#228 March 2020 by CPI Financial

MARCH 2020 | ISSUE 228 MIDDLE EAST

B R AT I

MARCH 2020 | ISSUE 228

YEARS

SERVING THE BANKING INDUSTRY

Hisham Alrayes, CEO and Board Member, GFH Financial Group

A CPI Financial Publication

MARKETS 18 UAE banking at a time of inflection

CAPITAL MARKETS 34 Tackling a triple-tranche

INVESTMENTS 42 The ROI in sustainability

TECHNOLOGY 49 Emerging tech and its potential

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A SOLID MARKET POSITION Hisham Alrayes, CEO and Board Member, GFH Financial Group

A SOLID MARKET POSITION

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EDITOR'S NOTE

Nabilah Annuar Editor, Banker Middle East

ebruary has been an uneasy month, both on the personal and business front. Dominating headlines over the last few weeks, the coronavirus outbreak reverberated through financial and commodity markets. In January, oil prices fell (Brent -11.9 per cent m/m; WTI -12.7 per cent m/m)—the largest January slide since 1991, according to MUFG—as demand-side apprehensions following the outbreak more than offset supply-side risks stemming from elevated MENA regional geopolitical risks. This was a sign of how the health of the global economy remains front and centre of investors’ minds, with the ceiling in oil prices being in sharper focus than the floor. Although the short-term negative shock from the epidemic was stronger than expected, analysts are projecting a rebound in the second quarter of the year on the back of easing virus fears and subsequently having the spread contained by April. According to market reports, financial institutions have begun forecasting the potential impact of the coronavirus on the global economy, projecting that it will reduce global GDP by 0.2 to 0.3 percentage points. Another issue that has been playing on many minds is the rising level of global debt. Some have questioned if the next crisis would be brought by institutional debt. A prolonged period of low interest rates, along with expectations of persistent low inflation has contributed to a large buildup of sovereign debt. According to S&P, sovereign ratings continue to indicate a steady deterioration of credit quality globally. The ratings agency has taken negative ratings actions on governments that account for more than 80 per cent of all outstanding sovereign debt in 2019. Carrying on from last year, geopolitical tensions, domestic politics, and now the outbreak of the coronavirus in China are likely to be the most immediate key risks for sovereign ratings over the next six months. In this issue, we take a look at the several facets of our region’s financial landscape. We have an in-depth feature on how the virus has impacted markets on page 14 and a piece dedicated to the UAE banking sector on page 18. Despite the global commotion, the GCC managed to witness successful capital market issuances from Bahrain and Saudi Arabia— we take a closer look at these in our cover story and capital markets section, respectively. And as usual we have a staple technology section concluding our publication—this issue helps demystify emerging technologies, the divide between banking and technology, as well as cybersecurity. We always aim to provide you with highly relevant and though-provoking content. As usual we wish you a productive read of a great March issue. We hope you have a positive close to the first quarter of the year.

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CONTENTS

ANALYSIS 6

MARCH 2020 | ISSUE 228

A rocky beginning

NEWS 10

News Highlights

MARKETS

14 18

Offering a better insight than stocks UAE banking at a time of inflection

COVER STORY

22 A solid market position

COUNTRY FOCUS

26 Kuwait: Fashionably late

CAPITAL MARKETS

34 Tackling a triple-tranche

ISLAMIC FINANCE

36 Meeting the global demand 38 Spearheading a digital future

INVESTMENTS

42 The ROI in sustainability

COVER STORY A SOLID MARKET POSITION Hisham Alrayes, CEO and Board Member, GFH Financial Group

18 4

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TECHNOLOGY A Banker Middle East Supplement

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49 Emerging tech and its potential 52 Banking and technology:

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ANALYSIS

PHOTO CREDIT:kentoh/iStock

A rocky beginning The GCC has earned its reputation for pricing blockbuster primary transactions, setting the stage for 2020 borrowing programmes. However, sluggish economic growth, geopolitical pressures and a global epidemic continue to weigh on capital markets and hydrocarbons

n its Global Investment Outlook 2020 report, Emirates NBD suggested that the relative optimism for the year ahead is predicated on the growth-boosting effects of looser monetary policy, and a moderate easing of tensions related to the US trade tensions and Brexit. “After a spectacular 2019, propelled by monetary easing meeting excessive pessimism, we expect markets to come back to the reality of fundamentals,” said Maurice Gravier, Chief Investment Officer at Emirates NBD Group. With US and China being the world’s two largest economies and major trading partners, a decline in their trade flows will hurt not only their countries but also the global economy. While Gulf nations have been steadily diversifying their economies, primary income is still generated from oil revenues. Therefore, any volatility in oil could dampen confidence among investors and affect the regional markets. Market reports have suggested that the Middle East could be indirectly affected if the trade war escalates. The region accounts for 40 per cent of China’s oil imports and if industrial activity dips as a result of slow growth, demand for oil exports from the MENA could also fall.

