The period since the failed coup in 2016 has seen increasingly expansionary fiscal policy that has stimulated growth to unsustainable levels,” Moody’s warned. SEEING RED Tougher financing conditions and a weaker economy will likely hit the performance of the banking sector, heightening pressure on asset quality, capitalisation and liquidity and funding profiles, Fitch warned. External debt rollover rates for banks have held up, and banks generally have sufficient foreign currency liquidity to meet foreign currency wholesale liabilities maturing within a year. The IMF noted that the Turkish banking system is well-capitalised with strong liquidity buffers and asset quality. However, the cost of financing has gone up and market demand for some instruments has tailed off. “Headline NPLs remain stable at around three per cent, but the volume of at-risk restructured loans and watchlist loans continues to rise,” said Fitch. “Banks may not be able to fully pass on

If Erdoğan doesn’t relinquish some control or use his power to cultivate a favourable economic climate, there will not be anyone to catch the economy when it falls hard. PHOTO CREDIT: Shutterstock/Thomas Koch

AFTER A BUOYANT GROWTH IN THE FIRST QUARTER OF THE YEAR, IT IS LIKELY THAT THE ECONOMY HAS CONTRACTED AND FITCH EXPECTS IT TO CONTINUE TO SHRINK UNTIL THE FOURTH QUARTER.

higher CBRT rates, putting pressure on margins, and the high loan-to-deposit ratio and weaker demand for foreign currency lending will likely constrain credit growth.” Fitch currently has 25Turkish banks placed on Rating Watch Negative, while Moody’s has downgraded and placed on review for further downgrade the ratings of 17 Turkish banks and two finance companies. Moody’s said that the operating environment in Turkey has deteriorated, with negative implications for the institutions’ funding profiles. In March alone, the $4.7 billion outflow of central bank foreign exchange reserves roughly matched the $4.8 billion current account deficit. In the same month, the roll-over ratio for banks’ long-term

Turkey’s current account deficit is expected to widen to

6.1% 4.1%

of GDP this year but should decline to

next year

Source: Turkish Statistical Institute

external funding fell to only 64 per cent, compared to 88 per cent for the whole quarter. Also, since then, the cost of bank funding has risen sharply. “The cost of banks’ foreign currency funding has widened significantly this year, following an increase of the benchmark 10-year government bond yield of roughly 300bps between January 2018 and late May—of which almost 200 bps since March,” said Moody’s. Furthermore, the roll-over ratio for banks’ long-term external funding declined in March, compared to the whole of the first quarter of 2018. Constrained funding conditions are a key challenge for Turkish banks, given their high reliance on US dollar short-term market funding, which

stood at $75 billion, or about half of their foreign currency market funding at March 2018, according to Moody’s. Currency weakness also poses a test to the private sector, which is heavily reliant on external financing. “The private sector has regularly demonstrated capacity to cope with adverse financing and exchange rate shocks, but a series of recent corporate debt restructurings point to the crystallisation of risks stemming from high corporate borrowing in recent years,” said Fitch. The IMF highlighted initiatives which seek to enhance the ease of doing business by simplifying the procedures for setting up new companies and shortening bankruptcy proceedings. However, “Policy uncertainty is found to negatively affect productive investment,” the IMF warned. “It is, therefore, important to restore policy certainty by addressing investors’ concerns about public institutional capacity, the predictability of the regulatory environment, and commitment to structural reforms.” A GOOD HOST The influx of more than three million Syrian refugees in 2016-17 poses a separate challenge and opportunity. Turkey’s newcomers have created new social, economic and political demands, particularly in urban centres where most refugees have settled. The government will need to take strong measures to revitalise private investment, boost growth, and resume Turkey’s convergence with Europe, the World Bank warned.

It does, however, give the world something to applaud Turkey for. “Turkey’s generosity in hosting refugees—the numbers hosted is estimated at more than 3.5 million—serves as a global example,” the IMF said. Turkey will need all the positive sentiment it can get. In 2018, economic activity is expected to decelerate to close to 4.5 per cent, according to the IMF. “Continued accommodative monetary, fiscal, and financial policies will support growth, but inflation is projected to remain well above target and the current account deficit is expected to remain elevated,” it said. Fitch warned that the significant tightening of financial conditions will cause GDP growth to slow. After a buoyant growth in the first quarter of the year, it is likely that the economy has contracted and Fitch expects it to continue to shrink until the fourth quarter. A period of growth below trend— estimated by Fitch at 4.8 per cent—may allow a partial unwinding of imbalances. However, the risk of a hard landing for the economy has increased. “At present, the fact that economic and financial vulnerabilities are rising in parallel with an increasingly unpredictable political situation and rising global interest rates heightens the threat,” Moody’s said. “The outcome will mainly rest on the coherence and predictability of the policies that are pursued after the upcoming elections and beyond and the extent to which an improved policy framework will restore adequate financing and refinancing of Turkey’s large external borrowing requirements.” Turkey is no stranger to economic shocks. Its large and diversified economy—along with its relatively strong fiscal position—has always cushioned its fall. However, its rising debts suggest that the economy is now on borrowed time. If Erdoğan doesn’t relinquish some control or use his power to cultivate a favourable economic climate, there will not be anyone to catch the economy when it falls hard.

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29.11.18 JW MARRIOTT MARQUIS DUBAI

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COUNTRY FOCUS

TURKEY in numbers POPULATION

MEDIAN AGE

30.2

million 1m

years

10m

Source: Worldometers; United Nations estimates (June 2018)

Source: Worldometers (July 2018)

GDP

BUDGET (2017)

GDP (PURCHASING POWER PARITY)

CURRENT ACCOUNT BALANCE

$2.133 $2.029 $1.966

trillion (2017 est.)

$38.95

trillion (2016 est.)

Source: CIA World Factbook

CURRENT ACCOUNT DEFICIT

trillion (2015 est.)

33.1%

Source: CIA World Fact Book

GDP REAL GROWTH RATE

3.2% 7% 4.4%

GDP GROWTH

4% Turkey’s GDP is expected to grow 4% in 2019

(2018 projected) Source: International Monetary Fund

Source: IMF

GDP PER CAPITA

$26,500 $25,400 $25,000 Source: CIA World Factbook

billion (2017 est.)

of GDP

GROSS INTERNATIONAL RESERVES

$107.7

billion NET EXTERNAL DEBT

35.4%

of GDP INFLATION

11.1%

(period average)

Source: IMF

(2017 est.) (2016 est.) (2015 est.)

