FEBRUARY 2019 | ISSUE 215 MIDDLE EAST
FEBRUARY 2019 | ISSUE 215 A CPI Financial Publication
Tareq Muhmood, Acting Chief Executive Officer, Ahli United Bank Kuwait
the answer to an overbanked market? 16 Mergers:
16 and its consequences 24 IFRS
Arabia: from here to modernity 34 Saudi
Federal Reserve: the biggest risk factor for 2019 58 US
Dubai Technology and Media Free Zone Authority
COMMITTED TO A CAUSE Tareq Muhmood, Acting Chief Executive Officer, Ahli United Bank Kuwait
COMMITTED TO A CAUSE
AT YOUR SERVICE ACROSS AT YOUR SERVICE ACROSS THE REGION AT YOUR SERVICE ACROSS THE REGION AT SERVICE ACROSS EnjoyYOUR ABK’s simpler banking services in THE REGION Kuwait, Egypt, and the UAE. services in Enjoy ABK’s simpler banking THE REGION Kuwait, Egypt, and the UAE. services in Enjoy ABK’s simpler banking Enjoy ABK’s simpler banking Kuwait, Egypt, and the UAE. services in Kuwait, Egypt, and the UAE. Simpler Banking Simpler Banking Simpler Banking Simpler Banking
EDITOR’S NOTE
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here are thus far two themes that have begun to carve out across the region—a noticeable uptick in bonds and Sukuk, and the drive for financial technology advancements. Apart from the Brexit negotiations that has moderate to little impact on the region’s banking sector (except towards investments), one major thing to note is the win that Lebanon had when it finally formed a government. Prime Minister Saad Hariri finally announced his new cabinet line-up early February, after a nine-month political strife. The government is now able to follow through with its much needed fiscal and structural reforms that would unlock $11 billion in grants and loans. Positive investor sentiments were apparent when Lebanon’s sovereign bonds due in 2028 soared to its highest since they were issued in November 2015. It is now time for markets to wait and see how things develop from here. Coming to the GCC, majority banks have posted double digit growth rates for 2018 from 2017 figures. This signifies the continued resilience of the region’s banking sector in a volatile global environment. Industry players expect the trajectory to continue all through 2019, with a gradual climb in profit margins going into 2020.
With oil prices expected to witness a moderate recovery this year, long-term commercial borrowing in the MENA market could increase by 25% after falling 38% in 2018. S&P expects about 44% of MENA sovereigns’ gross borrowing this year to go towards refinancing maturing long-term debt, resulting in an estimated net borrowing requirement of $76 billion. Adding amounts owed to bilateral and multilateral institutions, total debt would reach $892 billion. Should there be a sustained funding need for sovereigns in the region, appetite for GCC/MENA debt may increase, eventually creating the long awaited yield curve desired by investors. Reflecting these developments, our edition this month sheds light on the issues above, including a deep dive into Saudi Arabia, capital market transactions, socially responsible financing and technology. We wish you a productive read.
Nabilah Annuar EDITOR, BANKER MIDDLE EAST
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CONTENTS
FEBRUARY 2019 | ISSUE 215
NEWS 8 Breaking dawn 12 News highlights
THE MARKETS 16 Mergers: the answer to an
overbanked market?
20 Embracing disruption
LEGAL PERSPECTIVE 24 IFRS 16 and its consequences
COVER INTERVIEW 28 Committed to a cause
COUNTRY FOCUS: SAUDI ARABIA 34 From here to modernity
DEBT CAPITAL MARKET 40 Debt wish
INVESTMENTS 44 Out of the dark into another light
ISLAMIC FINANCE 48 Sukuk: strength in numbers
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16 4
20
24
CONTENTS
FEBRUARY 2019 | ISSUE 215
SUSTAINABLE FINANCE 50 ING nurtures a green footprint
HUMAN CAPITAL
GET THE DIGITAL EDITION OF BANKER MIDDLE EAST ONLINE.
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54 Health is wealth
FEBRUARY 2019 | ISSUE 215
TECHNOLOGY
COMMITTED TO A CAUSE Tareq Muhmood, Acting Chief Executive Officer, Ahli United Bank Kuwait
factor for 2019
CHAIRMAN Saleh Al Akrabi
FEBRUARY 2019 | ISSUE 215
58 US Federal Reserve: the biggest risk
MIDDLE EAST
IN DEPTH
CHIEF EXECUTIVE OFFICER STEVE LEE steve.lee@cpifinancial.net Tel: +971 4 391 4681 EDITOR - BANKER MIDDLE EAST NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726
62 Unity is power, but your combined IT Dubai Technology and Media Free Zone Authority
COMMITTED TO A CAUSE A CPI Financial Publication
systems may weaken you
Tareq Muhmood, Acting Chief Executive Officer, Ahli United Bank Kuwait
the answer to overbanked market? 16 anMergers:
IFRS 16 and its 24 consequences
Saudi Arabia: from to modernity 34 here
US Federal Reserve: biggest risk factor for 2019 58 the
64 Screen savers JANUARY 2019 | ISSUE 214 MIDDLE EAST
EDITORS MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716
JANUARY 2010 | ISSUE 214
WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718
DID 2018 RE-WRITE OUR UNDERSTANDING OF TRADING Philippe Ghanem, CEO and Vice-Chairman, ADSS
ISLA MACFARLANE isla@cpifinancial.net Tel: +44 7875 429476 WEB EDITOR JESSICA COMBES jessica@cpifinancial.net Tel: +971 4 364 2024
A CPI Financial Publication
Philippe Ghanem, CEO and Vice-Chairman, ADSS
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tense, future perfect? 30 Present
inclusion and the future of fintech in the Middle East 40 Financial
the digital CFO 46 Introducing
EDITORIAL ASSISTANT KUDA MUZORIWA kuda.muzoriwa@cpifinancial.net Tel: +971 4 391 3729
Dubai Technology and Media Free Zone Authority
DID 2018 RE-WRITE OUR UNDERSTANDING OF TRADING Open for business: How Kuwait is transforming itself to attract FDI
DECEMBER 2018 | ISSUE 213
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DECEMBER 2018 | ISSUE 213
EDITORIAL editorial@cpifinancial.net
HARNESSING COLLABORATIVE OPPORTUNITIES OPPORTUNITIES Faisal Al Haimus, Chairman & President of Trade Bank of Iraq
great US experiment 18 The
about the workers? 34 What
of trade finance underway, despite geopolitical concerns 42 Digitalisation
FDI Forum 62 Sharjah
Dubai Technology and Media Free Zone Authority
Faisal Al Haimus, Chairman & President of Trade Bank of Iraq
A CPI Financial Publication
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HARNESSING COLLABORATIVE OPPORTUNITIES Faisal Al Haimus, Chairman & President
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ANALYSIS
BREAKING DAWN
The economies of Saudi Arabia and UAE are expected to grow despite faltering oil prices
S
audi Arabia and the UAE are restructuring and opening up their economic activities, rethinking the role of foreign investors as they look to ease fiscal burdens and do away with dependence on oil, with a strong focus on technology, entertainment and foreign direct investment. The introduction of value added tax (VAT) is believed to be are part of a broader strategic shift on the part of respective
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governments to prepare for an after-oil future, where oil’s global dominance is set to die down owing to adoption of electric cars and clean sources of energy such as solar and wind power. In its report, Middle East Economy Watch 2019, PwC stated that whatever happens at a macroeconomic level, 2019 is likely to be an active year for corporate transactions in the GCC region. Last year was the best for Saudi and UAE
economies due to rising oil prices and increased government spending. Richard Boxshall, the Senior Economist at PwC Middle East, said that the combination of stronger prices as well as fiscal and structural reforms put Saudi Arabia and the UAE economies on a solid footing for 2019, despite a weaker final quarter in 2018—which was marked by increased geopolitical risks and falling oil prices.
MERGERS AND ACQUISITIONS Several mergers and acquisitions in the banking sector have been reported in both Saudi Arabia and the UAE— the two main overbanked territories in the GCC. Banks across the region are rapidly consolidating, with more than a dozen tie-ups projected to be closed this year alone, a move which is expected to boost the sector’s capacity to finance projects and businesses at the same time supporting economic growth. UAE BANKS Rating agencies, Moody’s, S&P as well as Fitch concurred that the outlook of the UAE’s banking sector will remain stable, reflecting a gradually recovering economy and banks’ strong capital, resilient profitability as well as solid funding. The UAE banking sector is leading a wave of mergers across the Gulf.
THE COMBINATION OF STRONGER PRICES AS WELL AS FISCAL AND STRUCTURAL REFORMS PUT SAUDI ARABIA AND THE UAE ECONOMIES ON A SOLID FOOTING FOR 2019, DESPITE A WEAKER FINAL QUARTER MARKED BY INCREASED GEOPOLITICAL RISKS AND OIL PRICES FALLING INTO CORRECTION BY YEAR’S END. — Richard Boxshall, Senior Economist, PwC Middle East
The merger of First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) in 2017—which resulted in the formation First Abu Dhabi Bank (FAB), the largest bank in the UAE and one of the largest after Qatar National Bank in GCC region, marked the beginning of synergies in the UAE banking industry. Similarly, Abu Dhabi Commercial Bank (ADCB) and United National Bank (UNB) agreed to merge and together acquire Al Hilal Bank. The tie-up will create the third largest bank in the UAE, with total assets of AED 420 billion and the third largest Islamic banking franchise in the country. The new entity will carry the ADCB identity and Al Hilal Bank will retain its existing name, brand as well as operate as a separate Islamic banking entity within the group. Additionally, Abu Dhabi Islamic Bank (ADIB) is reportedly weighing strategic options for its business, including a potential merger.
(CREDIT: RED IVORY/SHUTTERSTOCK)
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ANALYSIS
2019 BREAKEVEN OIL PRICES ($/BARREL)
Source: IMF
The lender is said to be planning to acquire another banking entity rather than being taken over—although a formal process has not started. SAUDI BANKS In Saudi, the Saudi British Bank (SABB) and Alawwal Bank entered into a binding merger agreement in the second half of 2018 having started discussions on a potential merger in April 2017. Alawwal Bank and SABB merger will create the Kingdom’s third-largest bank, a top-tier retail and corporate bank with SAR 271 billion in assets. On completion of the merger, SABB will continue to exist and Alawwal bank will cease to exist as a legal entity and its shares will be cancelled and new shares in SABB will be issued to shareholders of Alawwal Bank. Additionally, Saudi Arabia’s National Commercial Bank (NCB) and Riyad Bank have reached an advanced stage on the proposed merger that will create the Gulf’s third-largest lender with $182 billion in assets.
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NCB hired JPMorgan Chase and Riyad Bank said that it is working with Goldman Sachs to advise on the potential tie-up. The Kingdom’s sovereign wealth fund owns a 44 per cent stake in NCB and about 22 per cent of Riyad Bank, which is likely to make the consolidation process easier. ECONOMIC DIVERSIFICATION PwC said that the introduction of VAT in Saudi Arabia brought in more funds than the expat levy and excise taxes combined, and it tripled the amount from taxes on income and capital gains. The Kingdom managed to contain the inflationary impact of VAT as well as limiting its impact on growth—ultimately raising more revenue than was initially expected. Overall, the new tax policy has been relatively successful in diversifying government revenue without producing excessive inflation. Under Crown Prince Mohammed bin Salman’s Vision 2030, Saudi Arabia introduced a series of economic transformation reforms aimed at reducing the Kingdom’s high reliance on oil.
According to the Arab Monetary Fund’s Outlook Report of September 2018, reforms being implemented across the GCC region to improve the business climate will support economic activities during the forecast horizon. The Crown Prince’s grand vision to diversify the economy include the futuristic city, NEOM, which is expected to start taking shape in the first quarter of 2019, with the main city opening five years later. The $500 billion-Red Sea coast planned city which revolves around artificial intelligence (AI), one of Saudi Arabia’s mega-projects that is projected to attract billions of foreign investors. The ambitious 26,500 square kilometre NEOM city will link Saudi Arabia, Egypt and Jordan and it is imagined as a futuristic hub for both industry and citizens. To attract foreign talent and investment, the futuristic city will have a free zone with its own customs system, special taxation as well as labour legislation and an independent judicial system subject to independent regulations—which will be drafted hand-inhand with local and foreign business entities.