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

FIXED INCOME The GCC bond market has provided investors with classtopping returns several times within the fixed income asset class in the last decade, said Emirates NBD. The Arabian Gulf witnessed a larger than expected borrowing spree with sovereigns issuing more to plug their budget deficits through debt markets, on the back of lower oil prices. Issuers in the Gulf have made a significant impact in international capital markets to reduce their reliance on the oil and gas sector. It has earned its reputation for pricing blockbuster primary transactions, setting the stage for 2020 borrowing programmes and upcoming refinancing due, said Gravier. Emirates NBD explained that on a ratings adjusted basis, the region remains attractive, especially compared to their lowerrated emerging market peers such as Southeast Asia. Saudi Arabia sold its first Eurobond of the year in January as tensions in the Middle East dialled down following the US assassination of a top Iranian general. The Kingdom issued $5 billion in debt, taking advantage of low borrowing costs globally, reported Bloomberg. Saudi Arabia issued a $1.25 billion seven-year tranche at 85 bps over US Treasuries with

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ANALYSIS

a yield of 2.54 per cent, a 12-year offering of $1 billion at a spread of 110 bps and a yield of 2.88 per cent, as well as a $2.75 billion 35-year tranche. The Kingdom is seeking to plug part of its growing budget deficit by selling about $32 billion in local currency and international debt over the course of the year. According to Emirates NBD, the current GCC spread is around 155 bps, which provides significant carry considering its high credit quality compared to other emerging market regions. GCC countries such as Saudi Arabia and the UAE are on the path of massive economic transformations, attracting foreign capital flows and the yield-hungry investors’ search continues to provide strong technical support to the regional bonds as they offer higher risk-adjusted returns globally. 2019 was a good year for all asset classes and emerging market debt was no exception. Gravier pointed out that given the easing backdrop, returns could even have been higher. However, they were capped by the US-China trade tensions which kept investors sceptical for most of the year. Emirates NBD expects emerging market central banks to have enough headroom for policy easing, aiming at stimulating economic growth, which is a robust technical catalyst for their fixed income markets.

GCC AVERAGE REAL GDP GROWTH (WEIGHTED BY NOMINAL GDP) 2.36 1.88 1.47 1

0.50

0 -0.27 -1

2016

2017

2018

2019e

2020f

GCC average growth Source: Haver Analytics, Emirates NBD Research, January 2020

GCC PMI SURVEYS SHOW DIVERGENT TRENDS IN H2-2019 61 58 55 52 49 46

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

Dec-19

Source: HIS Markit, Emirates NBD Research, January 2020

Egypt PMI

Oct-19

Saudi Arabia PMI

Jul-19

Apr-19

Jan-19

Oct-18

Jul-18

Apr-18

Jan-18

UAE PMI

— Maurice Gravier, the Chief Investment Officer at Emirates NBD Group

A dominating factor remains the growth differential between emerging markets and developed markets, whereby emerging markets contributes to over two-thirds of global growth, along with strong demographics and consumption story. “The effects of last year’s rate cuts will be felt, supporting consumer spending, helping manage the enormous amounts of debt in the system, and providing oxygen to other central banks especially in emerging economies,” said Gravier. Furthermore, the US Federal Reserve has indicated a willingness to continue to expand its balance sheet by buying short-term bills, which had been in play since the Q4 2019 repo situation. The developments in the mature markets are said to have consequences in the emerging world.

BLACK GOLD

“AFTER A SPECTACULAR 2019, PROPELLED BY MONETARY EASING MEETING EXCESSIVE PESSIMISM, WE EXPECT MARKETS TO COME BACK TO THE REALITY OF FUNDAMENTALS.”

Oil markets are at risk of a soft year in 2020 as anxiety over trade relations between the US and China continues, coupled with broader slowdown across the industry in developed and emerging markets. Emirates NBD expects oil production growth to remain high as non-OPEC countries’ supply surges. Despite the slowdown in the pace of growth, due to the shale boom, US has become the largest oil producer in the world this year, overtaking Saudi Arabia and Russia, eroding more of OPEC’s market share. OPEC+ started a fresh round of deeper production curbs in January 2020, the latest step in a three-year effort to prevent the US shale supplies from putting the global market into surplus. However, the outlook has deteriorated rapidly in the last few weeks as the coronavirus curbs air traffic and slows China’s economy. The share of deeper cuts will be borne most heavily by Saudi Arabia, the UAE and Kuwait, amongst OPEC producers, while Russia, Kazakhstan and Mexico are due to take most of the burden for non-OPEC producers. Saudi Arabia also made its over-compliance official, pledging an additional 400,000 barrels per day (b/d) of output restraint, in addition to the official cuts endorsed by OPEC+. The decision by OPEC+ to deepen production cuts will help set a floor for prices but will not be enough to move the market into deficit in H1 2020, said Emirates NBD. OPEC+ officials have met in February to assess how China’s coronavirus may hurt oil demand and what measures they can take in response. The International Energy Agency expects growth in oil demand to improve in 2020 to around 1.2 million b/d from closer to the 1 million b/d last year. Unlike 2019 when virtually all the demand growth was contributed by emerging markets, a recovery in OECD, Europe and Asian demand will drive developed markets to record a growth of about 300,000 b/d, suggested the report. Nevertheless, ENBD highlighted that the fixation for oil markets remains on what happens in China and India, as well as other large, and growing, consumer markets in emerging economies.