BUDGET

Revenues:

$173.9 $190.4

Expenditures:

billion billion

Source: CIA World Factbook

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RETAIL BANKING

WHEN IT COMES TO MILLENNIALS, GCC BANKS MUST BE PARANOID 38

PHOTO CREDIT: Shutterstock/DisobeyArt

By Kishan Shirish and Christian Kunz, Associate Partners, McKinsey & Company

he retail banking industry is a ripe candidate for digital disruption. Rather than being designed to delight the customer, it is usually complicated, frustrating, timeconsuming, and not transparent; shielded by regulation, traditional banks have taken a long time to innovate and become customer centric. Meanwhile, technology and connectedness have decreased entry barriers, particularly on the highly profitable sales side of banking (in contrast to the less profitable balance sheet side). As a result, the industry is under attack: from fintechs and digital ‘challenger’ banks, with new technology and innovations that

aim to compete with traditional methods in the delivery of financial services, but also from so-called ‘platform players’ outside the banking industry such as Facebook, Google and Apple, who are capitalising on their vast customer bases by expanding into financial services. For banks in the Gulf Cooperation Council (GCC), digital disruption means one thing: they must be even more paranoid than their western peers. The biggest users of digital technologies and platforms are millennials, individuals born between 1980 and 2000. While millennials in the US make up 22 per cent of the households, and in China represent 30 per cent, they account

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RETAIL BANKING

for more than 50 per cent of the GCC population and the majority of GCC banks’ customer base. Millennials are also in their prime spending years. Understanding and responding to the needs of millennials, then, is critical for GCC banks to sustain market share and build products and capabilities for future growth. MILLENNIALS’ BEHAVIOURS AND REQUIREMENTS Millennials have very specific behaviours and requirements. Our research shows that they are global citizens, travelling around the world, living in a border-less environment with converging education and culture. They are so-called ‘digital natives’, having grown up amid the rise of companies whose operations have been digital-heavy from the start; they use smartphones uninterruptedly to simplify, connect and speed up their lives, they are always ‘on’, they see seamless as a norm, and quickly adopt new technologies. They are values driven, in search of meaning, and having a desire to make a difference and to contribute to society. They demonstrate a ‘me-now’ attitude, valuing personalisation and used to instant gratification. They are social and connected, maintaining a two-way dialogue with their communities as well as frequent interactions with brands. And they are in search of experience, valuing experience over product, both in terms of category and as a purchase driver. Most incumbent banks today do not have the products and digital capabilities to serve the needs and behaviour of millennials. In some markets banks are already losing control of the tech-savvy consumer. In China, platform giants such as Baidu, Alibaba and Tencent, the latter two among the top 10 most valuable companies globally, are becoming the main interface to manage clients’ personal needs, including financial. In other markets, such as Europe and the US, banks have acknowledged the shift towards digital and today most large players either partner with fintechs rather

Kishan Shirish

Christian Kunz

IN ADDITION TO BUILDING INTERNAL CAPABILITIES, BANKS WILL ALSO NEED TO CREATE AN ECOSYSTEM OF PLAYERS TO DELIVER THOSE PRODUCTS AND SERVICES, WHILE OWNING THE CUSTOMER EXPERIENCE. Kishan Shirish, Associate Partner, McKinsey & Company

than compete with them, or establish a venture capital and innovation vehicle to improve their proposition and capabilities. HOW GCC BANKS CAN ADAPT GCC banks have recently begun experimenting with fintechs and partnerships. To win the race for the emerging customer of the future, millennials, our research and experience highlights four areas GCC banks should consider in order to move beyond the experimentation phase. Firstly, GCC banks need to fundamentally rethink their current value proposition and business model to acquire and retain millennial customers.

This requires detailed understanding of their unmet needs and behaviour and reorienting to establish customer centricity as expected by millennials in the digital age. Banks should think about propositions and experiences that are critical to this demographic and can maximise share of wallet. In addition to building internal capabilities, banks will also need to create an ecosystem of players to deliver those products and services, while owning the customer experience. For previous generations, that might have meant that a bank would offer an individual a customised mortgage product for a house. Millennials expect banks to go further: to provide advice, offer access

COUNTRY FOCUS

to real estate brokers and appraisers, find and compare different options (including rent versus buy), and finally close the deal. All these services need to be instant, as fast as possible, and whenever and wherever they are. Companies that understand millennials and build their business model accordingly have been able to attract that demographic and show unparalleled growth. A regional millennial-friendly example is Emirates NBD’s digital-only bank ‘Liv.’ proposition, which offers instant digital account opening, chat instead of phone customer service, and gamification around spending and lifestyle benefits. ‘Liv.’, part of Dubai’s biggest bank’s one-billion-dirham investment in its digital transformation, has in its first year acquired 100,000 customers, of which 82 per cent are millennials, and is now the fastest growing bank in the Middle East, gaining 10,000 customers a month. Secondly, GCC banks need to build a next-generation operating model, able to respond to customer needs quickly and continuously innovate based on customer feedback. One example in the banking industry is ING, as described in the McKinsey Global Banking Annual Review 2016, which has transformed to become ‘agile’—an organisation that is both stable (resilient, reliable and efficient) and dynamic (fast, nimble and adaptive). In the bank, a range of functional experts come together to work on a certain project and disband when it is completed, and join another group of experts for a different project.

Millennials make up

22% 30% 50%

of the households in the US,

in China, and more than

of the GCC population Source: McKinsey & Company

Since it began this shift in 2015, the bank has seen a 30 per cent increase in efficiency and radically improved time-to-market. Thirdly, GCC banks must modernise their technology landscape along with the business and operating model, to enable speed and flexibility. Moving from traditional IT systems to a flexible component and API approach (interfaces enabling the exchange of information between software) is critical to enable partnerships across all dimensions and keep up with the demands of millennials.

GCC BANKS MUST MODERNISE THEIR TECHNOLOGY LANDSCAPE ALONG WITH THE BUSINESS AND OPERATING MODEL, TO ENABLE SPEED AND FLEXIBILITY. Christian Kunz, Associate Partner, McKinsey & Company

A large US credit card lender migrated over two years to a server-less ‘cloud’ infrastructure and a micro-services-based architecture (a modern IT architecture pattern breaking down large, rigid systems into small and flexible components) similar to leading digital attacker banks, reducing costs and enabling full agility, with the aim of functioning and behaving like a technology company instead of a traditional bank. The transformation is allowing the bank to reinvent its services and products: its digital and artificial intelligence propositions include an intelligent assistant, a quick and conversational way for customers to perform tasks such as checking their balances, which has significantly cut costs, and a car search and financing app that has helped grow the bank’s credit card and auto loan business. And finally, in order to stay successful and compete with platform players in the race for millennials, GCC banks need to acquire the same type of digital talent. One example is a large Spanish bank, which has been transforming from an analogue to a digital company. The bank has achieved both an increase in revenue by growing its customer base and greater savings through leaner operations, via a combination of building a digital and innovation culture internally while accessing digital talent and expertise by acquiring fintechs and working with start-ups through its digital and innovation ventures arm. In conclusion, while the banking industry as a whole must embark on a digital and analytics transformation, it is far more urgent for GCC banks to act given their majority millennial constituents. The winners in the long-run will be those GCC banks that reinvent their business model with millennial customers front and centre, and develop in-house capabilities by creating an innovation culture that attracts the best talent and at the same time establish the right operating model allowing them to develop strategic partnerships across their value proposition, products and technology.

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RETAIL BANKING

CAN’T GET NO SATISFACTION? As customer expectations continue to rise, it’s no longer just the job of a bank’s contact centre to manage the customer journey, writes Giselle Bou Ghanem, Customer Engagement Solutions—Middle East, Africa & Turkey at Avaya

or decades, every bank has wanted to be ‘faster, better, easier’ than its competitors. However, in a society where we’re all plugged in 24/7, our expectations of faster, better, easier have skyrocketed. And when money is on the line, well… patience is often in short supply. One recent study found that as many as 41 per cent of UAE banking customers and 52 per cent of customers in Saudi Arabia could change their bank as a result of bad customer service— with Saudi having the highest churn rate of the nine countries surveyed globally. In the UAE around 38 per cent of banking customers also said that they would share their bad experiences online with friends and acquaintances. Digital transformation has helped banks to enhance their customer’s journey. New communication capabilities—particularly on mobile— have allowed people to connect with banks in newer, easier ways. Impressive mobile applications and stronger security protocols have helped bring an omnichannel vision of ‘anytime, anywhere’ access to life. But the job is far from done. The biggest customer experience management challenge for banks today is often not the ownership of the right technologies; it is bringing the entire organisation together to use these capabilities in a cohesive manner. Every employee within the bank influences the customer journey.