Similarly, the UAE has already started the implementation of regulations to stimulate non-oil economic growth. Last year, the President of UAE, HH Sheikh Khalifa bin Zayed Al Nahyan issued a new investment law which is expected to boost and retain foreign investment in the UAE. The UAE authorities seek to focus on the manufacturing sector, transport, renewable energy, agriculture and water. The new FDI law will be integrated with several supplementary laws and a list of incentives to lead future FDI trends with an aim to reach between $11-11.5 billion. Additionally, the granting of long-term visas to the country’s largely expatriate population will benefit investors and people with specialised expertise like doctors, researchers and those in the technology field. The new visa law—which saw the first batch of recipient receiving their visas in January this year is set to go hand in glove with the FDI law which allows foreigners to hold 100 per cent ownership of business in specific zones in the country as well as certain industries of the economy. The UAE introduced support for the industrial sector by agreeing to reduce electricity fees for UAE factories. Under the plans, larger factories would receive a 29 per cent reduction in tariffs while small and medium-sized units would have fees reduced by between 10 and 22 per cent. Likewise, the Dubai International Financial Centre Courts (DIFC) and Abu Dhabi Global Markets Courts (ADGM) provides a legal framework that assures foreign investors rules and regulations that guarantees investor rights, property rights as well as arbitration, insolvency and corporate laws. The UAE’s new debt law is set to deepen the financial markets, allowing the Emirates to tap a wider pool of financing options and create a government yield curve. The new Public Debt Law enables the UAE to issue
sovereign bonds, enabling the country to tap a wider pool of financing options and creating a government yield curve to bolster secondary debt market in the country. Recently, Emirates Development Bank (EDB) announced plans to sale $750 million bond, becoming the first lender to utilise the new debt law by selling its first bond since the bank was launched in 2015. STATUS UPGRADES MSCI and FTSE Index’s classification of Saudi Stock Exchange, Tadawul, from standalone market to an emerging market is expected to attract billions of dollars of passive funds. The listing will solidify the strength of the Kingdom’s financial markets as well as the expected participation of international investors, which will contribute significantly to the growth of the of the economy. Recently, Tadawul and the MSCI jointly launched a tradeable index in a move that is expected to spur the growth of derivatives and exchange-traded funds. The MSCI Tadawul 30 index will provide investors with a useful benchmark of
The Kingdom’s sovereign wealth fund owns a
44% 22%
stake in NCB and about
of Riyad Bank, which is likely to make the consolidation process easier.
the largest liquid companies in Saudi and serve as the basis for development of an index futures contract listed on Tadawul. Similarly, Nasdaq Dubai launched futures trading on the MSCI UAE equity index last month, in the latest expansion of the exchange’s futures market. The introduction of the MSCI UAE index futures came a week after Nasdaq Dubai launched single stock futures trading on 12 Saudi Arabian companies. The duo also signed a licence agreement for the exchange to launch derivatives on FTSE Russell’s Saudi Arabia equity indices. The futures, together with other derivatives which are set to be launched in the first quarter of 2019 under the licence, will be designed to attract global and regional market participants including the many funds that use FTSE Russell’s indices as benchmarks for investing in Saudi equities. Saudi Arabia and the UAE are embarking on an economic transformation journey which is set to bolster their respective economies against the shocks in the oil market. The duo has advanced infrastructure such as free zones and ports that are spread across the country, well-established road networks and faster communication systems, all of which are technologically advanced to harness competitiveness and attractiveness for investors. The classification of the Tadawul as an emerging market on the MSCI and FTSE index is attracting international banks to the Kingdom. Japan’s SMBC recently announced the opening of first branch in the Kingdom, while SocGen authorities said that they were in the process of acquiring the necessary licences from SAMA to start operations in Saudi. Similarly, earlier in February, Citigroup opened a new branch in the ADGM and Swiss-based private bank Lombard Odier announced plans to open a new branch in Abu Dhabi respectively expanding their existing footprint in the UAE.
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NEWS HIGHLIGHTS
Turkey’s sovereign wealth fund approaches banks for EUR 1 billion loan
Turkey’s largely dormant sovereign wealth fund, Turkiye Varlik Fonu's (TWF), has hired Citigroup and Industrial Commercial Bank of China to act as coordinators in a EUR 1 billion ($1.14 billion) syndicated loan deal, according to five people with knowledge of the matter, reported Bloomberg. TWF's foray into the loan market comes amid a rally across emerging markets that has helped stabilise the Turkish currency. The security will have a maturity of two years with an option to extend for another year so that TWF, can inject cash into the companies it holds, one of the people said, asking not to identified. The transaction will mark the first time the fund taps international markets for debt. While it’s unusual for a sovereign fund to borrow— they’re typically established to deploy a nation’s accumulated wealth, there is a recent precedent. Saudi Arabia’s fund last year signed an $11 billion syndication with some of the world’s biggest global lenders, including Goldman Sachs Group, HSBC Holdings and JPMorgan Chase. It was priced at 75 basis points over Libor.
Group led by Kuwait’s NIC wins tender to buy Kuwaiti bourse stake
Kuwait’s National Investment Company (NIC), Arzan Financial Group as well as First Investment and the Athens Stock Exchange has won the tender to acquire 44 per cent of the Kuwait stock exchange, according to Kuwait National News Agency. Kuwait’s Minister of Commerce and Industry said that the changes will give the private sector a larger role in developing the national economy. Khaled Al-Roudhan, the Minister of Commerce and Industry, said, “The move is a reflection of the huge strides Kuwait is taking to raise its global competitive index, improve its business climate and develop its efficiency in attracting foreign capital.” The consortium offered 237 Kuwaiti fils per share for the stake purchase.
Saudi Aramco appoints banks for international bond issuance
Saudi Aramco has hired banks to arrange its first international debt sale to finance the acquisition of a controlling stake in SABIC.Saudi Aramco seeks to purchase Public Investment Fund’s (PIF) 70 per cent stake in SABIC. Last month, Saudi Energy Minister said that Aramco plans to issue its first international bonds in the second quarter of 2019, which is likely to around $10 billion. The state oil giant has hired JPMorgan and Morgan Stanley as joint global coordinators as well as Citi and HSBC, reported Reuters.
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Saudi Arabia’s wealth fund plans to open San Francisco office Saudi Arabia’s sovereign wealth fund is following its peers in the GCC by opening an office in the US technology hub of San Francisco, reported Bloomberg. Yasir Al-Rumayyan, the Managing Director of the Public Investment Fund, said that the sovereign wealth fund is looking forward to open offices in San Francisco, New York and London. Sovereign wealth funds in Gulf Arab states are seeking to seeking to invest some of their oil and natural gas billions into technology and communications to lessen their reliance on volatile crude markets and to bring home the businesses and skills that will help transform their economies. Abu Dhabi’s Mubadala Investment Company have in recent years opened offices in Silicon Valley to focus on the technology industry.
Takaful International unveils new identity Bahrain’s Takaful International Company has unveiled its new brand identity incorporating a revamped logo that reflects the company’s forward-thinking momentum following its merger with Gulf Insurance Group (GIG) in 2015. In a statement, Takaful International stated that following completion of its merger, the insurance firm become a Takaful arm of GIG. The new identity builds on Takaful integration with GIG Group and embodies shared values between the organisations. Jamal Al Hazeem, the Chairman of Takaful International, said, “The new identity encapsulates the values we share and brings the promise of greater things to come for our network and stakeholders as we continued to build, grow and stay true to our history and focus on delivering innovation.”
Goldman Sachs sees oil reaching $70-75 a barrel
StanChart secures Saudi Arabia banking licence Saudi Arabia currently has 27 banks operating in the Kingdom and 15 of them are foreign lenders. Saudi Arabia’s Council of Ministers has approved a licence for Standard Chartered Bank to operate in the Kingdom, according to local newswire, Saudi Press Agency. The opening of StanChart unit in the Kingdom is expected to benefit the private sector with new banking products and financing tools through the provision of modern banking technology, create more jobs as well as meeting the increasing financing needs in the sector in light of the ambitious plans of Vision 2030.
UAE’s EDB appoints arrangers for $750 million bond issuance UAE’s Emirates Development Bank (EDB) has hired banks to arrange a series of fixed-income investor meetings ahead of a potential sale of benchmark US dollardenominated five-year bonds. The lender has appointed Emirates NBD Capital as the financial adviser and, together with Standard Chartered as joint global coordinators. Representatives of the banks will meet investors in Asia, the UAE and London starting from 20 February. Industrial and Commercial Bank of China has also been hired as joint lead manager, reported Reuters.
Oil prices could potentially rise as much as 12 per cent from current levels, though the rally may prove fleeting, according to Goldman Sachs Group. Analysts said that OPEC member Saudi Arabia is cutting output faster than US shale drillers can fill the gap and supply disruptions in Venezuela are likely to accelerate in coming months, leaving a void in the market that may push global benchmark Brent crude to $70-$75 a barrel. In a report from Bloomberg, Jeffrey Currie, analyst at Goldman Sachs, said that while prices could easily trade in a $70-$75 a barrel trading range, we believe such an environment would likely prove fleeting-reaffirming Goldman’s forecast for Brent to end the year at $60. Brent has rallied 25 per cent this year to around $67 a barrel after a collapse of 35 per cent in the last quarter of 2018 as the Saudis spearheaded a plan by the organisation of Petroleum Exporting Countries and its allies to curb production. Signs the US and China are moving closer to a trade deal have improved the demand outlook, with President Donald Trump saying over the weekend he’ll extend a deadline to raise tariffs on Chinese goods. The fleeting period of elevated oil prices presents a window of opportunity for producers to sell long-dated futures and options in order to hedge prices in case of a drop later in the year. US drillers had only four per cent of their 2020 output protected at the time they posted third quarter results, compared with a five-year average of 36 per cent, suggesting they will begin hedging programmes soon.
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NEWS HIGHLIGHTS
Lebanon seeks funds from more allies
Lebanon is in talks with allies to secure financial backing that would help it manage one of the world’s highest debt burdens. The funds will help calm investor concerns that Lebanon is on the brink of a financial meltdown sparked by political turmoil and doubts over its ability to repay debts, reported Bloomberg. The support could come in the form of deposits or a purchase of Lebanese Eurobonds at reduced interest rates, according to Nadim Munla, a senior adviser to Prime Minister Saad Hariri. The funds will also buy the Lebanese government much-needed time to implement steps agreed with international donors in return for $11 billion in aid. “We are actively pursuing friendly countries to help us mitigate the short-term crisis we have faced because of the delay in the formation of the government,” Munla said. With the money, Lebanon would be able to reduce the cost of debt servicing, he said. The newly-formed government will soon announce a plan to eventually slash costly subsidies to the stateowned electricity company, Munla said, a move that would save hundreds of millions of dollars a year. Other proposals under discussion include the implementation of a programme to overhaul the public sector. Spending, however, increased in 2018 as oil prices and interest rates climbed. Lebanon’s public debt, estimated at over 160 per cent of gross domestic product this year, is projected to rise to near 180 per cent by 2023, second only to Japan’s, according to the IMF.
FAB mulls raising foreign shareholder limit
First Abu Dhabi Bank (FAB) will follow peers and raise the foreign ownership limit, reported Bloomberg. The bank’s shares climbed as much as 5.8 per cent to AED 15.6 at the open in Abu Dhabi, the biggest increase since April 2017. The ADX General Index added 2.5 per cent. Investors from abroad held about 12 per cent of FAB shares as of the end of last month, according to information on the stock exchange’s website. Similarly, Dubai-based Emirates NBD plans to quadruple the limit for foreigner to 40 per cent.
SEDA to establish SAR 30 billion EXIM bank The Saudi Exports Development Authority (SEDA) has announced plans to establish an independent export finance bank with a capital of SAR 30 billion to provide local exporters and foreign importers with finances in line with the best international practises in export finances, according to local newswire, Saudi Press Agency. In a statement, SEDA stated that the bank is expected to open soon. The lender will work to bridge the gaps in financial services to the sector of importing and exporting.
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EDB, UBF launch AED 100 million credit guarantee scheme for SMEs Emirates Development Bank (EDB) has launched a AED 100 million credit guarantee scheme for SMEs together with partner banks and the UAE Banks Federation. The credit guarantee scheme provides strategic financing solutions to the SME ecosystem in the UAE. In a statement, the lender stated that the new scheme aims to boost SMEs’ business activities and pave way for economic diversity in line with the UAE’s move towards a post-oil economy. The scheme will allow EDB to provide credit guarantee to partner banks in the UAE that can offer up to AED 2 million financing to start ups where the lender guarantees their loan up to 85 per cent and up to AED 5 million financing to existing SMEs where EDB also guarantees up to 70 per cent of their loan. HE Obaid Humaid El Tayer, the Minister of State for Financial Affairs and Chairman of EDB stated that the scheme provides a solid platform for emerging national companies and entrepreneurs to explore new opportunities through innovation such as smart industries, which serve the country’s efforts of building a knowledge-based economy and contribute to sustainable economic development. UAE banks that are partnering with EDB include Commercial Bank of Dubai, RAKBANK as well as Mashreq Bank, National Bank of Fujairah and Commercial Bank International.
FTSE Russell, Nasdaq Dubai to launch Saudi equity indexes for derivatives trading
Bahrain’s budget deficit down 35 per cent in 2018 Bahrain’s finance minister said that the Kingdom’s budget deficit dropped 35 per cent in 2018 compared to a year earlier. Bahrain had projected a $3.5 billion budget deficit in 2018. Last year, Manama released a fiscal plan after signing an agreement with its Gulf neighbours to fix its debtburdened finances and abolish its budget deficit by 2022. Bahrain’s finances have been hit hard by a slump in oil prices in 2014 and it has been struggling to cut government spending while avoiding public anger over austerity measures.
Nasdaq Dubai and FTSE Russell have signed a licence agreement for the exchange to launch derivatives on FTSE Russell’s Saudi Arabia equity indices. The move is part of an expansion of Nasdaq Dubai’s derivatives market and follows the launch of single stock futures on 12 Saudi companies last month. In a statement, Nasdaq Dubai stated that the futures, together with other derivatives to be launched in coming months under the licence, will be designed to attract global and regional market participants including the many funds that use FTSE Russell’s indices as benchmarks for investing in Saudi equities. Waqas Samad, the Chief Executive of FTSE Russell, said, “Saudi equities are some of the most heavily traded of all the region’s markets, and the futures contracts are an important additional tool to give regional and international investors efficient access to this dynamic market.” The futures trading will begin in February giving investors new ways to gain exposure to dynamic Saudi Arabia stock market. In March 2018, FTSE Russell announced that Saudi Arabia would be promoted to Emerging Markets status in its global equity benchmarks from March 2019. The FTSE Russell Saudi Index contains 46 companies listed on Tadawul including SABIC and Al Rajhi Bank.
SOVEREIGN RATINGS AS OF 1 FEBRUARY 2019 Issuer
Foreign Currency Rating
Last CreditWatch/Outlook Update
1 Bahrain
B+/Stable/B
01-Dec-2017
2 Central Bank of Bahrain
B+/Stable/B
02-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-2017
6 Kuwait
AA/Stable/A-1+
20-Jul-2011
7 Lebanon
B-/Stable/B
02-Sep-2016
8 Morocco
BBB-/Negative/A-3
06-Oct-2018
9 Oman
BB/Stable/B
11-Oct-2017
10 Qatar
AA-/Stable/A-1+
08-Dec-2018
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
05-Dec-2018
14 Sharjah
BBB+/Stable/A-2
27-Jan-2017
Copyright © 2018 S&P Global Ratings. All rights reserved.