SPREAD DIFFERENTIAL BETWEEN EM DEBT AND GCC DEBT 600

300

500

250 200

400

150 300

100

200

100 0 2010

0 2011

2012

2013

2014

EM Debt (LHS)

2015

2016

GCC Debt (LHS)

2017

2018

2019

-50

Delta (RHS)

Source: Bloomberg

GCC IS HOME TO SOME OF THE HIGHEST RATINGS IN THE WORLD COUNTRY

S&P

MOODY'S

FITCH

CDS (bps)

10Y BOND YIELD

UAE (Abu Dhabi)

Aa2

39.1

2.60%

KSA

A-

62.8

2.95%

Kuwait

Aa2

38.7

2.70%

Qatar

AA-

Aa3

AA-

40.7

2.60%

Oman

Ba1

BB+

234.2

5.90%

Bahrain

B+

BB-

171.0

4.90%

Source: Bloomberg pricing as of January 2020. Bonds yields are indicative and have been extrapolated in some cases (Kuwait, UAE, Bahrain, and Oman), and purely for illustrative purposes.

WHAT’S ON OUR WATCHLIST? THE ECONOMIC CYCLE The global economy has surpassed a decade of more than 3 per cent growth, while bond yields are close to multi-year lows which also includes negative yields. While the economic growth remains at trend levels, we remain cautious, and closely monitor all the ongoing concerns surrounding global trade, surging debt, slowing manufacturing activity, and the heightened geopolitical uncertainties. While we do not foresee the aforementioned challenges as triggers for the next recession, we still advocate our investors to remain cognizant and vigilant to the risks associated within. We recommend tilting bond portfolios toward quality and Income-generating strategies. RETURNS FOR THIS YEAR—BE REALISTIC For bond returns this year, we consider the current valuations on corporate bonds as adequately priced and see limited spread compression due to the higher volatility, sporadic corporate defaults, and the current phase of investors fatigue

on rich valuations across assets prices. Our base case assumption is that total returns would fall broadly in line with the current index yields. We expect Emerging Markets debt to deliver returns of 5 per cent to 5.25 per cent while Global Investment-grade and Global High yield bonds to post 2.5 per cent and 5 per cent respectively for 2020. THE YIELD CURVE—UNDERSTANDING CURVES AND THE NOISE WITHIN It is essential to keep in mind the time between yield curve inversion, and economic slowdowns do not spark an immediate catastrophe. There are several indicators to observe, and the “yield curve” is just one of the many ﬁnancial-cycle indicators. Inﬂation levels, the cycle of monetary policy, the returns on risk assets (stretched valuations), poor economic activity, as well as property prices, are a few others. As the Federal Reserve expands its balance sheet, the yield curve is expected to steepen.

Source: Emirates NBD

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NEWS HIGHLIGHTS

Central Bank of Iraq approves UGH’s acquisition of Bank of Baghdad Bahrain’s United Gulf Holding (UGH) has secured Central Bank of Iraq’s approval to acquire a stake in Bank of Baghdad. In a bourse filing, UGH stated that it has received approval from the Central Bank of Iraq to acquire a 51.8 per cent stake in Bank of Baghdad from Kuwait-based Burgan Bank. UGH expects the consolidation of Bank of Baghdad, one of the largest commercial banks in Iraq, to be profit accretive going forward for the company and will increase the size of its balance sheet by $1 billion. The firm said that in the medium-term debt will increase by $55 million which was acquired to fund the acquisition. Earlier this month, Kuwait’s Burgan Bank signed an agreement to sell its majority stake in Bank of Baghdad to UGH as the bank considers reducing group-wide nonperforming loans, exit riskier assets and consolidate position in the domestic market. Burgan Bank stated that the transaction is projected to have a one-off negative impact of around KWD 9 million on Burgan Bank's 2020 net income and part of this impact of around KWD 4 million is expected to be reversed after completion of the transaction. The Kuwaiti lender said that the transaction will have a positive impact on the Burgan Group’s asset quality with a reduction in non-performing loans (NPL) by around KWD 34 million which has an impact of around 70bps on the group NPL ratio.

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

SAMA launches licences for non-bank financial institutions

DIB plans to reduce headcount following merger with Noor Bank

The Saudi Arabian Monetary Authority (SAMA) has launched licences for nonbank financial institutions (financial technology institutions) for the first time in the Kingdom, licencing an electronic wallet company and a payment services company. In a statement, SAMA said that the licencing of financial technology companies is aimed at opening financial services to non-banking actors and support the development of the national economy. The guidelines enabled the licencing of payment companies, as well as regulate payment services in Saudi Arabia through a supervisory and oversight framework that ensures the safety and efficiency of transactions in the payments sector. Additionally, SAMA said that the guidelines included the minimum requirements to undertake any of the payment services such as minimum capital requirements, data protection, governance and risk management requirements.

Dubai Islamic Bank (DIB) is expected to start a sweeping round of job cuts with planned more than 500 dismissals at newly acquired Noor Bank as part of cost cuts across both lenders. DIB, the largest Shari’ah-compliant lender in the UAE, has more than 9,000 employees, while Noor Bank has between 1,200 and 1,400 full-time staff. The final numbers on the job losses will emerge after completion of interviews between Dubai Islamic Bank managers and Noor Bank staff. Job cuts will be on both sides but DIB is the buying side so job losses are expected to be more on Noor's side. DIB completed its acquisition of Shari’ah-compliant Noor Bank in January 2020 in a deal that will make DIB one of the world's largest Islamic banks, with total assets worth AED 275 billion ($75 billion).