THE BIGGEST CUSTOMER EXPERIENCE MANAGEMENT CHALLENGE FOR BANKS TODAY IS OFTEN NOT THE OWNERSHIP OF THE RIGHT TECHNOLOGIES; IT IS BRINGING THE ENTIRE ORGANISATION TOGETHER TO USE THESE CAPABILITIES IN A COHESIVE MANNER.

IDENTIFYING RESPONSIBILITIES Employees in the contact centre remain on the front lines of customer experience management. These centres are not just staffed with rows of agents reading off a manual. These agents are highly skilled service and technology consultants, working as part of quality teams to examine more than just callresolution times. Advanced analytics on every customer call, text or social media post has allowed banks to gather a wealth of data about how and why customers engage with them. This data can in turn be used to provide context to every banking interaction. Next door, IT teams also play a significant role in meeting customer expectations. Their main priority still remains to plan, configure, and manage back-end processes. At the same time, their ability to store and secure customer data can be a major factor in a customer’s relationship with the bank. Their selection of scalable, standards-based IT systems also makes a huge difference when their colleagues in marketing, for example, want to quickly implement the latest and greatest customer relationship management (CRM) solutions. Marketeers, the gurus of brand advocacy, are also being assigned greater responsibilities when it comes to customer experience management. Social media has brought marketing and customer service together, in part because when a customer posts a comment on social media the whole world can see it.

PHOTO CREDIT: Shutterstock/Olivier Le Moal

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RETAIL BANKING

identifies a new product opportunity, they must define the business requirements of the product. It is also their responsibility to work with a digital team to consider the channel for delivery and design the product experience. More and more, banks in the region are using a ‘scrum model’ for new product development based around the individual product manager and involving people from marketing, IT, and so on. Their ability to bring products to market successfully and swiftly hinges on their skill at putting themselves into the customer’s shoes, not just thinking about their respective silo. This is where business leadership comes in. As one Forrester study notes, organisational silos impede customer understanding, but are also hard to dismantle. This is the job of the C-Suite: to make sure that effective collaboration models are in place within the bank, as well as building multi-disciplinary talent with a focus on the customer experience. It is the C-Suite, after all, that is able to connect technology, operations, and talent at a macro level.

Giselle Bou Ghanem

Customer Engagement Solutions—Middle East, Africa & Turkey, Avaya

Who is responsible for picking up a dissatisfied customer’s Tweet? Who is responsible for designing the policies that guide social media interactions on credit card fraud? Most marketeers would consider themselves experts in convincing customers why they should act, but directly managing those experiences has led some marketeers to reframe their role as ‘social customer care’. Product managers are also becoming more fluent in the language of customer experience management. If a credit card team, for example,

As many as

41% 52%

of UAE banking customers and

of customers in Saudi Arabia could change their bank as a result of bad customer service

CONTEXT IS KING Banks across the Middle East are well set to adapt to this new customer experience paradigm. They are already investing in many of the digital communication and collaboration systems needed to break down internal silos. These new technologies also enable seamless transactions across physical branches, ATM/VTMs, mobile and online applications. Breakthroughs in artificial intelligence, in particular, are giving employees more time to apply human thinking to the customer experience equation, as routine interactions are automated through bots. By bringing the entire bank together to use these capabilities, every employee can play a role in helping customers do what they want to do as fast and effectively as possible.

THE ABILITY OF BANKS TO BRING PRODUCTS TO MARKET SUCCESSFULLY AND SWIFTLY HINGES ON THEIR SKILL AT PUTTING THEMSELVES INTO THE CUSTOMERâ&#x20AC;&#x2122;S SHOES, NOT JUST THINKING ABOUT THEIR RESPECTIVE SILO.

Source: Avaya

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CRYPTOCURRENCY

CASHLESS OR USELESS? Nizamuddin Arshad, Head of the Financial Stability Office at the Central Bank of Kuwait, shares his views on the viability of digital currencies

ryptocurrencies, Bitcoin and others of that ilk, have generated a lot of buzz. Proponents hail these electronic tokens as a revolution in finance and the future of money. Central banks, however, seem roundly downbeat, apprehensive of the risks both to individual users and to the financial systems at large. Many, across the developing and developed world, have warned the public and barred the banks to deal in anything cryptoâ&#x20AC;&#x201D;and rightly so. Notwithstanding the media hype, cryptocurrencies are fairly useless as currencies, if not plainly risky. At least this is the case with the current variety. These digital currencies fare poorly on all three measures critical for the wider acceptance of any currencyâ&#x20AC;&#x201D;be it a medium of exchange, a store of value or a unit of account. Consider bitcoin, the most popular cryptocurrency, against these yardsticks.

Nizamuddin Arshad

In general, serving as a good store of value is a relatively easier condition to meet. Many items in your home, including the home itself, can serve as a decent store of value, with values broadly stable, at least in the short run. Bitcoin, on the contrary, is outrageously volatile; its value, in terms of standard deviation, varied around 10 times of some major currencies during the last year alone. And the average volatility of top ten cryptocurrencies was even worse, at 25 times of the US equity market in 2017. With this scale of oscillation, putting your savings in bitcoin would be nothing but a gamble. The value of bitcoin plummeted from nearly $20,000 in midDecember last year to $6,000 in early February 2018. During the last six months alone, bitcoin has lost over 52 per cent of its value. No currency should fluctuate that wildly; and if it does, it cannot

serve as a good store of value. Other cryptocurrencies are equally unstable; the five largest have on average shed 21 per cent of their value against the US dollar in the last three months. Given that degree of uncertainty, even stashing your money under the mattress would possibly be a better choice. How about the role of cryptocurrencies as a medium of exchange i.e. as a form of payment? Their high volatility should already be a red flag. Had these currencies been widely accepted, few big trades would not have influenced their value much. So far, cryptocurrencies represent a very small fraction of the global payments. But more worryingly, whatever their limited acceptance, cryptocurrencies are disproportionally more popular among those buying drugs or laundering money, as these digital tokens allow users to pay without revealing identity. So, anyone aiming to use cryptocurrencies for making payments is generally not in good company. This explains why central banks have taken a stern view. Their primary motivation has been to protect the public and ensure safety of the payment systems, even if the cryptocurrencies are not a threat to financial stability yet, given their limited acceptance. Moreover, cryptocurrenciesare also prohibitively expensive to create. Power consumption to mine bitcoin is enormous, reaching 52 terawatt hours annually. In comparison, global Visa credit card network, despite processing more transactions, consumes barely a quarter terawatt, or just half per cent of bitcoinâ&#x20AC;&#x2122;s energy usage. There are also reports of bitcoin users facing, at occasions, long processing queues and high transaction costs. Besides, incidents of hacking as well as crackdown of law enforcement agencies on crypto exchanges are not unheard of. In early June this year, bitcoin dropped by more than 13 per cent in a day amid reports of cyberintrusion in the South Korean cryptocurrency exchange, coinrail.