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THE MARKETS
MERGERS: THE ANSWER TO AN OVERBANKED MARKET? Godfrey Sullivan, Partner & Managing Director at Boston Consulting Group Middle East, discusses the survival of banks in the GCC 16
(PHOTO CREDIT: ONEINCHPUNCHU/SHUTTERSTOCK)
T
he GCC is one of the most overbanked regions in the world. What are your views on how sustainable this is for the market? We are already beginning to see the impact of an excessive number of banks in the region with the current wave of consolidation taking place most notably in the UAE and KSA. In our view there are a number of important contributing factors: • Firstly, customers are becoming ever more demanding from their banking providers, particularly when it comes to the use of new technologies to reduce the hassles of banking. • Secondly, regulators are beginning to make it easier for customers to switch bank accounts. In Saudi Arabia, a number of banks are now allowing customers to open accounts remotely
and are witnessing a huge demand. In the UAE, we have already seen the success of digital account opening at banks such as Emirates NBD’s Liv. • Finally, and most import antly, shareholders realise that the future winners in banking will be those with scale and the ability to invest in new technology.
SHAREHOLDERS ARE REALISING THAT THE FUTURE WINNERS IN BANKING WILL BE THOSE WITH SCALE AND THE ABILITY TO INVEST IN NEW TECHNOLOGY. — Godfrey Sullivan
Over the last couple of years, we have seen quite a number of merger announcements, with two successfully materialising in that period of time. How do you foresee the M&As in the banking sector evolving over the next five years? Given the emerging pressures of a tightening economy, and the needs of large digital investments to compete, we expect to see increasing levels of consolidation.
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THE MARKETS
AS A START, BANKS IN THE REGION SHOULD FOCUS THEIR EFFORTS IN ADDRESSING THE SOFTER CHALLENGES FIRST, PARTICULARLY: HOW DO I ATTRACT THE RIGHT TALENT? AND HOW DO I CREATE THE RIGHT INNOVATIVE AND ATTRACTIVE WORKING CULTURE? — Godfrey Sullivan, Partner & Managing Director at Boston Consulting Group Middle East
What do you think are the biggest challenges faced by GCC banks at the moment? And what would you suggest to address these issues? There are numerous challenges for banks in the region, with the most obvious being the difficult economic circumstances with an ever-increasing regulatory burden and the need to digitise.
Godfrey Sullivan
Banks with common shareholder ownership are those to watch; for example, we saw this in Saudi Arabia with both SABB-Alawwal and NCBRiyadh Bank mergers. Referencing markets such as the UK, the US and Canada, there are typically four to five big banks that dominate the market, and a series of smaller banks that struggle to compete. The Kingdom of Saudi Arabia’s banking market is beginning to resemble that structure. As these trends continue—the smaller traditional banks will face challenges as to how they will compete. This is particularly pertinent now, with regulators increasingly open to offer licences to new start-up banks, resulting in traditional banks losing their attractiveness, even to those looking to enter the GCC markets.
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Financial institutions have discussed digitisation at length, with many rolling out extensive strategies and services. Taking these into consideration, are there still gaps to fill? If so, where and why? Banks in the region are still in a nascent phase and have a long way to go in their digitisation journeys. For most, the onboarding process for retail customers still does not reflect the true impact of digitisation to create seamlessness and ease, such as the “scan your ID and take a selfie” account opening process of Monzo. In corporate banking, the digitisation journey has hardly started for most banks. When it comes to data analytics, most banks are still on the starting blocks. There are certainly plenty of gaps to be filled.
As a start, banks in the region should focus their efforts in addressing the softer challenges first, particularly: how do I attract the right talent? And how do I create the right innovative and attractive working culture? The winning banks in years to come will be those who are the fastest at capitalising on the changes sweeping the industry, and this will mean acquiring the best talent; leading data scientist, programmers, inventors, and creating a culture where these individuals are retained and thrive. These will be the toughest challenges for banks in the GCC. From your conversations with industry stakeholders, what would you suggest bank CEOs here do differently? Based on our experience and engagement in the regional industry, there are three key imperatives for banks in the region: • Focus on customers; • Unlock your talents; and • Keep the process as simple as possible.
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THE MARKETS
EMBRACING DISRUPTION
Financial institutions can out-innovate fintechs through greenfield approach, according to Oliver Wyman
T
he next big wave of innovation in financial services will be driven by incumbents starting with a blank canvas, according to Oliver Wyman’s State of Financial Services 2019 report, Time to Start Again. The report introduces an emerging new approach called “greenfield”— where existing firms break free from the constraints of their legacy systems, business and t alent models. The greenfield approach seeks to prove that it is possible to build a digital banking or insurance platform that is open to customers in just 12 months, at a materially lower cost than in the past. “Greenfield is when existing firms break free from the constraints of
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their legacy systems, business and talent models,” explained Mathieu Vasseux, Partner and Head of Financial Service at Oliver Wyman Financial Service (MEA). The greenfield approach is fuelling a wave of start-ups that are going to market with rudimentary banking and insurance propositions for less than $5 million, which might not account for large amounts of sweat equity. While fintechs were early movers and catalysts, financial institutions can out-innovate fin-techs through greenfield approach and—the next big wave of innovation in financial services will be driven by incumbents, not fintechs, added Vasseux.
THE GULF Conventional lenders are introducing more robust digital banking and insurance offerings for between $10 million and $60 million. Regionally, the majority of banks are going digital in a bid to remain competitive and effective in service delivery. In the last quarter of 2018, Standard Chartered announced plans to reduce its headcount in the UAE as part of a global shake-up, within corporate, commercial and retail banking divisions as most of these divisions are going digital. The UAE has a high digital penetration rate compared to other countries where the Standard Chartered operates in the emerging markets.
(PHOTO CREDIT: VALEX/SHUTTERSTOCK)
Similarly, Abu Dhabi Islamic Bank (ADIB) is making changes to its retail business, including encouraging customers to go digital. The lender increased the number of its network of ADIB Express branches— new technology-enhanced express banking branches bringing it’s technologicallyenhanced units to the UAE. There has been a clear change in the relationship between conventional outfits and their customers in the UAE and banks are investing in technology infrastructure to capture a distinct preference for digital banking. Additionally, Abu Dhabi Commercial Bank (ADCB) inaugurated its ADCB Hayyak application recently. The paperless account opening app enables new
customers to open accounts, receive their debit cards and cheque books without having to visit a branch or complete any paperwork. According to Mathieu Vasseux, “Regulators are embracing fintech and open-banking, we are now seeing an accelerated push by the central banks and Capital Market Authorities (CMAs) to leapfrog on the fintech environment which is disrupting the competitive landscape massively.” GCC-based lenders, as well as their international peers operating in the region, are looking for disruptive ways to free themselves from the shackles of their legacy infrastructure and embark on futuristic digitally-creative banking journeys.
“For an industry whose product—the movement and storage of money—is electronic, the processes are still far too manually intensive,” added Ted Moynihan, the Managing Partner and Global Head of Financial Services at Oliver Wyman. GLOBAL-PERSPECTIVE On a global scale, digital challengers are providing inspiration and motivation for existing firms to embark on new builds. South Korean digital bank Kakao attracted six million signups in less than a year. Furthermore, In the UK Monzo, Revolut, and other digital banks grew their customer base from 0.6 to 2.5 million customers in a year. US-based Chime has opened more than two million
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THE MARKETS
GCC REGULATORS ARE EMBRACING FINTECH AND OPEN-BANKING, WE ARE NOW SEEING AN ACCELERATED PUSH BY THE CENTRAL BANKS AND CAPITAL MARKET AUTHORITIES (CMAS) TO LEAPFROG ON THE FINTECH ENVIRONMENT WHICH IS DISRUPTING THE COMPETITIVE LANDSCAPE MASSIVELY. — Mathieu Vasseux, Partner and Head of Financial Service at Oliver Wyman Financial Service (MEA)
Mathieu Vasseux
no-fee transaction accounts to date, Goldman Sachs also launched Marcus in the US and Europe allowing it to enter consumer banking. Banks are going digital, adapting t e ch n o l o g i e s w h i ch c a n s i m p l i f y customers’ lives and make their banking experience as seamless and secure as possible. Emirates launched Liv—a digital lifestyle banking that allows customers to open bank accounts instantly as well as allowing money transfer through social media. Similarly, Royal Bank of Scotland (RBS) is set to unveil a standalone consumer digital lender called Bó as it plots a fightback against the technology ‘unicorns’ which are threatening to lure millions of customers from their wellestablished rivals.
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The Oliver Wyman report said that some of these businesses may not yet be profitable, but over time the digital challengers and greenfield businesses will use what is called ‘flywheel momentum,’ collecting more data, developing new propositions with that data and attracting more talent. Vasseux said that to be successful financial institutions need to have the same advantages as digital challengers—while also using their deep pockets, extensive customer networks and vast troves of data. The greenfield is an attempt to deliver a customer offering to match or exceed the challengers. Using modern technology, an open platform and third-party services, new banking and insurance platforms can be built within a year, at a cost of between $10 million and $60 million.
Financial services firms will hope to outcompete fintechs with greenfield platforms while having the advantage of tremendous resources and an existing customer base from day one. Moreover, in the foreign exchange market, regional players like Finablr’s UAE Exchange and Unimoni in Africa are roping in blockchain to outdo well established foreign exchange companies like Western Union and Moneygram. Last month the duo became the first in their category in the MENA region to implement blockchain-based money transfer services. UAE Exchange and Unimoni will use Ripple’s blockchainbased RippleNet platform to provide seamless cross-border transactions to Thailand—with plans in place to extend it to other countries. The biggest demography of fintech users are millennials, individuals born between 1980 and 2000. Millennials are also in their prime spending years as well as sustainable investments. Understanding the techie needs of this class, is crucial for banks to sustain market share, build products and tailor products as well as services to meets the expectations digital bankers. Wellestablished lenders should rope in digital start-ups and invest in resources and services that sustain them as technology keeps on evolving and transforming the banking industry.
LEGAL PERSPECTIVE
IFRS 16 AND ITS CONSEQUENCES Meenakshi Sundaram, Tax Director with KPMG Oman, discusses the potential implications of the new accounting treatment from an Oman tax perspective
(PHOTO CREDIT:CHILLCHILL_LANLA/SHUTTERSTOCK)
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Depreciation on ROU and interest expense on the liability will be charged to the income statement instead of showing the operating lease payment as an expense. From a lessee’s perspective, this is a significant change compared to the existing standard (IAS 17). The Oman Income (the tax law) requires all taxpayers to follow IFRS when preparing their financial statements. The also requires adjustments to the accounting profit to arrive at the taxable income, only in case of matters which are specifically addressed by the such as depreciation, remuneration to members, provisions, etc.
UNDER IFRS 16, BOTH FINANCE AS WELL AS OPERATING LEASES NEED TO BE REPORTED ON THE BALANCE SHEET OF LESSEES, WITH SOME EXCEPTIONS. Meenakshi Sundaram
T
he International Financial Reporting Standards (IFRS)— adoption of which is mandatory for businesses preparing statutory financial statements under IFRS—have undergone significant changes in the last decade. Companies across the globe have made considerable efforts to implement revenue recognition (IFRS 15) and financial instruments (IFRS 9) standards for their 2018 reporting. The next big change is in IFRS 16 (leases standard), which is mandatory from 1 January 2019. Earlier adoption is permitted for entities under certain conditions. Under IFRS 16, both finance as well as operating leases need to be reported on the balance sheet of lessees, with some exceptions. The balance sheet of lessees would, for the first time, show an operating lease as a ‘Right of Use’ (ROU) asset with the associated liability for future payments.
There have been many changes to the IFRS. Changes include interpretations occasionally issued when taxpayers have also followed the accounting treatment for tax purposes in the absence of specific provisions in the tax law, requiring them to disregard the accounting treatment specified by IFRS. As this does not require changes to the accounting profit with respect to IFRS 16, the taxable income/loss should be the same as the accounting profit. However, there are several factors that need to be considered before reaching such a conclusion. In order to allow deductions for expenses during the tax assessment process, the tax authority usually requires documents such as agreements, invoices and proof of payment to support claims. With respect to depreciation on ROU and interest expenses on the liability for future lease payments, the lessee will not have supporting documents to directly support a claim for expenses.
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LEGAL PERSPECTIVE
Meenakshi Sundaram
They will instead have to provide a reconciliation between the expense appearing in the income statement and the underlying supporting documents evidencing the operating lease payments. The expense claim will not agree with the legal form of the operating lease agreement and payments, however the reconciliation mentioned above will demonstrate that the claim is in agreement with the underlying documents and the substance of the arrangements. There is nevertheless a risk that the tax authority might disregard a claim as shown in the income statement and instead allow deductions only for the periodical operating lease rental payments, as is currently being done (prior to the adoption of IFRS 16). Other challenges that will arise include the classification for ROU assets (intangible assets) and therefore the rate of tax depreciation (applying over the period of benefit or right of use) and the applicability
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GIVEN THE UNCERTAINTIES INVOLVED, IT WOULD BE IMPORTANT FOR BUSINESSES TO CAREFULLY EVALUATE THE TAX IMPLICATIONS OF ADOPTING IFRS 16 AND ACCOUNT FOR TAXES APPROPRIATELY. Meenakshi Sundaram, Tax Director with KPMG Oman
of thin capitalisation rules with respect to the operating lease liability, if the lessor and lessee are related parties. If the tax authority considers the form of the transaction to take precedence over its substance, it would allow deductions for lease rental payments and disregard depreciation on ROU and interest on lease liability for tax purposes. This would give rise to temporary differences. In this case, deferred tax would need to be recognised in accordance with IAS 12–Income Taxes. Lastly, under the tax law, withholding tax (WHT) is applicable on specific categories of payments made to foreign persons. Lease payments and interest payments form part of the categories that are subject to WHT. In case the tax authority accepts the accounting treatment followed under IFRS 16, then the question will be whether WHT should be accounted for at the time the operating lease payments are due or on the recognition of liability associated with the ROU asset. Accrual of interest cost will also need to be considered. The latter could result in the WHT liability possibly accruing much earlier. However, this is not appropriate as the liability created towards the ROU asset is only for the purpose of the accounting requirement under IFRS 16. The payment to the lessor is not due and it will be payable only at a later stage as per the lease agreement. In accordance with the tax law, for the purpose of WHT, the liability should arise only when amounts become due or paid, whichever is earlier. Given the uncertainties involved, it would be important for businesses to carefully evaluate the tax implications of adopting IFRS 16 and account for taxes appropriately.