Maybank Islamic opens first overseas branch in DIFC Maybank Islamic, the largest Islamic bank in Malaysia and the ASEAN region by assets size, inaugurated its first overseas branch in DIFC. Maybank Islamic was granted the full Islamic banking licence from the Dubai Financial Services Authority (DFSA) in July 2019, to open a branch in the DIFC making it Malaysia’s first Islamic bank to have a foreign presence. HH Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum, Deputy Ruler of Dubai and President of Dubai International Financial Centre (DIFC) who attended the official opening said, “Islamic finance is a key element of Dubai’s economic strategy based on Vice President and Prime Minister of the UAE and Ruler of Dubai HH Sheikh Mohammed bin Rashid Al Maktoum’s vision for a new phase of transformative growth in the next 50 years. The establishment of the first overseas office of Malaysia’s largest Islamic bank in Dubai is an acknowledgement of Dubai’s pivotal role at the heart of the Islamic economy and the strong advantages it offers institutions who base themselves here.” Maybank Islamic is the Shari'ah-compliant division of Malaysia’s largest lender Malayan Banking (Maybank), and one of the leading arrangers in Bloomberg’s Global Sukuk League Table. Maybank Islamic’s total assets stood at more than $57.35 billion as of 30 September 2019. Maybank Islamic Dubai DIFC branch will engage in wholesale banking with emphasis in corporate financing, treasury and capital markets and trade finance. Dato’ Mohamed Rafique Merican, Group CEO Maybank Group Islamic Banking & Maybank Islamic CEO commented, “We are delighted to be announcing the launch of Maybank Islamic’s operations in Dubai. The opening of our DIFC branch is indeed significant for us. Not only does this mark our very first overseas branch, but it also establishes us as Malaysia’s first Islamic bank to have a presence overseas. With Dubai being a leading Islamic economic centre, it was timely for Maybank Islamic to be here to tap into the increasing demand for financing in the global Halal economy and to become a link between the GCC countries and the world’s 5th largest economy that is the ASEAN Economic Community. Indeed, we look forward to making the Dubai DIFC branch our hub for the MENA region.” He added that it has been the aspiration of the Maybank Group that Maybank Islamic becomes a global leader in Islamic finance, and the opening of the Dubai DIFC branch in a leading Islamic financial hub, the DIFC, is a major achievement for the Bank into that direction. HE Essa Kazim, Governor of DIFC said, “Aligned with the visionary leadership of Dubai to establish the city as the capital for the Islamic Economy, we are committed to continuing to support the growth of Shari'ah transactions in the DIFC and transforming the future of finance. We are pleased to welcome Maybank Islamic to the home of the region’s Islamic finance with its newly established regional headquarters in Dubai.” The new branch is headed by Country Manager Nik Joharris Nik Ahmad who has over 20 years of experience in the financial services industry. He has extensive experience, having worked across geographies such as Malaysia, Kuwait, Bahrain and Saudi Arabia particularly in Islamic corporate debt financing.

DAE secures $300 million fiveyear dual-tranche unsecured term financing Dubai Aerospace Enterprise (DAE) has secured a $300 million five-year dual-tranche unsecured term financing facility from Emirates Islamic and Emirates NBD Capital, the investment banking arm of Emirates NBD to support its future financing needs. DAE, the Dubai-based aircraft lessor, said that the facility will contain a conventional and an Islamic tranche and can be upsized to $600 million. DAE's senior unsecured debt is now rated investment grade by S&P Global, Fitch Ratings and Moody’s, the three major credit rating agencies. The ratings will enable DAE to further solidify its business and accelerate growth ambitions while strengthening the firm’s liquidity and capital position.

UAE’s First Abu Dhabi Bank cuts hundreds of jobs First Abu Dhabi Bank (FAB) has cut hundreds of jobs, making it the latest UAE lender to shed staff as sluggish growth weighs on the finance industry, reported Bloomberg. FAB, the UAE’s biggest bank, dismissed hundreds of employees in recent weeks across several divisions. The lender which was created with the merger of two lenders in 2016, has about 5,400 workers globally. Last month, FAB said that nonperforming loans for 2019 jumped 17 per cent to AED 13.5 billion ($3.7 billion) at the end of December, while impairment charges climbed seven per cent to AED 1.84 billion.

UAE discovers 80 trillion cubic feet natural gas reserves in Jebel Ali The UAE has discovered 80 trillion cubic feet of shallow gas reserves between Saih Al Sidirah and Jebel Ali in the emirates of Abu Dhabi and Dubai respectively. Abu Dhabi National Oil Company (ADNOC) will jointly develop the reservoir in a project named ‘Jebel Ali’ with distributor the Dubai Supply Authority (DUSUP). HH Sheikh Ahmed bin Saeed Al Maktoum, the Director General of DUSUP, said, “This collaboration will contribute to raising our long-term energy security, which is crucial to realising our aspirations in a new economic era of growth to be a leader in shaping the future of the region and the world, as well as enhancing the happiness and welfare of our people." In a joint statement, ADNOC and DUSUP said that around 10 exploration and appraisal wells were drilled by the Abu Dhabistate owned energy giant in its debut exploration in Dubai over 5,000 km. Under the agreement, ADNOC will deploy capital, technology and expertise to develop and produce shallow gas resources. The energy giant will also conduct further exploration to assess further volumes and firm up development costs.