THESE DIGITAL CURRENCIES FARE POORLY ON ALL THREE MEASURES CRITICAL FOR THE WIDER ACCEPTANCE OF ANY CURRENCYâ&#x20AC;&#x201D;BE IT A MEDIUM OF EXCHANGE, A STORE OF VALUE OR A UNIT OF ACCOUNT.

On the third and final measure, a unit of account, cryptocurrencies fare even worse. To belabour the obvious, no retailor will be interested in quoting prices in a currency that is an inconvenient medium of exchange and a poor store of value. As cyrptocurrenices squarely fail to pass the test of a useful currency, one wonders as what benefit such currencies has on offer, except for their feature of anonymity which can only appeal to drug dealers or tax evaders. Given their little use as currencies, some have argued that the term cryptocurrency is a misnomer, suggesting the label cryptoasset instead. In that case, it is pertinent to ask if crypto assets are a lucrative investment choice. It is a relevant question, at least in the minds of general public which is being attracted by the media hype and lured by fraudsters.

Unfortunately, the answer is a resounding no. A wise investment decision must be based on fundamentals; yet anything with solid fundamentals cannot surge from under $1,000 to nearly $20,000 in almost a year and then plummet to $6,000 in a span of two months, as did bitcoin. This is particularly worrying for an asset that has no physical presence or intrinsic value. To make money out of it, one can only hope that others will keep buying cryptoassets, pushing the prices up. It is typical of a Ponzi scheme which temporarily pays its way through new investors but eventually comes crashing. Despite all the troubles with the current breed of cryptoassets, their underlying technology, the blockchain, has the potential to transform payment systems. By allowing parties to transact without central intermediaries, blockchain can strip off costs, reduce inefficiencies and enhance customer services. However, a lot more is required to harness that potential. Till that time, we would be better off with what we already have in our wallets, be it cash or plastic cards. And even as the blockchain technology matures in the months ahead, the acceptance of anything as a currency would ultimately depend on the credibility of the institution issuing it, not the technology used. Central banks have earned that credibility long and hard, as they gained autonomy and tamed inflation. Modern technology is unlikely to replace that, though it will surely transform the payment systems.

The writer heads the Financial Stability Office at the Central Bank of Kuwait. Views expressed here are his own and not of the institution.

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WEALTH MANAGEMENT

THE MIDDLE EASTâ&#x20AC;&#x2122;S PROMISING WEALTH LANDSCAPE By Francois R. Farjallah, Global Head of Middle East & Africa for Indosuez Wealth Management 48

s a strategic financial and trade gateway connecting the developed markets in the West with emerging markets in the East, the Middle East has established itself as a region of prominence for the creation of new wealth. Whether this is through the local sovereign wealth funds, entrepreneurs, family businesses or high-net worth individuals (HNWIs), the growth of regional economies has coincided with the growth of millionaires and billionaires at a rate that is amongst the fastest in the world. The total concentration of wealth in the Middle East is estimated to be $5.2 trillion according to Deloitteâ&#x20AC;&#x2122;s private wealth and asset management report. MIDDLE EAST A TOP PRIORITY IN TERMS OF GLOBAL STRATEGY FOR WEALTH MANAGERS There continues to be a lot of growth potential for wealth in the Middle East, which is why it is such a significant market for international wealth management firms wanting to grow their business. For Indosuez Wealth Management, the Middle East is one of our biggest markets and will remain a top priority in terms of our global strategy.

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WEALTH MANAGEMENT

In a report published by Knight Frank last year, the firm highlighted that the number of ultra-high-net worth individuals (UHNWIs) in the region grew by 48 per cent between 2006 and 2016. As off today, this segment consists of 7,730 individuals who hold a combined wealth of $810 billion; out of whom 1,510 are in the UAE. The UAE is one of the world’s most popular destinations for UHNWIs— the Knight Frank report showed that the country has the seventh fastestgrowing UHNWI populations— because of the favourable business environment, quality infrastructure and high standards of living. In terms of global net investable assets (NIAs) amongst HNWIs, the Middle East is expected to see a 7.2 per cent growth in this segment. A recent Boston Consulting Group report also showed that the region’s HNWI/UHNWI population will continue to grow at the fastest rate amongst all other global geographies between now and 2022. It highlighted that from 2017 to 2022, there will be a 14.1 per cent increase in the Middle East’s wealthy who hold investable assets. This is compared to an expected growth rate of 7.4 percent globally for the same period. But it is important to note that wealth in the region is not only being created at the highest level, because wealth per capita is expected to increase from $18,000 in 2017 to $25,000 in 2022.

Francois R. Farjallah

Global Head of Middle East & Africa for Indosuez Wealth Management

The total concentration of wealth in the Middle East is estimated to be

$5.2 trillion Source: Deloitte

HNWI/UHNWI POPULATION IN THE REGION WILL CONTINUE TO GROW AT THE FASTEST RATE AMONGST OTHER GEOGRAPHIES BETWEEN NOW AND 2022. FROM 2017 TO 2022, THERE WILL BE A 14.1 PER CENT INCREASE IN THE MIDDLE EAST’S WEALTHY WHO HOLD INVESTABLE ASSETS. THIS IS COMPARED TO AN EXPECTED GROWTH RATE OF 7.4 PERCENT GLOBALLY FOR THE SAME PERIOD.

The Middle East has been able to maintain this positive trending trajectory in wealth creation despite the twoyear period of low oil prices between 2014 and 2016. For instance, this is the case in the UAE because industrial conglomerates are the most common sector where wealth is being generated and this offers diversified risk to the entrepreneurs behind it. We can expect to see this being replicated in Saudi Arabia, which means that regardless of the oil price environment, you will see still a growth in wealth compared to today thanks to diversification, markets opening up and governments supporting local industries. GREATER WEALTH WILL MEAN GREATER SOPHISTICATION As wealth continues to grow, the region’s clientele will become increasingly sophisticated in the tools that they will require in order to manage that wealth; as traditional methods are changing. In recent years, the rapid pace of development and adoption of fintech

technologies has added new dimensions to the wealth management profession. This has also led to industry and fintech experts speculating on how this trend will impact the role of a wealth manager. What we can unanimously agree upon is that the technological evolution will help deliver significantly better services for client; aspects of which we are already seeing demanded today. Wealth management will gain many benefits from technological adoption, especially in portfolio construction and management or client reporting of real time portfolio performance. This trend will lead to an overall enhanced customer experience. Robo-advisors, as they are popularly known, are fully automated service providers who can construct and update a client’s investment portfolio through mathematical algorithms based on an individual’s profile and needs as well as a high volume of real-time market data available. Additionally, machine learning technology now also offers smart tools that are able to provide personal solutions to clients and advise them with specific tailor-made investment strategies. Digitalisation is a major business driver today with many international wealth management firms and private banks investing heavily in big data and artificial intelligence. Younger investors, particularly the millennial generation, tend to prefer a hybrid wealth management model combining digital investment tools and human advisors more than the generation before them. We are seeing large international investment firms such as Fidelity, Vanguard and Schwab are investing in these digital tools so that they can tailor their offerings to this clientele. This is also happening in the Middle East, albeit more in a gradual manner. However, we cannot foresee our industry becoming fully automated with clients only interacting with artificial intelligence. The human factor remains the number one driver for client acquisition, holistic servicing and proper retention, and especially for

YOUNGER INVESTORS, PARTICULARLY THE MILLENNIAL GENERATION, TEND TO PREFER A HYBRID WEALTH MANAGEMENT MODEL COMBINING DIGITAL INVESTMENT TOOLS AND HUMAN ADVISORS MORE THAN THE GENERATION BEFORE THEM. the UHNWI segment whose demands are complex due to the volume of assets being allocated. We consider digitalisation as a driver for future growth for those who know how to apply it in order to improve business efficiencies, rather than replacing the human interaction element. Digital technology will no doubt help increase client satisfaction levels by enhancing investment performance, convenience and personalised service. However, the role of the wealth manager will remain important; but professionals must also evolve in tandem with new technologies and find how to best integrate them into their offering.