Please note that no information delivered as part of this article should be construed as legal advice from us, nor is it intended to be a substitute for legal counsel on any subject matter.
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COVER INTERVIEW
Tareq Muhmood
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COMMITTED TO A CAUSE Tareq Muhmood, the Acting Chief Executive Officer of Ahli United Bank Kuwait is focused on technology, talent and the Kuwaiti economy
H
ow would you describe AUB Kuwait’s performance in 2018? And what are your focus areas this year? The team and I were extremely proud of the performance in 2018. We delivered disciplined and sustainable growth in our core business areas, whilst also working on initiatives around improving the customer experience and our end to end processes. From a financial perspective, we delivered growth in our net profit of 15.3 per cent (from KWD 44.5 million in 2017 to KWD 51.3 million in 2018). This growth was delivered through above industry growth in our corporate lending book, whilst keeping a strong discipline on credit standards and our cost base. The results were further supported with greater contributions from our retail and treasury lines of business. The return on average equity (ROAE) and return on average assets (ROAA) of 14.2 per cent and 1.4 per cent respectively continue to be amongst the best returns in the market.
More important than the numbers, was the impact we had on supporting our customers with their ambitions. During the year we supported businesses with their financing needs ranging from Kuwait’s oil exports (through purchasing additional tankers), to enhancing the domestic public transport infrastructure. We enhanced our retail products by adding life insurance to financing solutions to better protect our customers. These are several examples of how we are positively impacting the community we are part of. Our investment in technology continued. This covers improving our IT architecture and constantly addressing cybercrime risks, to initiatives to improve our mobile application and internet banking. As an example, Ahli United Bank is presently the only bank in Kuwait that offers an advanced cash management solution (B2B) to customers on a mobile app.
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COVER INTERVIEW
In addition, we added enhancements to our retail mobile app that allows greater functionality and user experience. Internally, we adopted various technologies to reengineer a number of our core processes including payments and account opening. A key landmark was the opening of our ‘concept’ branch in Avenues phase four. The branch provides digital tools that will continue to evolve over the coming months. When we see solutions working in this branch, such as video banking, we will consider extending them to other locations. We have more initiatives in our pipeline that should make 2019 another exciting year. In addition to the all the above initiatives a key part of our responsibilities is to ensure we keep a strong culture of governance and robust controls over our business. We continued to strengthen areas around our data management, broader IT security, liquidity ratios which all benefited from stronger engagement with our regulator and other stakeholders.
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Kuwait still enjoys a healthy expansion in real estate prices, whether commercial or residential and the commercial sector was the scene of a big improvement in activity and sales in 2018. (PHOTO CREDIT: IBRAHIM MUHAMED/SHUTTERSTOCK)
WE BELIEVE THE PACE OF FISCAL CONSOLIDATION IS SET TO SLOW IN 2019, AND NON-OIL GROWTH IS EXPECTED TO INCREASE. GROWTH PROSPECTS IN THE MEDIUM-TERM WILL DEPEND ON THE SUCCESS OF DIVERSIFICATION EFFORTS AND IMPROVING AREAS SUCH AS THE ‘EASE OF DOING BUSINESS’. — Tareq Muhmood, the Acting Chief Executive Officer of Ahli United Bank Kuwait
AUB is headquartered in Bahrain but has presence in most Middle East markets including Iraq and the UK. Can you explain the dynamics of this network? What makes AUB a special place for both customers and staff is that footprint in key regional markets, and in the United Kingdom. When we look at the growing trade and investment flows across these key markets, it puts AUB in a unique position to support customers across these geographies. In terms of specifics, AUB Group’s has wholly owned operations of AUB (Bahrain) and AUB (United Kingdom), AUB Group has an 85.4 per cent stake in AUB (Egypt), a 74.9 per cent stake in AUB (Kuwait), a 68.9 per cent stake in Commercial Bank of Iraq, a 40 percent stake in United Bank of Commerce & Investment (Libya) and a 35 per cent stake in Ahli Bank (Oman). AUB Group also has Al Hilal Insurance, which offers conventional and Islamic insurance solutions. What this means in practise is we can support customers with their needs in multiple markets across a range of relevant products. For example,
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COVER INTERVIEW
Ahli United Bank Kuwait has a corporate customer investing in Bahrain. Our colleagues in Bahrain are the perfect team to support this corporate. Or a Kuwaiti customer is looking to purchase a property in London as an investment or as a family base. Again, our colleagues in London have a range of solutions that could support them. There are not many this region that operate in this manner.region, that operate in this manner. It’s an acknowledged fact that the GCC is over-banked—hence the wave of consolidations over the last three years. What are your views on this? Some markets in the GCC are more overbanked than others, and there clearly is a growing trend of M&A in the industry. As with any industry, the benefits and risks of a merger applies. The assessment is greater than the discussion of scale or cost benefits. Similarly, aspects such as cultural integration and market positioning will need to be considered to get the most out of any two businesses combining. If you look back in history, many markets witnessed waves of consolidation in the Banking sector. At the same time, smaller players can still thrive and do well. Having taken over the reign this year, how do you plan to navigate persisting challenging conditions? It is a tremendous honour being part of the team that run the oldest operating bank in Kuwait. Our history is unique, and the contribution to supporting the prosperity and ambitions of the community in Kuwait is second to none. As part of this Ahli United Bank has managed to reinvent itself a number of times to ensure it stays relevant to the market in Kuwait. The last significant re-invention was when the Bank converted from conventional to Islamic in 2010.
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PRIVATE BANKING IS A KEY LINE OF BUSINESS… OUR HISTORY, TRUST AND DELIVERY IS A KEY DIFFERENTIATOR. — Tareq Muhmood, the Acting Chief Executive Officer of Ahli United Bank Kuwait
We are presently going through a digital reinvention, where we looking at all aspects of our business and seeing how we can leverage technology to improve. Some tools are internal, such as collaboration platforms. Some tools are external, such as giving customers more insights on their finances so they can make better decisions. We have a team that has an exciting mix of long serving experienced bankers combined with youthful energy and creativity. Their passion every day to drive improvements and deliver to the customers creates a good learning and evolving environment. We have regular informal and formal discussions, and through this we are navigating to an exciting future ahead. How big is AUB’s private banking business in Kuwait? Do you have any expansion plans on this? Private Banking is a key line of business. It has grown well in recent years, with more customers doing more business with us. This ranges from discussing their wealth needs or seeking financial support for a project they are working on. We are adding to this team, as we do see this sector growing in a sustainable manner. Our history, trust and delivery is a key differentiator. The Kuwaiti government undergoing economic transformation agenda. How does AUB’s future plans fit into this? Since 1947, we have played a role in developing Kuwait’s economy.This contribution continues and is growing. Our Corporate & Treasury teams are closely engaged with Ministries, the private sector and other agencies to ensure we remain actively engaged. We also review how this impacts the retail sector, and position ourselves appropriately. For example, we see a growing need for leasehold property in Kuwait for the industry sector. As a result we developed a tailored financial structure that supports our customers how have needs in this area.
WE DELIVERED GROWTH IN OUR NET PROFIT OF 15.3 PER CENT (FROM KWD 44.5 MILLION IN 2017 TO KWD 51.3 MILLION IN 2018). THIS GROWTH WAS DELIVERED THROUGH ABOVE INDUSTRY GROWTH IN OUR CORPORATE LENDING BOOK, WHILST KEEPING A STRONG DISCIPLINE ON CREDIT STANDARDS AND OUR COST BASE. — Tareq Muhmood
With so many risks and challenges facing GCC economies at the moment, what are your projections on the banking sector in Kuwait? Following an active strategy and engagement by the Central Bank, the Kuwait banking sector is in a very strong position. This has also been highlighted by the rating agencies and organisations such as the World Bank. The stability of the currency, strengthened liquidity and improved nonperforming loan ratios are key success measures. However, for me, the key source of optimism is the quality of the talent available in Kuwait. Some of the current leaders in the industry and the younger leaders coming up, are truly world class. The training and development opportunities available are excellent.
In terms of future growth, Kuwait still enjoys a healthy expansion in real estate prices, whether commercial or residential and the commercial sector was the scene of a big improvement in activity and sales in 2018. Consumer spending also remains strong in Kuwait and debt/GDP level amongst the lowest in the region. We believe the pace of fiscal consolidation is set to slow in 2019, and non-oil growth is expected to increase. Growth prospects in the mediumterm will depend on the success of diversification efforts and improving areas such as the ‘ease of doing business’. Overall, the Banking sector will remain strong and support the economy. It’s overall growth, as with any geography, will depend on the rest of the economy. Having worked in various markets and organisations over the last 24 years, what is your current approach in leading AUB Kuwait into a more profitable trajectory? Having worked in over 10 geographies in my career with three world class banks (HSBC, ANZ and AUB) I am really fortunate to have had the experiences that I have had. The team at AUB Kuwait are determined to deliver growth, through supporting individuals, companies and the broader community with their ambitions. My role is to make sure the team are empowered with the right tools to deliver this. We are working though a number of initiatives which includes improving our customer experiences through the mobile, ATM, call centre and branch. At the same time, we are using technology to improve our operational back bone and operate in a more agile manner. A key part to this is also organising our data so we can make better informed decisions. It is an exciting time to be part of Ahli United Bank. With what the team are working on, we can expect our growth to continue.
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COUNTRY FOCUS
FROM HERE TO MODERNITY Saudi Arabia has the difficult job of convincing the world that it is as progressive as it says it is
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However, Saudi Arabia is working hard to win back the world’s confidence and woo investors. In January, it advertised a SAR 1.6 trillion ($429 billion) investment opportunity in its infrastructure and industrial programme. “It is quite ambitious, but it is over a 10-year period, so we have the time to do it,” said Energy Minister Khalid al-Falih, at a press conference last month. The Kingdom has also put the longawaited listing of state-owned oil giant Aramco back on the table. At the time of Degolyer’s survey, many thought he was exaggerating; however, his estimates have since proved quite conservative. A thorough audit by the petroleum consulting company later found that Saudi Arabia’s oil wealth is even more humongous than previously thought.
(PHOTO CREDIT: HANSMUSAE/SHUTTERSTOCK)
W
hen prominent oilman Everette Lee DeGolyer, founder of applied geophysics in the petroleum industry, surveyed the Gulf as part of the war effort in 1943 he was quoted as declaring that “The oil in this region is the greatest single prize in all history.” However, international investors may no longer agree. There is no getting away from the fact that Saudi Arabia has made some serious diplomatic faux pax in 2018. From squabbles with Canada and Germany to the incident in Istanbul that caused some of Saudi Arabia’s biggest foreign business partners to snub its headline conference in October 2018, it has been tainted by controversy.
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COUNTRY FOCUS
TAKING STOCK In a giant leap towards transparency, the Saudi authorities commissioned t h e i n d e p e n d e n t a s s e s s m e n t by DeGolyer and MacNaughton. The move paid off. The audit showed that statecontrolled Aramco, previously painted as a secretive giant, had 263.1 billion barrels of oil waiting to be tapped at the end of 2017—2.2 billion barrels more than it reported in its last annual review. Aramco’s natural gas reserves stood at 319.5 trillion cubic feet, up from the 302.3 trillion cubic feet previously reported. “This certification underscores why every barrel we produce is the most profitable in the world, and why we believe Saudi Aramco is the world’s most valuable company and indeed the world’s most important,” Energy Minister, Khalid Al-Falih, said in a statement posted by Saudi’s state news agency. Saudi Arabia has been dancing around Aramco’s IPO since Crown Prince Mohammed bin Salman first floated the plans in 2016. The historic IPO, which would be the largest in history, has been delayed by a series of indecisions about where to list it and a failed effort to attract an ambitious value of $2 trillion. Saudi Arabia has silenced its doubters, the Crown Prince is hoping to raise $100 billion from the IPO to fund his ‘Saudi Vision 2030’, which has bought the Kingdom much positive press. However, with oil prices heading upwards, there is no rush and Aramco’s stock market debut has been pushed back to 2021. GOOD BUDGETING Saudi’s budget for 2019 also contained some crowd-pleasing surprises. It was announced that the Government would keep paying its citizens cost of living allowances and increase state spending by more than seven per cent to SAR 1.11 trillion ($295 billion) in 2019.
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The
2019 SAR 131 2018 SAR 136
budget deficit is estimated to amount to billion which is lower than the expected
deficit of
billion
Mohammed Al-Jadaan, Minister of Finance, said, “the 2019 Budget illustrates the strength and resilience of the Saudi economy, and the continued efforts to improve government performance levels, enhance spending efficiency, adopt the highest standards of transparency and implement comprehensive reforms. Saudi citizens are always the top priority in all government efforts to build a stronger economy and to promote economic and social development in the medium term.” Saudi Arabia’s Government can afford to be generous. It predicts that revenues will rise nine per cent to SAR 975 billion this year. The 2019 budget deficit is estimated to amount to SAR 131 billion (4.2 per cent of GDP), which is lower than the expected 2018 deficit of SAR 136 billion (4.6 per cent of GDP). This has impressed obser vers. Following the pre-budget statement in September, the IMF raised its projections for economic growth in Saudi Arabia to 2.4 per cent, 0.5 percentage points higher than it predicted last April, thanks to “a pickup in non-oil economic activity and a projected increase in crude oil production.” Moody’s Investor Service has been even more enthusiastic, raising its GDP growth forecasts for 2018 and 2019 to 2.5 per cent and 2.7 per cent respectively, quite a jump from its previous expectations of 1.3 per cent and 1.5 per cent. The rating agency’s revised numbers are even more optimistic than the Saudi Government’s, which estimates that real GDP will grow by 2.6 per cent in 2019 compared to 2.3 per cent in 2018. Both the IMF and Moody’s enthused about the Kingdom’s plans to diversify its economy away from oil. S&P noted a substantial improvement in projected current account surpluses. It expects that Saudi Arabia’s liquid external assets, net of external debt, will average about 200 per cent of current account payments over 2018-2021.