Similarly, DUSUP will supply the gas produced by ADNOC to support Dubai’s economic growth ambitions and enhance its energy security. The reservoir is referred to as ‘shallow gas’ because it contains highquality organic gas at relatively shallow depths from the earth’s surface. ADNOC also plans to tap gas from its gas caps and substantial unconventional gas reserves, as well as new natural gas accumulations as part of the company’s 2030 strategy. In November 2019, ADNOC announced the discovery of additional reserves of seven billion stock tank barrels of oil, 58 trillion of conventional gas and 160 trillion of unconventional gas, moving the UAE from seventh to the sixth position in both global oil and gas reserves rankings. ADNOC will use both conventional and unconventional drilling and completion technologies and methods to extract gas, including horizontal drilling and hydraulic fracturing to enable optimal productivity. The process will reduce the number of drilling rigs required extract the gas. Last month, Sharjah also discovered gas and condensate, with flow rates of 50 million cubic feet per day.

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NEWS HIGHLIGHTS

Abu Dhabi Power plans to take control of TAQA in asset swap Abu Dhabi Power Corporation (ADPower) plans to take control of Abu Dhabi National Energy Company (TAQA) in an asset swap deal that would value it at AED 4.16 billion ($1.13 billion) and create a combined utility with assets worth $54.5 billion. According to WAM, ADPower submitted to TAQA an offer with principal terms and conditions on which the firm would transfer the majority of its water and electricity generation, transmission and distribution assets in return for 106 billion convertible shares in the latter. The new entity would be one of the largest utilities companies in the GCC and a top 10 integrated utilities player in the EMEA region by regulated assets. Post conversion—contingent on the asset transfer being made—ADPower would own 98.6 per cent of the entire issued share capital of TAQA, in which the Abu Dhabi government currently has a 74.1 per cent share. Abu Dhabi Development Holding Company-owned ADPower said that its offer implies an equity value for TAQA of AED 4.16 billion, which corresponds to an over 40 per cent premium to its current market cap of AED 2.9 billion. ADPower said that it plans to maintain TAQA’s existing listing, making the combined group one of the largest companies on the Abu Dhabi Exchange.

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

Egypt plans to offer investors full ownership in some NSPO companies Egypt may offer stakes of as much as 100 per cent in some military-linked firms as the North African country steps up efforts to attract sorely needed private investment, reported Bloomberg. Under the plan, investors will be given the chance to secure a majority stake in some companies held by the National Service Projects Organisation (NSPO) which is affiliated with the ministry of defence. Ayman Soliman, the CEO of the Sovereign Fund of Egypt, said that the sovereign wealth fund will help the NSPO choose the firms, promote them to investors and potentially also invest in some of the stakes. The military controls dozens of companies, ranging from agriculture and industry to services and mining, through several entities, including the NSPO. Now that economic growth has rebounded since stalling after the 2011 uprising against longtime President Hosni Mubarak, the focus is on luring foreign investments and boosting growth in the private sector. The measure is the latest by Egypt’s government as it pushes ahead with a sweeping economic

ADCB to exit its Jersey operations to focus on home market Abu Dhabi Commercial Bank (ADCB) will exit its operations in Jersey to focus on its home market of the UAE. In a bourse filing, ADCB said that it informed the Jersey Financial Services Commission of its decision and will be communicating with customers and other stakeholders in due course. The Abu Dhabi-based lender said that the process of discontinuing its operations in Jersey will be conducted over an extended timeframe and ADCB's priority remains to provide excellent service to its customers. Furthermore, during the period until discontinuation, ADCB said that there will be no changes to products and services and the bank will continue to serve its customers requirements. The bank said that the move will have negligible impact on its profitability. ADCB’s Jersey business provided offshore banking to wealthy clients, allowing expatriate workers to house savings in offshore accounts in a range of different currencies. In September 2019, ADCB agreed to sell the majority of its banking portfolio in India to DCB Bank and subsequently exit its operations in the country after the transaction—subject to regulatory approvals.

FTSE Russell to create new ADX benchmark indexes

Turkey lowers banking fees to urge banks to boost credit

GCC oil wealth could be over by 2034 without reforms, says IMF

Abu Dhabi Securities Exchange (ADX) has appointed FTSE Russell, a global index and analytics provider, as its benchmark administrator for its domestic equity indexes as it seeks to lure more foreign investors. The new ADX indexes to be created by FTSE Russell aim to increase the quality and depth of sustainable investments in the UAE while enhancing the performance of financial markets. The indexes will transition to FTSE Russell’s index methodology, with index names to be co-branded. FTSE Russell will begin providing daily index calculations on the General Index which includes all companies listed on the stock exchange and nine sector-specific indexes (banks, energy, financial services, insurance, and real estate). ADX stated that a new series of sustainable finance indexes and Shari’ah compliant indexes are also planned. ADX’s indexes cover over 66 listed companies listed with a total market capitalisation of approximately $145 billion by the end of 2019. FTSE Russell classifies UAE as a secondary emerging market within its Global Equity Index Series (GEIS). UAE listed companies currently account for 0.93 per cent of the FTSE Emerging Index, a widely used global benchmark. Additionally, by providing enhanced ADX offering, the new indices will widen investor audiences and institutions to the ADX index family.