UHNWIs in the region grew by

48%

between 2006 and 2016 Today, this segment consists of

7,730

individuals holding a combined wealth of

$810 billion

out of whom

1,510

are in the UAE

Source: Knight Frank

This hybrid model of both human and digitalised client service has already been adopted by a number of wealth management firms servicing the Middle East. We notice that across all age groups in this region, the demand for speed and efficiency is increasing and the need for savvy wealth managers with sophisticated platforms are becoming increasingly crucial to meet client demands. Given that the Middle East is generally a youthful demographic and that millennials constitute for an increasing portion of the HNWI/UHNWI segment, wealth solutions need to be tailored to their profile and demands. The region’s technologically savvy young population will be relatively early adopters of digitalised tools and bankers need to adapt their services to them accordingly. This should probably be viewed as an opportunity rather than disruption in the industry, as firms will be able to carve out their competitive edge in the market. The Middle East’s positive wealth outlook and strong economic fundamentals offers a unique opportunity, as it is a high growth market. This is why we will see international firms continue to allocate resources to the region. Clients are becoming increasingly sophisticated and so must the industry’s professionals. As wealth managers, this will probably mean finding the right mix between personal contact-based advisory while also incorporating the digital tools that will increase both efficiency and quality of service.

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IN DEPTH

BULLISH AND CONFIDENT An exclusive with Gautam Duggal, Regional Head of Wealth Management for Africa, the Middle East and Europe—Head of Wealth Management for the UAE at Standard Chartered Bank, on market intricacies, investment strategies and projections

hat are your views on the macro-economic landscape of global markets this year and what kind of bearing does this have on Standard Chartered’s activities in the region? From a broad economy perspective, we continue to see the global economy as being in the late stage of the economic cycle, as envisaged in our 2018 Outlook. We see a bull and crunch from gradual heating up of inflationary pressures, increase in policy rates and strong equity market performance. The US economy is leading the global growth due to the tax cuts and benefits introduced last year. China is still balancing growth, moderation and structural reforms but I do see it coming out strong soon. However, a fullblown trade war between the US and China is not good for anyone. The crucial question on most people’s minds is the US-China tensions. Looking at it as an outsider, I’d say that the Government of China has a broader view, looking at it as a long-term trading discussion.

Both countries appear to be attempting to use their negotiation skills against each other to reap the most benefit for their respective economies. I do not see this as a long-drawn dispute; I highly doubt it because neither party would want a win at the cost of their own economies, and this I believe will be the tipping point. I wish I could set a certain time frame for the trade war, but it has hot and cold periods—it occasionally heats up and dies out, fuelled to test each other exploring the extent of pushing the opponent and seeing when to draw the line before someone breaks apart. Both the US and China are trying to push the boundaries to the maximum to gain as much benefits as they can, but I doubt it will go beyond the tipping point because no one wants to have a broken economy, but it will definitely have its ups and downs—that is how I look at it. In spite of this, we remain bullish and diversified. Our portfolios remain well positioned despite elevated uncertainty and we remain watchful.

WE SEE A BULL AND CRUNCH FROM GRADUAL HEATING UP OF INFLATIONARY PRESSURES, INCREASE IN POLICY RATES AND STRONG EQUITY MARKET PERFORMANCE.

Gautam Duggal PHOTO CREDIT: CPI Financial/Florante Magsakay

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IN DEPTH

Duggal highlighted that a big concern which will remain constant is the duration of the dispute between US and China. This will be something that constantly nags on every financial adviser’s mind for as long as it persists.

The message we convey to our clients is the belief that global equities [primarily US equities] need to grow, therefore it is important to stay bullish. However, having said that, diversification is extremely important in mitigating the risks and this is also something that we share with our clients over the last few months. I’d therefore say that we are continuously optimistic and bullish about things. How have asset classes performed and what are your projections for the rest of the year? US securities will continue to see ups and downs; as for bonds, which have higher interest rates, are slowly picking up [especially emerging market bonds]. Therefore, over the next six to nine months I expect to see that asset class pitching back as you need a better portfolio of investments in that space. Saudi Arabia is a key market— everybody would like to be there in some shape or form.

While we do have a capital market office there, Standard Chartered is still evaluating the best way to be present in Saudi to contribute to the economic transformation, as well as consider what suits our clients’ profiles. As far as Saudi equities are concerned, opportunities are not something I will look at immediately because markets are volatile. There is a lot of right intention talks happening, with right incentives there from the Government, and the number of banks penetrating the Saudi market. However, I believe that the next 12 months will provide a fair sense of how the market is really evolving and where you can draw a bigger picture. We should have a fair assessment of the effectiveness of Government policies by Q1 2019. What are your preferred asset allocations and how does this correlate with the diversification of a client’s portfolio? As I mentioned earlier, diversification is extremely important and this is something that we keep talking about to our clients.

By maximising returns through a diversification of risk portfolios, as any asset class will always have an external dependence. The first advice I would give to our clients is diversify—asset classes always changes. Apart from US and global equities, in the next 12 to 18 months bonds might be back in favour. One area that I see picking up today is technology— these are the kind of opportunities we look at in the future, in the way you look into artificial intelligence, etc.—all of them are going to be there for the next couple of years and I do not see them going away. I would say this is applicable across the world, that is why you see number of fund houses looking into technology funds for potential investment, which gives a fair sense assessment of the field. Additionally, consider diversifying in different asset classes of technology, so you are not just putting all your funds into one type of social media stock, but also into their equivalents—basically to diversify across technology value chain. How would you describe the investment appetite across markets you operate in? There are broad assets classes where it is common to invest in and there are other asset classes. We often suggest our clients to invest in currencies such as the dollar or the euro; thus, if an investor has the appetite for currency investment they should look at those. As for Gold, we take a neutral stand. It is always better to have a small percentage of exposure to gold—there is no harm in doing that. The broad classes under which we look at in the next five to six months are currencies, gold, bonds as well as global equities and US stock securities. Having a diversified portfolio balances it out, so if your equities goes down for two weeks, your gold will better it off. Gold balances other investment portfolios and that is why we do not give a significant weight to it, but having an allocation balances any major swings and gives things a stability factor.