“This figure has weakened somewhat, because we expect an increase in public sector external debt, following the Public Investment Fund’s raising of an $11 billion syndicated loan in September 2018,” the rating agency said. “Gross external financing needs will likely remain below 40 per cent of the sum of usable reserves and current account receipts over the same period, suggesting ample external liquidity. and higher foreign currency reserves than we had previously projected.” Early indications suggest that the Kingdom’s diversification efforts are already paying off. In 2018, there was a 12.4 per cent increase in non-oil revenues. The contribution of non-oil revenues to the overall total has surged from 12 per cent in 2014 to 32 per cent in 2018. However, these figures may not be as pleasing to the citizens of Saudi Arabia, as the rise in revenues largely came at their expense. Last year kicked off with the introduction of a five per cent VAT, a 130 per cent hike to petrol prices, increases to household electricity tariffs and an increase in levies on expatriates. Moody’s highlighted that revenues in the first half of 2018 rose by 43 per cent compared to the same period in 2017. Hardly surprising, as average oil prices were around 37 per cent higher than in 2017, and proceeds from tax revenues on goods and services tripled. Efforts have also been made to improve the business environment and promote SMEs and financial sector reforms, the World Bank cheerfully noted in its Economic Outlook for the Kingdom. A draft law on private sector participation was published for public feedback in July 2018, a good move towards greater transparency. LABOUR PAINS Critical reforms are also underway in the labour market. A large quota-based policy for Saudi nationals has shown
IN OUR VIEW, POLITICAL RISKS ARE HIGH COMPARED WITH PEERS AND HISTORICAL NORMS, DUE TO SAUDI ARABIA’S PROMINENT ROLE IN A VOLATILE REGION, THE COUNTRY’S INCREASINGLY ASSERTIVE AND UNPREDICTABLE FOREIGN POLICY AND THE RAPID PACE OF CHANGE DOMESTICALLY. — Fitch Ratings
positive results in terms of increasing employment of Saudi nationals, including women, in the workforce; however, it faces broader questions in terms of its impact on private sector growth and productivity. Some consequences are already painfully clear. Levies on expatriate labour in Q1 2018 and other disincentives for expatriate employment have resulted in nearly a quarter of a million foreign workers leaving Saudi Arabia, especially in construction. “A key challenge relates to the provision of adequate labour to support sustained growth,” the World Bank wrote in a recent study. “There is significant churn in the labour market with the ongoing departure of expatriate labour, but job creation for nationals has been lagging, and the number of workers in the private sector has declined for the first time since 2005.” However, Fitch believes the pain will be short-term. “These reforms are targeted at recharging the Saudi economy by finding ways to reduce the high levels of unemployment by giving women and Saudi nationals, rather than expats or migrant workers, a greater opportunity to enter the labour force,” it said. In particular, the government is focusing on retail and consumerfacing sectors for job creation, as the country aims to add 1.2 million jobs to the economy by 2022. The first phase of Saudisation went into effect in September 2018, when car dealerships and sellers of clothing and furniture were required to employ locals for 70 per cent of jobs. The second phase started in November 2018, which covered electrical and electronics shops, watch shops and optical stores. The third and most recent phase went into effect in January 2019, with jobs in building material shops, medical appliances and equipment shops, autos spare parts shops, carpet shops and confectionery shops and patisseries, becoming nationalised.
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COUNTRY FOCUS
“While these measures will increase labour costs for companies over the short-term, and will likely result in scaling back expansion or even closures of stores owned by expats, the Saudi nationalisation agenda will reduce unemployment, particularly among youths, boosting job and wage prospects for the Saudi population,” Fitch said. The sweeping socio-economic reforms are partly rooted in efforts to boost the Saudi economy, including encouraging Saudi citizens to spend their money domestically rather than travelling to neighbouring UAE and Bahrain for their retail therapy. Furthermore, the social liberalisation and reforms are also a way to soothe its large young adult population, whom the Crown Prince is counting on for support. The Government has also been making efforts to nurture its small businesses, which are the lifeblood of its economy. SMEs account for around 95 per cent of registered businesses, 38 per cent of jobs (of which 80 per cent are held by expatriate workers), 20 per cent of GDP, and only about two per cent of bank lending. The IMF hopes that the expansion of private equity and venture capital, including through the recently established Fund of Funds and SME investment fund, and the restructuring of the Kafalah loan guarantee programme will help improve SME access to finance. TWO BECOME ONE There have also been exciting developments in Saudi Arabia’s banking sector, with the first merger in nearly two decades signed and sealed. In October, the boards of Saudi British Bank (SABB) and Alawwal Bank approved a binding agreement to merge the two institutions, creating what will be Saudi Arabia’s thirdlargest bank. Moody’s said it should be a happy marriage, which will provide increased diversification and lending opportunities in a slow economic environment.
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GOING FORWARD, MORE FAVOURABLE OIL PRICES MAY WEAKEN THE DRIVE TO TACKLE PUBLIC-SECTOR COMPENSATION, WHICH DISTORT LABOUR MARKET INCENTIVES IN THE COUNTRY. — WORLD BANK
Although banks in Saudi Arabia are sparser than in other GCC countries, they have struggled to drum up business. Credit and deposit growth remain weak, according to the IMF, but both are expected to strengthen due to higher government spending and non-oil growth. “Bank profitability should increase as interest margins widen, and banks remain well capitalised and liquid,” the IMF said. Consumer confidence continues to grow across the Kingdom, according to Fitch. Overall, consumers are now more optimistic about the state of the economy than they have been in the past year. This is reflected in the growth in point of sales transactions, with the second half of 2018 reporting significantly high growth rates, reaching a high of 28.1 per cent y-o-y in December 2018. Consumer loans rose by 5.1 per cent in in the third quarter of last year, having returned to positive territory in the
second quarter following five consecutive quarters of either flat or negative growth. Total credit card loans have also seen significant growth, with growth rates above 20 per cent for the three quarters in 2018. “Although factors such as expat outflows and political uncertainty may offset these positive trends to some extent, we still expect higher confidence levels and rising credit uptake to support an acceleration in private consumption growth over the coming years,” Fitch said. Nonetheless, Saudi Arabia still has its work cut out convincing the world that it is a safe bet. “In our view, political risks are high compared with peers and historical norms, due to Saudi Arabia’s prominent role in a volatile region, the country’s increasingly assertive and unpredictable foreign policy and the rapid pace of change domestically,” Fitch said. S&P has also voiced concerns. “We expect the longstanding tension with Iran to remain high,” it said. “Saudi Arabia’s war in Yemen contributes to military and security services being the single largest spending item, at about 30 per cent of total government expenditures. We do not expect any of these foreign policy challenges to significantly impact the domestic economy. Rather, we believe that they add to the government’s already heavy policy programme, which could weaken its commitment to its fiscal adjustment plans.” Higher oil revenues could also distract the Government from its diversification efforts. “Going forward, more favourable oil prices may weaken the drive to tackle public-sector compensation, which distort labour market incentives in the country,” the World Bank said. Saudi Arabia also needs to attract vast investments to stoke its Vision 2030. To do this, it needs to keep up the momentum for political and social reforms. Otherwise, the world may decide that what was once the greatest prize in history is now the booby prize.
SAUDI ARABIA in numbers POPULATION
GDP PER CAPITA (000s)
33.9 million
10m
50m
Source: Worldometers (2019)
GDP NOMINAL GDP (US$ billions)
645 (2016) 687 (2017) 780 (2018) 801 (2019 – projected) OIL REVENUES FROM EXPORTS (SAR billions)
314 (2016) 416 (2017) 586 (2018) 580 (2019 – projected) Source: IMF
REAL GDP GROWTH
UNEMPLOYMENT RATE
20.3 (2016) 21.1 (2017) 23.3 (2018) 22.6 (2019)
5.6% (2016) 6.0% (2017) 6.1% (2018) 6.1% (2019)
Source: Standard & Poor’s
Source: IMF
BUDGET ACTUAL 2018
PROJECTED 2019
Revenues
SAR 895 billion
SAR 975 billion
Expenditure
SAR 1030 billion
SAR 1106 billion
Deficit
SAR 136 billion, 4.6% of GDP
SAR 131 billion, 4.2% of GDP
Public Debt
SAR 560 billion 19.1% GDP
SAR 678 billion, 21.7% of GDP
GDP
+2.3%, non-oil +2.3%
+2.6%, non-oil +2.5%
Source: Saudi Arabia Ministry of Finance
FISCAL INDICATORS CURRENT ACCOUNT BALANCE/GDP
DEBT/GDP
(3.7)% (2016) 2.2% (2017) 9.6% (2018) 8.0% (2019 – projected)
13.1% (2016) 17.2% (2017) 19.3% (2018) 23.1% (2019 – projected)
Source: IMF
Source: Standard & Poor’s
1.7% (2016) (0.9)% (2017) 2.3% (2018) 2.2% (2019 – projected)
(0.2)% (2016) (0.6)% (2017)
Source: Standard & Poor’s
Source: Standard & Poor’s
FDI/GDP
0.3% (2018) 0.5% (2019) bankerme.net
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DEBT CAPITAL MARKET
DEBT WISH A new white paper says that the GCC debt market offers investors emerging market exposure with the comforts of a developed market
G
lobal debt capital markets were not for the faint-hearted in 2018. The year was one of turmoil in the global fixed income space, as the great bull-run in bond markets screeched to a halt. However, MENA fixed income instruments provided a relative oasis of calm, according to a white paper titled MENA debt: an evolving world for fixed income investors. The numbers speak for themselves. The GCC benchmark index returned 0.30 per cent in 2018 compared to -1.72 per cent for the emerging market benchmark JP Morgan CEMBI Index, and -1.20 per cent for the Bloomberg Barclays Global Aggregate Index. MENA hard currency bond and Sukuk issuance reached $84 billion in 2018, with demand for new issues remaining high as regional debt was oversubscribed 2-2.5 times, according to the white paper by Emirates NBD Asset Management, KAMCO Investment Company and Fisch Asset Management. The paper champions arguments to invest in GCC bonds in 2019. GCC bonds are now included in the JP Morgan EMBI index series and more outward-looking policies aimed at integration with global markets are increasing the breadth of financial instruments traded in the region, which is good news for foreign and domestic investors. Faisal Hasan CFA, Head of Investment Research at KAMCO Investment Company,
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said, “Reforms being implemented across MENA make it an attractive destination for global investors—spending on infrastructure remains a priority for policymakers and expanding the non-oil sector to diversify economies away from oil dependence has received support from almost all governments in the region.” ARABIAN MIGHT Financial markets in the MENA region are evolving at a fast pace and catching up to other emerging economies by developing more advanced regulation, a supportive legal environment and a sophisticated investor community, the report says. Furthermore, the GCC’s share of global GDP is expected to increase from 1.8 per cent in 2015 to two per cent in 2019, while its share of emerging markets GDP is expected to increase from 4.7 per cent to five per cent.
Debt-to-GDP ratios among most GCC issuers remain very healthy, especially when compared to similarly rated emerging market peers, despite some having risen sharply. On the equity side, the recent inclusion of Kuwait and Saudi Arabia in emerging market equity indices owned by MSCI, FTSE Russell and S&P Dow Jones comes on the back of a number of positive changes made to trading systems and regulations. On the fixed income side, GCC bonds’ inclusion in the JP Morgan EMBI will result in increased foreign participation. Reforms have also been aimed at increasing transparency to boost investor confidence and at the same time provide ample supervision and oversight to protect investors. These changes have helped, to a great extent, in limiting the impact of political events and decorrelating them from financial markets.
MENA HARD CURRENCY ISSUANCE >USD200 MILLION
Non-sovereign issues Source: KAMCO Research
Sovereign issues
AN IMPORTANT DRIVER FOR INVESTORS, WHOSE DEMAND ENCOURAGES NEW SUPPLY, HAS BEEN A WIDENING OF SPREADS AS A CONSEQUENCE OF RISING INTEREST RATES IN THE US.
An important driver for investors, whose demand encourages new supply, has been a widening of spreads as a consequence of rising interest rates in the US, according to the report. Until a new equilibrium in the rate market is found, emerging markets remain attractive alternatives for allocation, with GCC countries among the most appealing of all. The report argues that the GCC fixed income space offers investors the best of both worlds, as it has characteristics of both developed markets and emerging markets. In addition, traditionally attractive emerging markets such as Turkey, with twin deficits, are experiencing growing pressure—encouraging investors to reallocate to markets such as those in the GCC, where a relative ‘haven’ can be found. INDEX INTELLIGENCE GCC sovereign and quasi-sovereign debt will become eligible to be included in the JP Morgan Emerging Market Bond Index (EMBI) series from 31 January 2019. Both conventional bonds and Sukuk will be eligible for index inclusion, however Sukuk will need to have a credit rating from at least one of the three major rating agencies. Approximately $300 billion worth of assets are benchmarked against the JP Morgan EMBI series, so this inclusion could translate into around $30 billion of additional inflows to GCC debt instruments.
FIXED INCOME ISSUANCE (LOCAL AND HARD CURRENCY) IN MENA (USD BILLION)
Bonds
Sukuk
Source: Bloomberg, KAMCO Research
MENA SUKUK ISSUANCE IN 2018 - SECTOR DISTRIBUTION
Government Financials Utilities Industrials Materials Consumer discretionary Energy Healthcare
Source: Bloomberg, KAMCO Research
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DEBT CAPITAL MARKET
Furthermore, the benchmark index inclusion provided a strong technical bid for regional debt in 2018, as active investors positioned ahead of the actual implementation date. “We expect to see a further boost as passive asset allocators follow suit in February 2019,” the report said. “Saudi Arabia, United Arab Emirates, Bahrain and Kuwait are expected to have an approximate weight of 3.1 per cent, 2.6 per cent, 2.1 per cent and 0.8 per cent, respectively.” “As a result, after the additional emerging market index inclusion to attract inflows and improve transparency of these high-quality names, the average rating of the index is expected to improve.” Oman is already in the index with a weight of two per cent. On an aggregate basis, the GCC is expected to represent about 13 per cent of the Index. With the inclusion of GCC countries, the average credit quality for the Middle East basket will move above the global emerging market sovereign bond universe average.