Turkey has lowered the fees banks earn on their customers’ transactions as policymakers urge lenders to focus on expanding credit, reported Bloomberg. Türkiye Cumhuriyet Merkez Bankası said that the regulations have been made in response to client complaints such as overcharging and a lack of transparency. The changes, published in the Official Gazette, dramatically cut down the number and types of commissions banks can charge retail and commercial clients. The new regulations underscore the government’s criticism of private banks for focusing on profit instead of boosting credit at the same pace as state lenders. The decision to lower banking charges came after Turkey’s anti-trust authorities started a preliminary probe into more than 20 lenders to determine whether they violated competition law in offering deposit, credit, foreign-exchange and brokerage services to clients. Fees and commissions account for about 12 per cent of total bank revenue, according to data compiled by the banking watchdog. Income from the charges rose 33 per cent in the year through December 2019.

The International Monetary Fund (IMF) said that the Arabian Gulf countries face a budget reckoning and risk squandering their $2 trillion in financial wealth within 15 years as oil demand nears peak levels. In a report, the Washington-based fund said that global oil demand may start falling sooner than expected, putting a strain on the finances of the six-member bloc, which accounts for a fifth of the world’s crude production. The fund projected that without decisive economic reforms, the oil-rich Gulf countries could exhaust their net financial wealth by 2034 as the region becomes a net debtor. Furthermore, the IMF said that within another decade, the GCC’s total non-oil wealth will also be exhausted. Jihad Azour, the Director of the IMF’s Middle East and Central Asia Department, said, “Countries in the region need to think long-term and strategically because the oil market is changing structurally both from the demand and the supply side.” Economic reforms already underway in some countries need to accelerate, said Azour. GCC countries would have to be more aggressive in their pursuit of an economic transformation to preserve their current wealth. Development plans need to shift spending and job creation from governments to the private businesses and develop more non-oil sources of income more quickly, added Azour.

Sovereign Ratings as of 1 March 2020 Issuer

Foreign Currency Rating

Last CreditWatch/Outlook Update

1 Bahrain

B+/Positive/B

30-Nov-2019

2 Central Bank of Bahrain 3 Egypt 4 Iraq 5 Jordan 6 Kuwait 7 Lebanon 8 Morocco 9 Oman 10 Qatar 11 Saudi Arabia 12 Abu Dhabi 13 Ras Al Khaimah 14 Sharjah

B+/Positive/B B/Stable/B B-/Stable/B B+/Stable/B AA/Stable/A-1+ CCC/Negative/C BBB-/Stable/A-3 BB/Negative/B AA-/Stable/A-1+ A-/Stable/A-2 AA/Stable/A-1+ A/Stable/A-1 BBB/Stable/A-2

30-Nov-2019 12-May-2018 03-Sep-2015 20-Oct-2017 20-Jul-2011 15-Nov-2019 06-Oct-2018 20-Apr-2019 08-Dec-2018 17-Feb-2016 02-Jul-2007 05-Dec-2018 14-Feb-2020

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MARKETS

Offering a better insight than stocks The coronavirus outbreak in China have begun to impact markets across the world. The concern remains that the wider markets have yet to reflect the full impact of the disruption. With China being the worldâ&#x20AC;&#x2122;s most dominant consumer of raw materials, Ole Hansen, Head of Commodity Strategy at Saxo Bank, explains why the impact continues to be felt strongly across key commodities as the world faces the biggest demand shock since the 2009 global financial crisis

Ole Hansen

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

ommodity markets continue to bear the brunt of the coronavirus outbreak in China. While stocks, led by the US technology sector, resumed their rally and reached new highs, the Bloomberg Commodity Index traded lower for a fifth week and down by 6.4 per cent since 17 January when China finally alerted the world about the severity of 2019nCoV outbreak. We remain concerned that the full impact of the slowdown in China and abroad, with the exception of commodities, is not being properly priced in. The stock market has recovered strongly as investors have become increasingly immune to the apparent risks. Instead, focusing on the support coming from low inflation, low interest rates and central banks, led by the US Federal Reserve, continuing to pump liquidity into the market. With China being the worldâ&#x20AC;&#x2122;s most dominant consumer of raw materials, the impact has been felt strongly across key commodities and the world is facing the biggest demand shock since the 200809 global financial crisis. Despite some attempts to recover this past week, the losses since 17 January are significant as highlighted in Graph 1. Chinese demand will undoubtedly take a hit during the first half of 2020 and the risk was highlighted this past week when some gas and copper importers began declaring force majeure on shipments. The

prolonged lockdown of parts of the country in order to prevent further spreading of the virus has not only hurt demand but in the short-term also reduced China’s ability to take deliveries. For natural gas producers this could not happen at a worse time with global inventories already elevated following a mild Northern Hemisphere winter. In Europe, the Dutch TTF contract dropped to the lowest since August 2009 while in Asia the Japan/Korea LNG (liquified natural gas) contract hit a record low at $3/MMBtu (Graph 2). All of this being bad news for an already depressed US natural gas market where robust production growth has increasingly been relying on exports through LNG to curb inventories. Copper managed to claw back some of its steep losses after finding support at $2.50/ lb on High Grade and $5800/t on LME. The temporary recovery was supported by robust action from the People’s Bank of China who returned from the Lunar New Year holiday to add liquidity and cut rates. News that China would cut tariffs on American imports also helped sentiment. While these developments are likely to support a recovery in copper once China returns to work, the short-term outlook remains very challenging with half of global copper supply being consumed by China. We keep a close eye on the mentioned levels with a break signalling a potentially even bigger sell-off. Reports that Chinese demand for crude oil has been cut by more than 3 million barrels/day has kept prices under pressure and once again the market is looking to the OPEC+ group of producers for support through additional production cuts on top of those announce just two months ago. According to a survey from Bloomberg, OPEC’s production dropped to 28.4 million barrels/day in January, the lowest since 2009. Since the peak in late 2016, the group has now cut production by 5.8 million barrels/day with more than half coming from involuntary cuts from Venezuela, Iran and Libya.