Considering the global market landscape and regional intricacies, how would you compare the risks in the MENA region to other emerging markets? There are opportunities in both GCC countries and the MENA region, as well as in emerging markets—that is the beauty of these markets. Reflecting on the last 12 months, it was a period of lower utility— something that investors have gotten used to. In other words, the markets have gone to its natural state and some clients have become a little concerned about the geopolitical reasons behind it. What we aim to do is educate clients about the need to look at the portfolio more closely and evaluate if they should diversify or if their investments are over reliant on one asset class in giving them returns. The question always is—‘Have you taken the market for granted?’ I keep telling everyone to never time a market and never take it for granted—those are two things that if they boomerang, they really boomerang bad on you. When I say never take a market for granted, I meant to diversify your portfolio in a way that you do not depend on one asset class or any one market. In terms of timing the market, for example, in the Middle East

we can talk about Saudi Arabia as a good place, to be but should one continuously keep on waiting and then put everything across in any kind of investment? Another example is oil prices, investors keep holding on to their investments and make business decisions based on those values. These regional intricacies do have an impact on global investment scenarios as well as the way investments happen. Where do you see opportunities? From an investment point of view, one of the key factors I look into when a client asks me this question is whether their investment is long-term or short-term and what are their risk appetites and for me to combine both of them. Otherwise, taking equities as an example, if an investor does not have the risk appetite for equities, I will turn to bonds. We ensure that we marry the duration of a long-term or short-term risk, versus the risk appetite and look at diversification on the portfolio. These are the parameters we use with clients while assessing and looking at the portfolio holistically. This applies to asset classes and markets, the investment horizon as well as the investment capital.

Duggal believes that it is always better to have a small percentage of exposure to gold as the allocation balances any major swings and gives investments a stability factor.

I KEEP TELLING EVERYONE TO NEVER TIME A MARKET AND NEVER TAKE IT FOR GRANTED— THOSE ARE TWO THINGS THAT IF THEY BOOMERANG, THEY REALLY BOOMERANG BAD ON YOU. What are your concerns moving forward and how do you see things transpiring for the rest of 2018 and going into 2019? One big concern that we touched on briefly—and is something that will remain constant—is the duration of the dispute between US and China. This will be something that constantly nags on every financial adviser’s mind for as long as it persists. The market has to appreciate in order to absorb these short and longterm trade war utilities and shocks. Both China and the US are financial power houses, and any decision from any one of them may have an immediate shock reaction which will potentially destabilise the market for a certain period of time. Thus, I would suggest diversifying investments, portfolios as well as asset classes and always look at it from one’s own risk appetite and not what somebody else is doing. We are quite bullish, we are definitely going bullish, because primarily we do see US equities driving the agenda that will have an impact on the world economy and we continue to look at that horizon positively. Real market assessments will materialise sometime in Q4 2018 and hopefully by then we would have seen some stability coming across. Therefore, if the dispute does not get resolved then it’s going to be a different projection for Q1 2019, which I would not dare to do now because you just do not know what will happen between now and Q4 2018. Markets are always exciting times as they go up and down. It is the patience and stability that an investor has that counts. I always advise my clients that it’s not always about immediate returns but the return you have planned for the future.

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TECHNOLOGY

PERSONALISING SERVICE FOR DIGITAL NATIVES By Keith Fenner, Dynamics 365 Business Group Director, Microsoft Middle East & Africa

o you remember when we used to talk about the ‘Information Age’? That term now seems archaic, does it not? Supplanted by those such as ‘third platform’, ‘social informatics’, ‘platform business’ and ‘predictive analytics’. Just think for a moment of how far the Fourth Industrial Revolution has brought us. From a global society connected by the digital, to one immersed in it. We are a hybrid community now—a blend of people, devices, data and software platforms that is irreversibly interdependent. Because of this sea change, consumers now demand a digital relationship with brands, and yet they also expect that relationship to be personal. GCC banks currently face precisely this challenge—how to build meaningful relationships with their customer bases,

which are increasingly composed of digital natives, with expectations to match. In the hybrid, “digiphysical” world that we have created for ourselves, it is significantly easier to change banks. And past market research show that 36 per cent of customers who switch banks cite poor service (Market Force, 2015), and that it costs five times more to attract a new customer—across industries—than to keep an existing one (Gartner, 2015). OPPORTUNITIES AND CHALLENGES This will be front of mind in the regional financial sector as it looks to capture new opportunities, especially in the rapidly maturing Shari’ah-compliant finance segment. Even though the global growth rate has been languishing in recent years, the Global Islamic Finance Report 2018 shows the segment grew six per cent

last year, to reach $ 2.4 trillion, with Saudi Arabia, the UAE and Kuwait ranked third, fourth and fifth in global market share. While regional banks consider how to balance low costs with the enhancement of the customer experience, they face a slew of externalities, such as tighter regulation in the form of fee caps or the arrival of VAT. And global research by Microsoft from last year showed that more than two thirds of a sales team’s time is consumed by internal activities, leaving them little time for chasing opportunities.

36%

of customers who switch banks cite poor service and it costs five times more to attract a new customer than to keep an existing one

THE UNIFIED COMMERCE PLATFORM If only there were a proven way to address the customer-expectation conundrum, free up employees from laborious tasks and supply sales and service staff with the kind of information that allows them to make prospects and loyal customers feel understood on an individual and personal level. The answer lies in digital transformation, which allows banks to engage customers, empower employees, optimise operations and reinvent business models. Specifically, it lies in the unification of ERP and CRM functions in a single, homogenous, intelligent commerce platform that: accelerates lead management, enhances the sales process and helps sales and service staff make intelligent, personal recommendations.

Keith Fenner

THE ANSWER LIES IN THE UNIFICATION OF ERP AND CRM FUNCTIONS IN A SINGLE, HOMOGENOUS, INTELLIGENT COMMERCE PLATFORM THAT: ACCELERATES LEAD MANAGEMENT, ENHANCES THE SALES PROCESS AND HELPS SALES AND SERVICE STAFF MAKE INTELLIGENT, PERSONAL RECOMMENDATIONS.

Machine-learning algorithms, which are an integral part of such commerce platforms, can find meaningful patterns in oceans of data at high speedsâ&#x20AC;&#x201D;patterns that would be invisible to a human no matter how long they searched. This results in significant improvements in the leadmanagement process, allowing banks to not only determine the value of each lead, but also automatically generate and prioritise them. Actionable intelligence enables sellers to effortlessly engage customers with relevant offers across all channels. Also, banks can starkly differentiate themselves by engaging in social selling, where they examine buying signals in social-media posts and share relevant content with prospects. COLLABORATION BREEDS PERSONALISATION According to a 2015 research from Deloitte, companies that prioritise collaboration are twice as likely to be profitable and twice as likely to outgrow competitors. Effective collaboration includes not only the ability to communicate easily and reliably, but the ability for conjunctive editing of documents in real time and the capability to share conversations, events, notes and graphics. Collective knowledge leads to happier customers, who will not expect to be asked the same question or offered the same thing twice, even if they are dealing with different employees. Personalisation has become a matter of survival. Digital natives can more easily navigate their way to the optimum product or service. They expect to be treated as an individual because they are aware that it is possible. Predictive machine-learning algorithms allow banks to assess what customers are likely to want prior to engagement, and make relevant recommendations tailored intricately to them. For example, based on age, recorded preferences and other personal information, a bank would be able to personalise its rewards programme to each customer, ensuring widespread enticement across its base.