The GCC benchmark index returned
0.30% -1.72% -1.20% in 2018 compared to
for the emerging market benchmark JP Morgan CEMBI Index, and
for the Bloomberg Barclays Global Aggregate Index
The risk premium will thereby turn in favour of the Middle East basket, and regional bonds will trade at lower credit spreads compared to average emerging market levels, according to the white paper. The average credit quality for the Middle East sovereign universe at the end of 2018 was two notches lower than for global emerging market sovereign bonds, so these sovereigns had to pay an aboveaverage risk premium. The premium has increased by 50 per cent from 60 bps to 90 bps in the last five years. RISKY BUSINESS If oil prices were to remain below $60/ barrel for a three to five-year period, oil-exporting countries may face widening deficits, which would make a reassessment of credit quality by the rating agencies likely. Additionally, the lower risk premiums for MENA credits would adjust to align with wider emerging markets.
SOVEREIGN BONDS GLOBAL EM VS MIDDLE EAST
J.P. Morgan - EMBIG Diversified Source: Bloomberg
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J.P. Morgan EMBI Global Diversified Middle East North Africa
Difference
Average
The volatility of current account balances, caused by oil price movements, make the region vulnerable, the report warned. However, large foreign reserves in the form of sovereign wealth funds provide a cushion to ride out any short-term volatility. The case for fixed income portfolio allocation to MENA is supported by the growing share of global GDP represented by the region, which for the GCC is expected to increase from 1.8 per cent in 2015 to two per cent in 2019, while its share of emerging markets GDP is expected to increase from 4.7 per cent to five per cent. Less than a month into 2019, the GCC delivered $9.1 billon in issuance from both sovereigns and corporates, including the Saudi sovereign, First Abu Dhabi Bank and Dubai Islamic Bank, setting the scene for the rest of the year. In addition, there are market-wide expectations that Saudi Aramco will issue debt in 2Q19 to fund its SABIC stake acquisition. Hasan said, “Regional gross government debt as a percentage of GDP increased from 29.7 per cent in 2014 to 44.4 per cent in 2018, after a series of issuances. Fiscal deficits for most MENA countries have been the reason for an increase in government debt, and this trend is expected to continue in 2019—providing a fresh set of opportunities for investors.”
UNTIL A NEW EQUILIBRIUM IN THE RATE MARKET IS FOUND, EMERGING MARKETS REMAIN ATTRACTIVE ALTERNATIVES FOR ALLOCATION, WITH GCC COUNTRIES AMONG THE MOST APPEALING OF ALL.
GCC FINANCIALS: SUBORDINATED TO SENIOR DEBT SPREAD RATIO
Subordinated spread
Senior spread
Ratio (RHS)
Source: Bloomberg
The region carries a risk premium. The paper also highlights that, while regional bonds look attractive on a ratingsadjusted basis against other emerging markets, there are a range of important considerations for investors: these include geopolitical uncertainty; possible rating downgrades, although in the case of most sovereigns this is mitigated by diversification initiatives; increased supply carrying the risk of a glut outstripping demand; and the region’s over-reliance on oil as a revenue source. Banks and corporates are more exposed to downgrades, with the recent example of National Bank of Oman’s re-rating to BB+ by Fitch putting it into the high yield category. Credit events of this kind usually lead to repricing, as certain investors are forced to sell bonds due to rating constraints. Overall, the white paper did not report a great deal of rating pressure for the region in 2019, but any downgrades that do occur could damage sentiment. Parth Kikani CFA, Director Fixed I n c o m e a t E m i r a t e s N B D As s e t Management, said, “Last year, GCC fixed income provided a safe haven during a sustained EM sell-off period. For 2019, we think risks are more balanced,
and investors will need to be more discerning in credit selection. While risks stem from further oil price volatility, increased issuance and geopolitical uncertainty, investors may benefit from attractive risk premiums, improving fundamentals and the benefits of index inclusion leading to efficient price discovery. “Moreover, with most GCC currencies pegged to the US dollar, this reiterates an attractive relative risk premium amid weakening emerging market FX rates and a stronger US dollar.” Philipp Good, CEO and Head of Portfolio Management at Fisch Asset Management, concluded, “An important driver for investors, whose demand encourages new supply, has been a widening of spreads as a consequence of rising interest rates in the US. Until a new equilibrium in the rate market is found, emerging markets remain attractive alternatives for allocation, with GCC countries among the most appealing of all. Most countries are pushing their reform agendas, and the balancing of the pace of reform will be one of the key drivers for stability in the region. Meanwhile, oil price performance remains crucial, and a key driver for credit.”
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INVESTMENTS
OUT OF THE DARK INTO ANOTHER LIGHT Whatever happens at a macroeconomic level, Hogan Lovells expects 2019 to be an active year for corporate transactions in the GCC
(PHOTO CREDIT: ARTISTDESIGN29/SHUTTERSTOCK)
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T
ECONOMIC TRENDS he macroeconomic picture is improving significantly across the GCC over the last 12 months, oil production cuts, the more benign fiscal environment translated into improved GDP growth as well as the Saudi Arabia and the UAE’s efforts to reduce the respective countries’ reliance on oil is set to improve GDP in 2019. The increase in oil prices in the third quarter of 2018 and an improved GCC investment ecosystem saw the majority of the regional countries recording fiscal surpluses in 2018 financial. In a report, Investment Outlook 2019, Hogan Lovells stated that Saudi Arabia and the UAE returned to fiscal surpluses in 2018, Oman’s deficit narrowed very sharply, and Bahrain pulled back from crisis, after receiving support from its GCC allies. Additionally, the global and regional framework grows ever more challenging and harder to navigate due to geopolitical tensions, US-China trade—which analyst said may continue throughout 2109, flatulating oil prices among other challenges. The global law firm said that some challenges from 2018 will make the transition into 2019. According to Hogan Lovells, the low hanging fruit has gone,
hindering the high growth rates investors have become used to in the GCC— however there are key opportunities for shaping Gulf economies this year. STOCK MARKETS Whatever happens at a macroeconomic level, 2019 is expected to be an active year for corporate transactions in the across the GCC. The Saudi Stock Market, Tadawul, recently partnered with MSCI Index to launch the tradeable MSCI Tadawul 30 Index ahead of the bourse’s inclusion into the MSCI Emerging Markets Index in May. Sarah Al-Suhaimi, the Chairwoman of the Tadawul, said that she expects qualified foreign investors to increase before and after the inclusion in the MSCI index. Currently, the stock exchange has more than 320 foreign institutions registered and which qualify as foreign
investors. The inclusion into the MSCI Emerging Markets Index is expected to attract billions of dollars in foreign direct investment (funds). Similarly, the Nasdaq Dubai recently launched futures trading on the MSCI UAE equity index last month, in the latest expansion of the exchange’s futures market—a week after Nasdaq Dubai launched single stock futures trading on 12 Saudi Arabian companies. Nasdaq Dubai also signed a licence agreement with FTSE Russell for the exchange to launch derivatives on FTSE Russell’s Saudi Arabia equity indices.
The futures which are set to be launched in the next four months under the licence will be designed to attract global and regional market participants including the many funds that use FTSE Russell’s indices as benchmarks for investing in Saudi equities.
THE ECONOMIC OUTLOOK FOR THE GCC REGION IN 2019 IS PROMISING THE GROWTH OF THE RESPECTIVE GOVERNMENTS’ NONOIL ACTIVITIES. INTERNATIONAL LENDERS ARE EXPECTING MORE OPPORTUNITIES IN THE REGION. — Hogan Lovells
Additionally, index operator MSCI is considering promoting Boursa Kuwait from frontier to emerging market status, a move which will make the country even more suited for foreign investment. In February, a consortium of companies led by Kuwait’s National Investment Company won the tender to acquire 44 per cent of the Kuwaiti stock exchange—the initial public offering (IPO) for the remaining 50 per cent of shares will take place in the fourth quarter of 2019 or the first quarter of 2020.
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INVESTMENTS
Th privatisation of Kuwait stock exchange creates an investment environment of international standards that will attract foreign as well as retain local investment. BANKS The GCC is considered one of the most overbanked regions in the world and there has been an increase in banks consolidating as they seek to stay competitive. Saudi British Bank (SABB) and Alawwal entered into a binding merger agreement last month having started discussions on a potential merger in April 2017. Alawwal Bank and SABB merger will create the Kingdom’s third-largest bank, a top-tier retail and corporate bank with SAR 271 billion in assets. Additionally, Saudi Arabia’s National Commercial Bank (NCB) and Riyad Bank have reached an advanced stage on the proposed merger that will create the Gulf’s third-largest lender with $182 billion in assets. Similarly, Kuwait Financial House (KFH) closed the Ahli United Bank (AUB) merger deal—a purchase which is expected to boost the lender’s consolidated profit by more than 90 per cent from the level in 2018. The duo agreed on a preliminary exchange ratio of one KFH share for every 2.326
AUB shares but they have not revealed the share prices for the exchange ratio. In the UAE, Abu Dhabi Commercial Bank (ADCB) and United National Bank (UNB) agreed to merge and together acquire Al Hilal Bank. The tie-up will create the third largest bank in the UAE, with total assets of AED 420 billion and the third largest Islamic banking franchise in the country. The trio confirmed that the new entity will carry the ADCB identity and Al Hilal Bank will retain its existing name, brand as well as operate as a separate Islamic banking entity within the group. Moreover, although a formal process has not started, Abu Dhabi Islamic Bank (ADIB) is weighing strategic options for its business, including a potential merger. The lender is said to be planning to acquire another banking entity rather than being taken over. SOVEREIGN WEALTH FUNDS According to the Sovereign Wealth Fund Institute, the funds of Saudi Arabia, the UAE and Kuwait have more than $2.8 trillion in assets under management. GCC Sovereign Wealth Funds (SWFs) are investing into global ventures—with the UAE holding a strong position as a gateway for investment into Africa, the US and Europe.
The UAE’s investment vehicle, Mubadala Investment Company has interest in the healthcare, information and communication technologies as well as aerospace, petroleum and petrochemicals, and renewables. Recently, Mubadala’s Healthcare unit acquired Amana Healthcare, a provider of long-term care, specialised rehabilitation and home healthcare services in the UAE. Mubadala also holds shares in United National Bank, Abu Dhabi Commercial Bank and Al Hilal Bank—which are going through a merger and the consolidation is expected to create the third largest bank in the UAE, with total assets of AED 420 billion and the third largest Islamic banking franchise in the country. Similarly, Saudi Arabia’s Public Investment Fund (PIF) is spearheading the Kingdom’s economic diversification programme. The PIF’s is the pockets behind the Crown Prince Mohammed bin Salman’s futuristic NEOM city in collaboration with other international investors. The Kingdom’s sovereign wealth fund boasts of swaths of investment in major technology companies and funds across the globe including Japan-based SoftBank, Uber Technologies as well as Elon Musk’ Tesla. In addition to its
GCC FISCAL BALANCE (% GDP) 15 2017
10
2018
5 0 -5 -10 -15
Kuwait Source: IMF WEO (October 2018)
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Qatar
UAE
Oman
Saudi Arabia
Bahrain
2019
NET INWARDS FDI FLOWS (US$ billion) 2.5 2.0 1.5 1.0 0.5 0.0 Source: SAMA
Q1 14
Q2 14
Q3 14
Q4 14
Q1 14
headline-grabbing investments around the globe, the PIF holds about $133 billion of assets in some of Saudi’s publicly traded companies, including stakes in SABIC, Saudi Telecom Company and National Commercial Bank (NBC). Ba h r a i n’s M u m t a l a k a t ’s c a p i t a l expenditure rose to $1.6 billion from $657 million in 2018. The sovereign wealth fund of GCC’s oldest crude producer has committed $88 million to the local economy to support projects such as the Bahrain International Circuit, Bahrain Real Estate Investment and the Arab Shipbuilding & Repair Yard. Mumtalakat’s assets jumped 46 per cent to $15.4 billion in 2017 after the consolidation of McLaren Group as well as profit rose at the state-controlled Aluminium Bahrain. OPEN FOR BUSINESS GCC governments continue to attract foreign direct investment (FDI) by offering far-reaching reforms, unlocking stateowned assets and loosening restrictions, added Hogan Lovells. New regulations such as the public-private partnerships (PPP) law in Saudi Arabia, the foreign direct investment (FDI) law and debt law in the UAE and possibly Oman are encouraging investors to take a real look at the GCC. The UAE recently issued new investment laws to boost and retain
Q2 15
Q3 15
Q4 15
Q1 16
Q2 16
Q3 16
Q4 16
Q1 17
foreign investment for the country to remain competitive and attract FDI as well as expat talent within the region. Imtiaz Shah, Partner at Hogan Lovells, said, “If the UAE introduced a strong foreign investment law and the right to stay, that would dramatically change the game.” The UAE’s new Foreign Direct Investment Law, the new Debt Law and 10-year visa regulation reflects the government’s commitment to diversify the economy and reduce the GDP from reliance on oil. The UAE has already started implementing these new change—recently the Emirates Development Bank issued international bond under the new debt law. Similarly, Saudi Arabia is also opening its once closed economy to the world. According to Hogan Lovells, Saudi Arabia is the clear focus of investor attention in the region, due to a combination of underdeveloped markets, far-reaching reforms, renewed government spending and a determination to have the private sector play a key role in infrastructure development. The Kingdom approved its privatisation plan for 2018-20 in April, with a view to unlock state-owned assets for investment and 14 public-private partnership (PPP) projects are on the way despite some delays, a pipeline of IPOs is yet to come. Saudi Arabia’s PPP law seeks unlock billions of dollars in FDI for public-private
Q2 17
Q3 17
Q4 17
Q1 18
Q2 18
Q3 18
projects, improving transparency and boosting its construction sector while easing pressure on government finances. The NEOM city and the recent MoU between Saudi Jordanian Investment Fund and the Aqaba Special Economic Zone Authority to establish, develop and manage a railway connecting Aqaba, on the Red Sea, to a future dry port in the Ma’an governorate are some construction projects aiming to achieve the PPP dream. The economic outlook for the GCC region in 2019 is promising the growth of the respective governments’ nonoil activities. International lenders are expecting more opportunities in the region—Saudi Arabia’s economic transformation that includes raising debt through bond sales, creating the world’s largest sovereign wealth fund and selling stakes in government assets has attracted the attention of Japanese, European and US lenders. Similarly, in the UAE, international banks are increasing their presence ahead of Expo 2020 next year— recently Citigroup and Lombard Odier announced plans to launch branches and representative offices in Abu Dhabi. The UAE’s new FDI and debt laws, Saudi’s PPP project as well as Bahrain’s promotion of fintech and the investment activities of the region’s sovereign funds promises a positive outlook in 2019.