Graph 1: COMMODITIES Coronavirus Market Impact (%) Changes since January 17 Gold Silver Wheat Platinum* Soybeans Aluminum Cotton US Natural Gas Soybean Oil Palladium* RBOB Gasoline HG Copper Arabica Coffee Lean Hogs Brent Crude Oil Japan/Korea LNG* Iron Ore* WTI Crude Oil Dutch TTF Gas* -25%

-20%

-15%

Source: Bloomberg, Saxo Bank

-10%

-5%

* Not part of the BCOM

Graph 2: NATURAL GAS Japan/Korea LNG

US NatGas

Dutch TTF, rhs

USD/MMBtu 12.0

EUR/MWh 35 30

10.0

8.0

20 6.0 15 4.0

2.0

0.0 2016

5 0 2017

2018

2019

2020

Source: Bloomberg, Saxo Bank

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“CHINESE DEMAND WILL UNDOUBTEDLY TAKE A HIT DURING THE FIRST HALF OF 2020 AND THE RISK WAS HIGHLIGHTED THIS PAST WEEK WHEN SOME GAS AND COPPER IMPORTERS BEGAN DECLARING FORCE MAJEURE ON SHIPMENTS.” — Ole Hansen, Head of Commodity Strategy, Saxo Bank

Graph 3: ICE BRENT CRUDE FUTURES 85.00 80.00 75.00 70.00 65.00 60.00 55.00 50.00

Indicative price. Prices delayed by 15 minutes Time Zone: Brussels, Copenhagen, Madrid, Paris

Q1Q2

Q3 2017

Q3 2018

45.00 Q1

Q3 2019

2020

Source: Saxo Bank

Graph 4: GOLD 1,600.00 1,550.00 1,500.00 1,450.00 1,400.00 1,350.00 1,300.00 Indicative price. Time Zone: Brussels, Copenhagen, Madrid, Paris

Apr

May

Jun

Jul

Aug

2019

Source: Saxo Bank

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

Sep

Oct

Nov

Dec

Jan

Feb 2020

1,250.00

Saudi Arabia, who needs oil closer to $80/b than the current $50/b, has shown an interest in yielding further market share in order to support and prevent the price from collapsing any further. The OPEC+ technical committee has proposed an additional cut of 600,000 barrels/day. Russia has once again shown resistance against cutting production and has promised an answer soon as to whether it will join. Five weeks of selling has taken Brent crude oil down by 25 per cent to a one-year low and the sudden shift from tightening supply to oversupply is reflected in the forward curve. In just three weeks the spread between the prompt April and the September futures contracts has gone from a healthy backwardation of $3/b, signalling tight supply, to a contango (oversupply) of -$0.85/b. While the virus tsunami hit pro-cyclical commodities, gold has spent the past three weeks trading within a relatively tight range. During the early stages of the virus breakout its lack of performance raised a few eyebrows of concern. Following a brief correction to support at $1550/oz it nevertheless managed to recover despite headwinds from rising stocks, yields and the dollar. These developments highlight gold’s continued safe haven despite a weaker inflation outlook—as raw materials tumble—and the risk of softer demand from China. Investors have, despite the lack of price performance, continued to accumulate gold through exchange-traded funds backed by bullion. Total holdings have, during the past three weeks, risen by 65 tonnes to 2585 tonnes, thereby breaking the previous record from 2012. While renewed dollar strength presents another challenge, we maintain our bullish outlook for gold. This given our concerns that stock markets, as opposed to commodities, are sending a wrong signal with the regards to the direction of growth and with that company earnings potential. At this stage however there is no point in chasing the market higher until stock markets and yields turn lower again.

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Future Bankers & Innovators 14 April 2020

Address Dubai Mall Hotel Dubai, United Arab Emirates SPEAKERS INCLUDE:

Sandeep Chouhan

EVP - Group Head Operations & Technology Mashreq Bank

Abdulaziz Abanmi VP for Technology Saudi Payments

Fraser Brown

Executive Director, Authorisation – Banking & Insurance ADGM Financial Services Regulatory Authority

Mohamed Abdelrazek

CIO - Africa, Middle East & Islamic Banking Standard Chartered Bank

Yuri Misnik

Group Chief Technology Officer First Abu Dhabi Bank

David Aldred

Managing Director, Treasury and Trade Solutions Citibank

Join our expert line-up of esteemed speakers and be part of the conversation. An exclusive gathering of the region's leading bankers and technology leaders to discuss pressing challenges of the new digital financial landscape. It will put the spotlight on the lessons learnt from the past successes in technology adoption and what it takes to be the bank of the future.