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TECHNOLOGY

CHALLENGES AND OPPORTUNITIES IN A NEW PAYMENTS LANDSCAPE SWIFT suggests a solution to the common challenges faced by financial insitutions 58

he international payments landscape is undergoing significant change. New, disruptive technologies are entering the payments market and putting pressure on traditional banking practises. Regulatory scrutiny, particularly around KYC and AML, and changes in consumer and client behaviours and expectations are also forcing the industry to review traditional banking models. The banking sector is facing these challenges head-on, developing a new, more innovative and dynamic payments landscape. The disruptive forces the industry faces are coming together in a short timeframe and within a cost-contained environment (see info graphic).

Consumers want their retail experience to be replicated in the banking world; this means instant, frictionless services. At the same time, corporate clients want to reduce payment costs and are entering new trade corridors; they also want transparency, predictability and timeliness of payments. Regulators have weighed in on consumersâ&#x20AC;&#x2122; behalf, promoting new products and services through open banking regulations that pave the way for new, non-bank institutions, along with financial technology companies, to enter the payments market. The wider postcrisis regulatory push means compliance is taking up more of payments professionalsâ&#x20AC;&#x2122; time. Data privacy, security and resiliency are key concerns.

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In particular, managing financial crime compliance requirements and addressing the cyberthreat in the high-speed world of real time payments is becoming ever more challenging. Dealing with these threats at a community level is the only way to protect the financial ecosystem. Finally, technological advances are bringing into play powerful and flexible new capabilities such as artificial intelligence and distributed ledger technology. In many cases, the new entrants have been more adept at harnessing such technologies—in proof of concept, at least—than the payments market incumbents. Payments actors must keep up with the pace of change and prepare for the future to remain competitive in such a rapidly evolving landscape.

MANAGING FINANCIAL CRIME COMPLIANCE REQUIREMENTS AND ADDRESSING THE CYBERTHREAT IN THE HIGH-SPEED WORLD OF REAL TIME PAYMENTS IS BECOMING EVER MORE CHALLENGING. DEALING WITH THESE THREATS AT A COMMUNITY LEVEL IS THE ONLY WAY TO PROTECT THE FINANCIAL ECOSYSTEM.

THE INDUSTRY RESPONSE: CORRESPONDENT BANKING IS BEING REVOLUTIONISED Historically, cross-border payments have been relatively slow, lacking in transparency and suffered unpredictable fees. The imperative to improve customer service in the cross-border space brought leading banks together with SWIFT to create the global payments innovation initiative—gpi. Objectives from the outset have been to deliver same day use of funds, transparency of fees, end-to-end payments tracking, and the unaltered transfer of remittance information. Live since January 2017, more than 180 transaction banks have signed up to the service, with more than 65 using SWIFT gpi to exchange hundreds of thousands of payments a day across 500 country

CHALLENGES FOR THE PAYMENTS INDUSTRY Many disruptions coming together in a short timeframe and cost-pressured environment

NEW CONSUMER BEHAVIOURS & NEEDS

TECHNOLOGY CHANGES

- Y, X generation ("NOW!") - Reduction of cash usage - More payments - Cross channel view - Payments methods re-definition (API, internet based, contactless...) - Expectation for "frictionless" - Demand for more security

- Mobile, wallets, cryptocurrencies - DLT & AI - Platform/Architecture renewal - Biometrics (e.g. facial recognition) - Cybersecurity

REGULATORY PRESSURE

INDUSTRY TRENDS

- Compliance - Data privacy (e.g. GDPR) - Open Banking (e.g. PSD2) - Resiliency

- Cost reduction pressure - New trade corridors - ISO 20022 adoption - Instant payments - GTB business evolution: transparency, predictability and timeliness - Competition from non-Fls & Fin/Reg Tech - Faster pace of change - Addressing fragmentation and interoperability issues

corridors. Many Middle East banks are already live and delivering a better service to their corporate customers including Mashreq Bank (UAE), National Bank of Kuwait, Commercial Bank of Kuwait, Garanti Bank (Turkey) and Bank al Etihad (Jordan). More than 20 other banks in the region are set to go live soon. SWIFT gpi is revolutionising crossborder payments by increasing their speed from days to minutes and even seconds. Nearly 50 per cent of gpi payments reach the beneficiary in less than 30 minutes. As a result, bank clients benefit from shorter supply cycles, goods are shipped faster, less liquidity is used, and there are far fewer enquiries and resulting costs. SWIFT gpi also addresses key corporate treasury concerns, including lack of transparency. The gpi Tracker gives the status of cross-border payments in real time and enables banks to review information about each bank in its path and any fees that have been deducted. This information is then passed on to corporate clients, offering a datarich experience with greater levels of visibility into each payment and their overall liquidity. The Tracker is accessible via application programming interfaces (APIs), which enable banks to embed the Tracker information into their payment flow applications and front-end platforms. As a result, corporate treasurers can track gpi payments in real time. FASTER PAYMENTS COMING FASTER THAN EXPECTED There are also significant strides being taken for instant payments. Australia is the latest market to go live with real time. The recently launched New Payments Platform (NPP) has been designed to remove inefficiencies and improve how consumers, businesses and government departments transact with one another. NPP was developed collaboratively by 13 Australian banks or authorised deposittaking institutions, and will provide the

system and the Eurosystem’s TARGET Instant Payments Settlement Service (TIPS). SWIFT’s evolving portfolio already allows users to connect to other instant payments systems such as TCH’s in the US and the Faster Payment System’s in Hong Kong.

IN ADDITION TO THE CHALLENGES ON THE TECHNICAL AND OPERATIONAL LEVELS, THERE ARE ALSO BUSINESS CHALLENGES AND FOREIGN EXCHANGE REQUIREMENTS. BANKS AND CENTRAL BANKS WILL HAVE TO AGREE HOW CROSS-CURRENCY INSTANT PAYMENTS CAN BE EXCHANGED, PROCESSED, GUARANTEED AND SETTLED.

basic infrastructure to connect these financial institutions, and through them businesses and consumers. SWIFT helped to design, build, test and deliver the NPP and will play a key role in operating the infrastructure for the NPP. Many of the components from NPP will be part of SWIFT’s ongoing IP strategy to ensure 24x7, instant, high-volume, low latency services. SWIFT is developing an instant messaging solution for Europe that will provide connectivity to both EBA CLEARING’s RT1 instant payments

THE FUTURE: CROSS CURRENCY, INSTANT PAYMENTS? Such systems have been designed to support markets where there is a single currency in use. Cross-currency instant payments will not happen on day one of any new IP system. In addition to the challenges on the technical and operational levels, there are also business challenges and foreign exchange requirements. Banks and central banks will have to agree how cross-currency instant payments can be exchanged, processed, guaranteed and settled. Putting aside the foreign exchange element, there are interoperability challenges that are related to market practise and preferences. Once systems are linked, those differences will have to be considered. For example, there is no standard definition of how instant an IP system will be; it ranges from five to 20 seconds. If you hook up a five-second system to one that clears in 20 seconds, there will be payment fails. There are some tough decisions ahead for different payments communities, and collaboration and harmonisation will be crucial. Part of SWIFT’s core mission is to help communities come together to define these standards and market practises. SWIFT gpi is an example of how existing networks can be revolutionised to deliver this high speed future. As a result of all the changes that are underway, industry players are faced with a myriad challenges. Not only do they need to find solutions—they must also create opportunities. In the new payment landscape, a delicate balance of harmonisation, innovation and collaboration will be key.