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ISLAMIC FINANCE
SUKUK: O STRENGTH IN NUMBERS Figures show GCC Sukuk is more resilient than bonds in secondary market, says Mohammed Khnifer, a debt capital markets banker, at a supranational banking institution
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ne thing to note about last year’s market turbulence is the fact Sukuk is more resilient than bonds in the secondary market. Middle East Sukuk have returned 0.9 per cent by end of 2018, compared with a 0.1 per cent return for conventional bonds, according to JPMorgan Chase & Co.’s (JPM) indexes. The same also goes to GCC bonds performance and the emerging market ones (Gulf bonds have returned an annualized 0.6 per cent by end of 2018, compared with a 4.6 per cent loss for other emerging markets, according to JPMorgan gauges). International investors who would be researching GCC credits more after JPM inclusion, should be aware of these figures for their portfolio diversification. REACHING BANKS’ LENDING LIMIT PUSHES BORROWERS TOWARD DEBT From a GCC perspective, the main drivers for Sukuk issuance would be due to at least two things: • The suitable cost of the borrowing environment which we have witnessed in the early start of 2019, i.e. the low yields from US Treasury bonds had a positive affect across all GCC securities in the secondary markets (this is
THE CHALLENGE WE HAVE IN SAUDI IS HOW TO CHANGE THE MENTALITY OF CORPORATES TO TAP THE DCM MARKET INSTEAD OF OVER-RELYING ON BANKS’ LENDING. compared with the last two months of 2018 when some investors decided not to subscribe into new securities (from the primary market) and wait until it traded in the grey/secondary markets and then buy it at a discount (due to market turbulence). Unlike other emerging market (EM) countries (whom their currencies are floated), GCC currencies are pegged to dollar. • Some GCC borrowers have exposure to all their relevant local lenders. Thus, these banks cannot exceed certain lending limits, prompting borrowers to seek external or internal funding sources via debt issuance. Note that in Saudi Arabia, the preferable debt instrument (among investors) is Sukuk.
SOME GCC BORROWERS HAVE EXPOSURE TO ALL THEIR RELEVANT LOCAL LENDERS. THUS, THESE BANKS CANNOT EXCEED CERTAIN LENDING LIMITS, PROMPTING BORROWERS TO SEEK EXTERNAL OR INTERNAL FUNDING SOURCES VIA DEBT ISSUANCE.
Middle East Sukuk have returned
0.9% 0.1%
by end of 2018 compared with a
LOCAL GCC REGULATORS SHOULD BE PROACTIVE While greater standardisation in the Sukuk market would be welcomed, I can see that the industry has adjusted to that shortcoming. Standardisation would be much needed in the local DCM market by capital market regulators in order to cut the cost of transaction documentation to borrowers.
return for conventional bonds
CHANGING MENTALITY There are no concerns that sovereign Sukuk issuances are crowding-out the corporate ones. For instance, in Saudi Arabia the Debt Management Office monitors the local debt capital market (DCM) and ensures that there is no crowding out effect. The challenge we have in Saudi is how to change the mentality of corporates to tap the DCM market instead of over-relying on banks’ lending. Local lenders also share the blame in not developing the corporate side of DCM.
Mohammed Khnifer MKHNIFER1@GMAIL.COM) and my twitter (@mkhnifer)
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SUSTAINABLE FINANCE
ING NURTURES A GREEN FOOTPRINT An exclusive with Leonie Schreve, Head of Sustainable Finance at ING, expects an upward trajectory in the sustainable loan market
(PHOTO CREDIT:ZLIKOVEC/SHUTTERSTOCK)
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ow does ING define sustainable finance activities? Although ING’s own operations have been climate-neutral for a decade, we can make our biggest contribution to a sustainable future through supporting our clients with financial services. We believe sustainable business is better business and by focusing on forward-thinking companies that are driving change to become more sustainable, we will have a positive impact on business in the long term. By supporting clients as they are future proofing their business, we are future proofing ours. For ward-looking businesses are embracing sustainability requirements, using them to foster innovation, drive competitiveness and create new
business models. Change, innovation and sustainability go hand-in-hand and offer strong future business opportunities. We approach every financing opportunity through a “green lens”—almost all projects can have a sustainability component, whether that ent ails implementing more alternative energy sources, recycling waste or developing green buildings/infrastructure. We are focused on increasing financing for environmentally and socially responsible companies, while reducing financing for carbon-intensive sectors. We are committed to our involvement in the circular economy and increasing financing for projects focused on promoting social progress. When companies want funding but can improve on sustainability,
ENERGY TRANSITION AND WATER ARE VERY PROMINENT TOPIC ON THE AGENDA IN THE MIDDLE EAST, WITH ENERGY SOURCES CHANGING THE REGIONS ACTIVELY SEEK NEW ECONOMIC SOURCES. THEREFORE, THE APPETITE FOR ENERGY AND WATER TRANSITION ABILITY IS STRONG. — Leonie Schreve
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SUSTAINABLE FINANCE
Leonie Schreve
we outline the changes they need to make first. We feel we can make the most impact by having a dialogue with clients and supporting them in improving their environmental and social impact where possible. Tell us more about the deals the bank has concluded in this segment and how complex are they and how does it defer from other sustainable financing activities in different parts of the world? In 2018, we completed a number of sustainable finance deals across Europe and Asia. There is a discernable difference between regions. Each transaction is tailored to the client’s business and sustainability ambitions. Some of these transactions are also innovations. The ING Sustainable Finance team works very closely with the client to ensure that the credentials of the transaction aligns with sustainable market expectations and practise. An example is the design and market launch of the Sustainability-improvement Loan where sustainable improvements are linked to the margin of the transaction. We launched the product in the market and still lead it. We have seen huge uptake by others, but ING still leads the troops in number of deals closed and coordinated.
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WE EXPECT THE SUSTAINABLE FINANCE MARKET TO KEEP GROWING. IN PARTICULAR, WE EXPECT TO SEE THE SUSTAINABLE LOAN MARKET TO KEEP THE ACCELERATED GROWTH THAT WE HAVE SEEN IN 2018. — Leonie Schreve, Head of Sustainable Finance, ING As sustainable finance becomes more mainstream, the process is becoming simpler and our experienced teams ensure support and guidance in every step of the process. What kind of opportunities do you see for this in this region? And from this, what are the challenges to realising these opportunities? Energy transition and water are very prominent topic on the agenda in the Middle East, with energy sources changing the regions actively seek new economic sources. Therefore, the appetite for energy and water transition ability is strong. ING has a multiple involvements in financing water and energy transition.
With the declaration on Sustainable finance initiated by ADGM and IJNG signing the momentum even gets more evident. ING is keen to support clients in the region to accelerate on this transition. In this regard, how would you describe your pipeline for the year? We expect the sustainable finance market to keep growing. In particular, we expect to see the sustainable loan market to keep the accelerated growth that we have seen in 2018. Given that many of our clients are investing in transitioning towards more sustainable business, and the increasing awa r e n e s s a r o u n d s u s t a i n a b i l i t y challenges (e.g. climate change, water scarcity, regulations, natural resource constraints), we see a strong demand for sustainable finance driven by investments needed for this transition. What is ING’s goal in the sustainable finance space? Our overall goal is to double our funding to companies and sectors that are helping to keep global warming below 2°C. We will do this by increasing our Climate Finance portfolio two-fold by 2022 (compared to 2017 where ING has committed EUR 14.6 billion to climate finance). We want to steer our portfolio to a well below two-degree scenario and announced Terra, an innovative and accurate way to measure our portfolio, together with 2Dii (two-degree investment initiative). 2Dii have successfully applied their measurement to institutional investors and we are the first bank in the world applying it to a lending portfolio. We hope this will also open up opportunities for other banks to look into measuring their portfolio, until now that was difficult (refer to TCDF). We want to remain at the forefront of the sustainable finance space, continue to grow our portfolio and create innovative products with a green footprint and share the market moving forward.
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HUMAN CAPITAL
HEALTH IS WEALTH
Off the scale workloads and out-of-touch senior management identified as key causes of financial services staff stress and mental ill health, says CISI survey
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nly 46 per cent of those working in financial services would feel confident about speaking to their manager about mental ill health, according to the latest CISI survey. The Chartered Institute for Securities & Investment (CISI) is the professional, not-for-profit body for those working in wealth management and capital markets, with a global membership of 45,000. Respondents were asked how confident they would be talking to their manager at work if they felt they
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were suffering from stress, anxiety or depression, with 3,686 respondents reflecting a survey of both CISI’s online community supported by a survey of its members*. Of those, 23 per cent said they were “unsure” and 31 per cent said they were “not confident” talking to their manager. It is the largest response obtained in the shortest amount of time compared to any other survey ever run by CISI before, showing the strength of feeling on this issue in the finance profession.
Many respondents to the CISI survey chose to leave anonymous comments, some indicating the financial services sector they worked in. We believe some of the comments are disturbing and touch on topics which may resonate across the world of work: lack of trust in human resource departments and managers, work-life balance, challenges faced by women in the workplace and bullying. Long working hours and the pace of activity during the working day is a theme which is continually reported by respondents.
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HUMAN CAPITAL
Last year, Dubai Health Authority (DHA) launched the first comprehensive mental health strategy for Dubai. The strategy titled Happy Lives, Healthy Communities was launched in line with Dubai Health Strategy 2016-2021. The Mental Health programme stimulates the development of an ecosystem that ensures that the population of Dubai have access to high quality care, including prevention and promotion, for mental health conditions, and addresses the social stigma associated with mental health. According to the Global Happiness Survey Report released in 2018 at the World Government Summit in Dubai, untreated mental illness reduces the GNP (gross national product) of countries by four per cent. Many other costs associated with mental illness are indirect or hidden. Indirect costs include loss of productivity attributable to the illness and costs related to morbidity, premature mortality, incarceration, and caregiver time. A 2017, an Adviserplus survey indicated that a third of absences in the financial services sector were due to mental ill health. Some employers in finance and professional services have been alert to the importance of work and its relationship to mental health for some time. Some firms were singled out by respondents as being particularly supportive to their staff on the issue of mental ill health, including Hargreaves Lansdown and PwC. Simon Culhane, Chartered FCSI and CISI CEO said, “This is the first time we have sought to find out how those in our profession feel about mental health. We are overwhelmed and moved by the strength of feeling on this issue amongst our members. The feedback in particular, has shown that workload and working hours are root causes in respondent’s experiences. These factors are controlled largely by the culture within a firm, which is in itself determined by the leadership. If leaders have an enlightened approach to their own well-being as it relates to work stress, then this is an important example
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THE UAE HAS CONSISTENTLY MAINTAINED ITS RANK AS ONE OF THE TOP COUNTRIES OF CHOICE FOR EXPATRIATES. THERE IS A STRONG GOVERNMENTAL DRIVE TOWARDS A HEALTHIER AND HAPPIER WORKFORCE AND INCREASINGLY EMPLOYERS ARE RECOGNISING THE IMPORTANCE OF INVESTING IN THE HEALTH OF THEIR EMPLOYEES. — Matthew Cowan
to set staff, to show the importance of self-care as it relates to mental health.” A recent HSBC poll of more than 22,000 expats revealed that on a third consecutive year the UAE has emerged as fourth best place to work in the world. According to HSBC, 73 per cent of expatriates living in the UAE earn more than in their home country. Matthew Cowan, Chartered MCSI and Regional Director Middle East said, “The UAE has consistently maintained its rank as one of the top countries of choice for expatriates. There is a strong governmental drive towards a healthier and happier workforce and increasingly employers are recognising the importance of investing in the health of their employees. There are firms who are leading the way with their approaches to reducing the stigma surrounding mental health. There is also lots of work underway by Dubai Health Authority (DHA). The profession as a whole can benefit greatly from this combined approach, and we can look forwards towards more understanding of mental health in professional services.” He added, “The findings are indicative that as a sector, the financial services profession needs to work towards a more supportive approach. We have 45,000 members globally and are exploring ways in which we can encourage an open discussion such as a professional refresher online module on mindfulness. We will be dedicating further online resources to signposting organisations and initiatives supporting this space. We will also see an increase in the number of events focusing on mental health and professional wellbeing.”
*The website CISI survey of its online community was undertaken May – September 2018, asked the question: “How confident would you be talking to your manager at work if you felt you were suffering from stress, anxiety or depression?”. There were 1,166 respondents. The CISI member survey took place during Spring 2018 asking the same question, with 2,520 respondents.
WEALTH ARABIA
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IN DEPTH
US FEDERAL RESERVE:
THE BIGGEST RISK FACTOR FOR 2019
An exclusive with Norman Villamin, Chief Investment Officer and Senior Managing Director at Union Bancaire Privée, on his projections for the year 58
(CREDIT:ORHAN CAM/SHUTTERSTOCK)
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hat is your outlook for 2019 and what are the most striking risk factors? 2 019 i s g o i n g t o b e somewhat similar to 2018, we are expecting a fairly choppy market in the equity markets around the world. Multiples are probably fair to a little bit expensive from here, so investors are going to have to rely on earnings growth to drive returns, but unfortunately earnings growth are only going to come in midsingle digits or so, thus [we expect] very modest return expectations for the year. I think the biggest risk factor that we see now is that the US Federal Reserve (Fed) and the other central banks around the world look like they are standing aside.
I WOULD SAY THAT TWO THINGS ARE PARTICULARLY ATTRACTIVE RIGHT NOW, WE’VE BEEN QUITE CAUTIOUS ON CORPORATE CREDIT FOR THE LAST COUPLE FOR YEARS BECAUSE YOU WANT TO BE, AS AN INVESTOR, COMPENSATED FOR THE KINDS OF RISKS THAT YOU ARE TAKING. — Norman Villamin
Any chance they get back involved may may primarily lead to an inflation at this point. We do not see it under the horizon but if that happens that is going to be a challenge for markets even with that modest return environment we expect. Would US-China trade relations, or any other macro factors significantly impact investor sentiment for the region? Yes, I think the trade issue remains a big concern worldwide. However, I think if there was a good outcome from the volatility for the year, is that it has woken up a lot of government leaders in the US and China in particular about the potential impact of policies affecting growth.
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IN DEPTH
Norman Villamin, Chief Investment Officer and Senior Managing Director at Union Bancaire PrivĂŠe
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WE THINK THE SHORT END OF THE US DOLLAR RATE CURVE SHOULD STAY FAIRLY CONTAINED. WE THINK THERE IS ONE MORE RATE HIKE OUT OF THE US THIS YEAR, SO THAT SHOULD NOT BE THE SAME AS LAST YEAR IN TERMS OF EMERGING MARKET DEBT. — Norman Villamin Until we see both US and China stepping back from that confrontation, we think this is constructive. I think investors must realise that this is something that goes beyond just trade. This is a much more strategic deal, than a political confrontation, so these issues will come back again especially in the run up to the 2020 US presidential elections which [will] really start to heat up in the second half of this year and first half of next year. In light of the above, which asset class you think will be the winners this year and why? I would say that two things are particularly attractive right now, we’ve been quite cautious on corporate credit for the last couple for years because you want to be, as an investor, compensated for the kinds of risks that you are taking. Really for the first time in a couple of years, you are now especially in high quality bonds, investment grade bonds, so we think that is attractive and that is a change from going back a couple of years. I think the second thing outside of that, is in the emerging market as well as Japan. We see evaluations that are nearing 2008-2009 lows, we see this in a lot of countries. We think this is certainly the case in Brazil, in Indonesia, as well
EARNINGS ARE GOING TO BE FAIRLY MODEST SO INVESTORS ARE GOING TO HAVE TO TILT THEIR FOCUS FROM TRYING TO DRIVE RETURN VIA CAPITAL GAINS AND REALLY FOCUS ON INCOME DIVIDEND OR WHAT WE LIKE TO CALL STOCK SELECTION OUTPUT. — Norman Villamin
as in India, where policy is moving from tightening to loosening, especially in the fiscal front, and we expect China to join them as we move through the year. That should create the factor backdrop for emerging market equities and emerging market debt through the year. How do you think interest rates will affect liquidity movements this year and how will this impact emerging market debt? We think the short end of the US dollar rate curve should stay fairly contained. We think there is one more rate hike out of the US this year. So that should not be the same as last year in terms of emerging market debt. Where investors need to be cautious is paused by the US Fed, which likely means that the yield curve will steepen, and in turn means that longer dated bonds will perform more poorly than shorter dated bonds. Thus, we expect to manage those risks in our portfolios. In your role as CIO what major challenges do you expect to face this year? I think the biggest challenge is generating return. Again as we said, we think multiples are more attractive than they were six months ago but not cheap by any means. Earnings are going to be fairly modest so investors are going to have to tilt their focus from trying to drive return via capital gains and really focus on income dividend or what we like to call stock selection output, rather than looking to how the market is going up—”I’m going to making money”—it is going to be a more grounded out year. Roll up the sleeves in order to get that mid-semi-digit kind of return for 2019.
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TECHNOLOGY
UNITY IS POWER, BUT YOUR COMBINED IT SYSTEMS MAY WEAKEN YOU Temenos highlights the realities of mergers and acquisitions in a digital world
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s the Arabian proverb says (Unity is power). And banks within Saudi Arabia are certainly hoping to achieve this; in 2018 alone, we saw several large financial institutions move to merge and acquire on an unprecedented scale. And these mergers are set to continue as the Kingdom’s main sovereign wealth fund, which owns stakes in some of the biggest lenders, has highlighted that it is weighing which banks could be merged to increase scale. In addition, authorities are also likely to look favourably upon potential mergers among banks outside the state’s control. The benefits are obvious and can include increased market share, a decrease in competition and, of course, a gain in greater synergy and operational efficiencies. However, these elements are not easy to achieve. Fo r m a n y b a n k s , p a r t i c u l a r l y those established a decade or more ago, technology has become a spaghetti of complex intertwined applications Maintaining these multiple,
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i n t e r c o n n e c t i n g s ys t e m s m e a n s dedicated resources, lethargic processing and an increase in systems failures. U l t i m a t e l y t e rr i b l e o p e r a t i o n a l inefficiencies are realised, damaging in themselves, but when you look at the lack of synergy that operating multiple systems from merging companies brings, it becomes quite frightening. THE DIGITAL CHALLENGE We now live in a digital world. Neo bank or fully digital banks are the trend. For young customers, banking should be no different to interacting with those services that support their digital lives such as Amazon, Careem and Google etc. fail to offer an intuitive, similar banking experience and banks fail to meet the expectations of the new tech savvy Generation Z audience that are soon to be their main customers. Post-merger, decent straight-throughprocessing (STP) cannot be achieved with multiple systems operating within a single bank. Add in duplicate systems from two or more banks for each core function that is required (although often
there are more per bank) and getting the systems to even talk to each other will be an achievement! THE DATA CHALLENGE The amount of digital data being generated today is huge thanks to smart devices and the internet of Things. This data can (and should) be analysed to make intelligent decisions to support areas including cross-sales, customer acquisition and retention, financial crime mitigation, however, in today’s fast moving, digital world this data needs to be available in real-time. Banks are realising this, in a recent survey we conducted with Ovum, Making the Business Case for Payment Transformation, 77 per cent of banks interviewed stated that ‘Meeting customer expectations around access to real-time information are a growing challenge for our business’. However post-merger, the data is often bound up in multiple systems with no conformity on semantic standards and when merging with additional systems this adds further complexity that makes real-time information an impossibility.
(CREDIT: WHITEMOCCA/SHUTTERSTOCK)
WHEN BANKS MERGE, INTRODUCING NEW PRODUCTS TO SHOW THE VERY STRENGTH AND BENEFIT OF THE UNION ARE OFTEN EXPECTED FAIRLY SOON, HOWEVER, THE BANK MUST HAVE THE INFRASTRUCTURE (OR PARTNER COMMUNITY) TO BRING THESE TO MARKET FAST.
THE INNOVATION CHALLENGE Post-merger, offering new products and services quickly and efficiently is essential to bank survival; banks must evolve with customers continuous demands. Products such as STC pay the wallet payments launched by STS for nationwide peer to peer transfer or Liv the new bank launched by Emirates NDB or Beehive for SME crowdfunding and Debt Invoicing, are demonstrating that disruptive services can significantly move customers away from traditional bank offerings. When banks merge, introducing new products to show the very strength and benefit of the union are often expected fairly soon, however, the bank must have the infrastructure (or partner community) to bring these to market fast. Building products requires the selection of an agile, configurable core banking platform. Empowering bank businesses to design and build their own products and services rather than outsource; it saves time, money and ensures full control throughout the product lifecycle. Some core platforms
have flexible product builder capabilities, which by their very nature empower banks to be more innovative. These should offer componentisation where banks can add functionality according to customer needs and parameter driven to enable easy changes. There should be no need for users to be IT experts or coders, so flexibility, business agility and productivity are boosted simultaneously. TURNING THE MERGED SYSTEMS CHALLENGE TO YOUR ADVANTAGE Merging banking systems can mean far more than doubling inefficiencies. Many systems have nuances and features which have evolved over decades and it is near impossible to understand all these before undertaking merger projects. Failure to consider (and address) every element can have a cascading effect on customers, as well as statutory and regulatory reporting leading to confusion and potentially irreparable damage to a bank’s reputation. Taking all these factors into consideration, moving to new core systems that can support digitisation,
data analytics, and agile product offering leads to lower risks and, faster market impact of newly established bank. Ultimately, merging banks means to create something that is bigger and better, something that enables a fresh start from a technology perspective. A new core platform should allow you to seamlessly connect with all other integral systems. It should address the data, digital and product development challenges listed and more. But above all, it should support the customer. A completely integrated core system offers a seamless real-time omni-channel experience to both employees who directly use it and its end customers. It should deliver on the market demands of any-channels, any-time, without complicated handoffs and different user experiences. Ultimately allowing banks to capitalise on understanding the customers user journey, and consequently follow up with knowledgebased services and product offerings. Focus on the customer by focusing on having a single version of the truth and together you will be stronger.
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CYBERSECURITY
SCREEN SAVERS Underground cybercriminal gangs have their sights set on the clouds
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ccording to a team of experts, only one thing is certain when it comes to cybercrime: it is impossible to limit its impact. Everything is now connected and violating one platform is a gateway to another. According to The McAfee Labs 2019 Threats Predictions Report, corporate data, home IoT devices and brand reputations will be under siege this year, with cybercriminals infiltrating social media, the cloud and mobile phones. The McAfee team believe that in 2019, underground cybercriminals will join forces to become sophisticated gangs; artificial intelligence will help cybercriminals hone their evasion techniques; bad actors will combine multiple attack types to create synergistic super threats; data stored in the cloud will be under serious threat; digital assistants will become accessories to cybercrime in the home; and data-rich social media platforms will continue to be popular attack targets.
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SOUND OF THE UNDERGROUND Hidden hacker forums and chat groups serve as a black market for cybercriminals, who can buy malware, exploits and botnets. These one-stop shops make it easier for entry-level criminals to execute successful attacks. With these off-the-shelf products, criminals of varying experience and s o p h i s t i c a t i o n c a n e a s i l y l a u n ch
attacks, the report warns. In 2019, McAfee predicts that this underground industry will consolidate, creating larger cybercriminal gangs. Established criminal networks will partner with other top-level services such as money laundering, evasion techniques and vulnerability exploits. As evidenced by conversations within the underground community, an increase is expected in mobile malware, botnets, banking fraud, ransomware, and attempts to bypass two-factor authentication. EASY ACCESS To increase their chances of success, attackers have long employed evasion techniques to bypass security measures and avoid detection and analysis. Packers, crypters and other tools are common cyber weaponry. In fact, an entire underground economy has emerged, offering products and dedicated services to aid criminal activities.
21%
of content now managed in the cloud contains sensitive materials
McAfee predicts that in 2019, due to the ease with which criminals can now outsource key components of their attacks, evasion techniques will become more agile due to the application of artificial intelligence. Think the counter-AV industry is pervasive now? This is just the beginning. As security gets stronger, bad actors need to be increasingly inventive. The availability of modular attack components on the underground market is expected to enable attackers to combine and repurpose established tactics and technologies to achieve new goals. With artificial intelligence, cybercriminals will have the ability to automate target selection, scan for target network vulnerabilities, and assess the posture and responsiveness of infected environments to avoid detection before deploying later stages of attacks. Bots will also play a part. Bots used to amplify deceitful messaging have already been created and are available for sale on the cybercriminal underground. Following in the footsteps of recent infamous nation-state campaigns to sway public opinion, cybercriminals will likely repurpose bots and leverage social media to extort organisations by threatening their brands.
(CREDIT: WORAWEE MEEPIAN/SHUTTERSTOCK)
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CYBERSECURITY
Raj Samani
IN 2018, WE WITNESSED EVEN GREATER COLLABORATION AMONG CYBERCRIMINALS THROUGH UNDERGROUND ALLIANCES. — Raj Samani, Chief Scientist at McAfee
BEYOND THE CLOUDS With access to increasingly complex tools and tactics, cybercriminals are aiming for more sophisticated targets. In 2019, cybercriminals are anticipated to target intellectual property, internet of Things (IoT) in the home and identity credentials via the cloud, digital assistants, and social media platforms. As much as 21 per cent of the content now managed in the cloud contains sensitive materials such as intellectual property, customer and personal data. Possible scenarios the report gives include cloud-native a tt a ck s t a r g e t i n g we a k A P I s o r ungoverned API endpoints, expanded reconnaissance and exfiltration of data in cloud databases, and leverage of the cloud as a springboard for cloud-native man-in-the-middle attacks to launch cryptojacking or ransomware attacks.
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“With the increased adoption of Office 365, we have noticed a surge of attacks on the service—especially attempts to compromise email,” the report said. “One threat the McAfee cloud team uncovered was the botnet KnockKnock, which targeted system accounts that typically do not have multifactor authentication. “We have also seen the emergence of exploits of the trust model in the Open Authorisation standard. One was launched by Fancy Bear, the Russian cyber espionage group, phishing users with a fake Google security app to gain access to user data.” CARELESS TALK As tech fans continue to fill their homes with smart gadgets, from refrigerators and motion sensors to lighting, the means of gaining entry to a home network are growing rapidly, especially given how poorly secured many IoT devices remain.
However, the report warns that the real key to the network door this year will be the voice-controlled digital assistant, a device created in part to manage all the IoT devices within a home. How could a cybercriminal resist the opportunity to control someone’s home or office? According to McAfee, bad actors will make use of malicious code designed to attack not only IoT devices but also the digital assistants that are given so much licence to talk to them. New mobile malware will likely investigate smartphones, tablets, and routers to gain access to the digital assistants and home IoT devices they control. Once infected, these devices can serve as a picklock to consumer homes while supplying botnets, which can launch DDoS attacks or grant cybercriminal access to personal data and the opportunity for other malicious activities such as opening doors and connecting to control servers. Infected IoT devices will supply botnets, which can launch DDoS attacks, as well as steal personal data. The more sophisticated IoT malware will exploit voice-controlled digital assistants to hide its suspicious activities from users and home-network security software. Malicious activities such as opening doors and connecting to control servers could be triggered by user voice commands. “In 2018, we witnessed even greater collaboration among cybercriminals through underground alliances,” said Raj Samani, Chief Scientist at McAfee. “This collaborative mentality has allowed for efficiencies in underground technologies and tactics, and the evolution of bad actors into some of the most organised and agile adversaries in the world. However, while we expect the underground market collaboration to continue, the year 2019 will also see cybersecurity alliances of defenders continuing to mature and further fortify defences.”