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TECHNOLOGY

PHOTO CREDIT: Shutterstock/Yurchanka Siarhei

AUTOMATION IS COMING Compliance is inevitable—and you’ll be thankful for that, says Promoth Manghat, Executive Director at Finablr and Chief Executive Officer at UAE Exchange Group

hen a robot comes for your job, the Smithsonian Institute recently wrote, you should think back to the Luddite revolts of early 19th Century Britain. Alarmed by the extent to which their skills were being replaced by mechanised labour, textile workers began to organise and agitate, going as far as attacking factories and factoryowners and destroying the machines they saw as a threat to their livelihoods. The term Luddite is still used to describe someone with a profound dislike for technology, whether it’s a loom for weaving cloth or a hi-tech robot. In most walks of life, the intrusion of robots will be limited to artificial intelligence (AI), machine learning (ML), and the increasing use of

automated processes. The humanoid robot as depicted in popular culture will be uncommon in most of our lives. But that doesn’t mean the potential for disrupting existing patterns at work or in our lives isn’t substantial. The challenge for business leaders will be to steer their organisations through these uncharted waters, avoiding collisions and reaping the rewards. CHANGE: INTERNAL, EXTERNAL, AND INEVITABLE Change can be unsettling, that is just part of what makes us human. Therefore, the successful adoption of change calls on leaders to highlight the positives and build on the benefits to create opportunities for the future. If we look at the impact automation will

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TECHNOLOGY

have on the way regulations are complied with, we can start to see how some of these benefits begin to take shape. There is, undoubtedly, a heavy regulatory burden on the financial services sector. We feel it even more keenly here in the fintech space. You could choose to view it as little more than a burden, of course. Red tape, cumbersome bureaucracy, and so on. Too much regulation can stifle productivity, and risk creating an environment in which change is almost impossible to imagine, let alone achieve. The German sociologist Max Weber was one of the first to raise this when he put forward his ‘iron cage’ theory. Structures, processes and bureaucracy developed over time can become disconnected from the original stated purpose, he argued. They start life as a worthwhile endeavour to improve the way of working, or to prevent problems. But human nature can obscure those benefits in time. If one’s view of how things ought to be done is overly-influenced by the way things have always been done, how can you come up with new ideas? It’s an interesting point, and while Weber is right in that simply adhering to pre-set patterns of behaviour can stifle creative thinking and problem solving, I see compliance in a much more positive light. As part of your strategic vision, it becomes a tool for adding value rather than being an iron cage. Compliance creates some of the most important factors in any market—certainty and a level playing field. It’s important because it compels organisations to align to the societal, political and legal frameworks of a country. At its most basic, this offers protection against a series of potentially damaging behaviours, and consequently offers reassurance to the end-customer that if something goes wrong they will have recourse in law. Without trust you cannot move forward, and nowhere is that more keenly felt than in financial services.

Promoth Manghat

Executive Director at Finablr and Chief Executive Officer at UAE Exchange Group

HONEST CONVERSATIONS ABOUT CHANGE MUST INCLUDE A THOROUGH ASSESSMENT OF HOW AUTOMATION CAN ENHANCE AN ORGANISATION’S REPUTATION AND COMMERCIAL SUSTAINABILITY TO THE BENEFIT OF ALL.

From the Sarbanes Oxley Act to the European Union’s GDPR, there are a lot of complex regulations that global businesses need to stay abreast of. Staying compliant is more than simply reading the rules and ticking all the boxes. Your business is made up of many moving parts and is always adapting, evolving and changing.

Every change has the potential to compromise your compliance status, and for a financial services business with a global footprint, the implications are profound. Regulations are often in a state of flux—subject to amendments, additions, and updates. When you’re operating in multiple markets

TECHNOLOGY

COMPLIANCE CREATES SOME OF THE MOST IMPORTANT FACTORS IN ANY MARKET—CERTAINTY AND A LEVEL PLAYING FIELD. IT’S IMPORTANT BECAUSE IT COMPELS ORGANISATIONS TO ALIGN TO THE SOCIETAL, POLITICAL AND LEGAL FRAMEWORKS OF A COUNTRY.

concurrently, the likelihood of having to deal with changing regulations multiplies, meaning that across several different jurisdictions, many different agencies and organisations may be making decisions that could impact your operations. Failure to stay ahead of compliance changes comes with a very high price tag—fines, revocation of trading licences, maybe even legal action against company executives, and a host of other possible penalties, both short and long term. That is a significant motivation to stay compliant. But with potentially thousands of small components across your business waiting in the wings to undermine your best efforts, managing compliance is a costly and resource-heavy undertaking. BASIC SKILLS ARE A FALLING STOCK The automation of routine tasks to ensure things are operating as they should is becoming increasingly commonplace. Using AI and ML can deliver three very significant benefits—enhanced speed, accuracy, and reliability. All this comes at reduced cost because you do not need an army of people constantly checking and fixing routine operations. In a recent study, McKinsey & Company (Skill Shift: Automation and the future of the workforce) says that “social and emotional skills (and) higher cognitive skills” will become increasingly sought after as demand for them grows. The same report says the demand for more basic skills, such as those associated with routine data input and processing,

will decline by 15 per cent. Think back to the Luddites, witnessing the falling demand for their work and suffering the consequences of a drop in income—they felt threatened and rose up in anger. Will we see the same here in the 21st century as automation spreads? In fact, I think not. An ambitious, growing business should always try to find opportunities to redeploy people away from mundane, routine tasks and direct them to more valuable efforts. That might involve an element of retraining and redeployment, naturally. But it needs to be part of a strategic plan that embraces automation and uses it to build a sustainable competitive advantage and commercial opportunities. CULTURE UNLOCKS COMPETITIVE GAINS For example, at Finablr, it has always been important to me that we embrace compliance as part of our culture rather than merely ticking boxes. Adhering to regulations enables us to build customercentricity into everything we do and—just

as importantly—demonstrate it, too. You can do that with teams of people. Or you can automate processes, thereby improving delivery and lowering cost. Smart algorithms, using machine learning, go beyond where automation has traditionally been used. You no longer need to programme them to perform discrete tasks. Instead, they improve their performance as they go, learning all the time, which increases their effectiveness and the value they deliver to the business. This is an approach we’ve adopted on the cybersecurity and compliance sides of Finablr. One of the direct consequences of that, has been reducing the number of false positives we see when checking transactions. We’re saving time, we’re saving money and reducing delays, which improves service delivery. Plus, it frees up resources to focus on more demanding tasks, priority cases and so on. Honest conversations about change must include a thorough assessment of how automation can enhance an organisation’s reputation and commercial sustainability to the benefit of all. It will be important to acknowledge that periods of change can be unsettling, too. After all, if we try to deny such an obvious truth, it will make everything we say seem lacking in credibility. But far from seeing the march of automation as a potential reprise of the Luddite Revolt, now is the time to identify opportunities to educate and inform our workforces and customers about the positive changes to come.

AN AMBITIOUS, GROWING BUSINESS SHOULD ALWAYS TRY TO FIND OPPORTUNITIES TO REDEPLOY PEOPLE AWAY FROM MUNDANE, ROUTINE TASKS AND DIRECT THEM TO MORE VALUABLE EFFORTS.

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