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CONFERENCE SPOTLIGHT:

• Technology for Banking: Past Successes, Emerging Landscape & New Challenges • Digital Attitude for Banks of the Future • Transformational Technologies & Implementation • Competitors, Vendors and Partners: The Blurring Line • The Demanding Consumer: What’s New and beyond Banking

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UAE banking at a time of inflection In the current market landscape, with its challenges in connection with difficult macro conditions, growing gap between leaders and laggards, and the threat from platform businesses, many banks need to do something. Dr Gokhan Ozevin, Senior Principal in the Financial Institutions Practise of Kearney says that difficult macro conditions should not be an excuse to only focus on short-term measures

UAE—AN ATTRACTIVE BANKING MARKET WITH UNIQUE CHARACTERISTICS

ost banking markets around the world have seen limited growth and profitability improvement in recent years. In contrast, despite the recent economic slowdown, UAE has been an attractive market from a growth and profitability standpoint and remains so. UAE banking income grew at a CAGR of five per cent between 2014 and 2018. Average annual RoE over the same period was 13 per cent. UAE banking is characterised by relatively higher risk costs and lower leverage which are offset by a high degree of cost efficiency and somewhat higher margins. Share staff costs in total costs remains very high. Corporate and GREs account for an unusually high share (approximately 70 per cent) of deposits and loans in the system, in line with the structure of the economy and concentration of income. Corporate loans, reflecting composition of the GDP, are

Dr Gokhan Ozevin

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

dominated by real estate and trade, with increasing yet limited diversification into manufacturing, transport and oil and gas. Deposits generate the lion’s share of risk-adjusted net interest income due to high risk costs associated with lending; high competitive pressure, negatively impacting pricing, and high share of current account and savings account in the deposit mix. Wining primary relationships in retail and transaction banking business in corporate are key for sustained profitability.

COMPETITIVE DYNAMICS CHANGING RAPIDLY Competitive dynamics is changing rapidly in the UAE market— top-end of the market has become much more concentrated after the major mergers over the past couple of years. While First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank, together account for more than 75 per cent of assets, rest of the market remains fragmented and overbanked—five banks with asset market shares between 2-7.5 per cent and 11 banks with less than two per cent. Growing pressure on mid-and small-size banks Impact of scale on performance becomes very visible the market is separated into three tiers based on asset market shares (Tier 1: > 5 per cent, Tier 2: 2-5 per cent, and Tier 3: <2 per cent asset market share in 2013). Although Tier-2 and Tier-3 banks managed to maintain their market shares so far, we observe a sizable profitability gap between Tier-1 banks and the rest. While Tier-1 banks delivered positive economic value added from 2013 to 2018, Tier-2 and Tier-3 banks struggled to pay back their cost of equity. Scale clearly matters, and gaps in digital as well as foundational capabilities contribute further to this profitability gap. We observe lesser productivity with Tier-2’s, and lesser productivity and lower risk-adjusted margins with Tier-3 banks. Gaps in scale, digital and foundational capabilities are likely to start a problematic competitive cycle for Tier-2 and Tier-3 banks. Investment pools required for customer innovation will be inadequate. Customer may accelerate defection to competitors with stronger balances sheets, more convenient and innovative offerings. In the absence of competitive value propositions, acquisition and retention levers may default to aggressive pricing and additional risk taking.

COMPARISON OF PROFITABILITY DRIVERS ACROSS BANK TIER Interest Income / Assets 4.3% 4.1% 3.7%

Opr. Income / Assets 4.5% 3.4% 3.2% Net Profit / Assets 1.9%

14.1%

10.8%

8.1%

Tier 1

Tier 2

Tier 3

1.6%

1.1%

Assets / Equity

Interest Expenses / Assets Opr. Costs / Assets

0.9%

2.0%

7.0%

7.4%

Opr. Costs / Assets

Tier 1

Tier 2

Tier 3

0.8%

Tier 2

Tier 3

1.2%

1.8%

Net F&C Income / Assets

1.4%

7.5%

0.3% Tier 1

1.4%

0.9%

1.4%

1.1%

Staff Costs / Opr. Costs 67% 63% 60% % Tier 1

Tier 2

Tier 3

Source: Kearney

Leading indicators and technology trends pointing towards tougher times Despite the unsupportive macro environment, profitability of UAE banks has remained broadly intact so far thanks to rising interest rates, cost-cutting efforts and financial buffers. Decelerating loan and deposit growth, tightening margins, accelerating NPL formation ratio are pointing towards tougher times. In addition to the bleak macro background, shifts in habits and preferences of customers, ongoing structural changes with the rise of fintech, open banking, and entrance of ‘platform’ businesses continue prompting a fundamental transformation of banks' operating models.

COST OPTIMISATION IS NECESSARY, BUT NOT ENOUGH

Revenue and margin growth Successful growth starts with reaching full potential in the core business and there are many levers to this end. When a bank has little competitive advantage and generating returns below the cost of capital, it would be more appropriate to focus on profit improvement with little growth or investment, shrinking the business to more attractive segments/products/channels. The chosen strategic intent should be supported by action across four essential enablers: value-based digital transformation, better analytics, agile ways working, and right talent and HR strategies. Regardless of their chosen strategy, firm foundational capabilities such as digital-ready IT, robust capital management and risk processes are key for UAE banks.

Commitment to efficiency and productivity gains Rigorous cost management, more selective definition of target segments and focusing business models accordingly are necessary for Tier-2 and Tier-3 banks. In addition to traditional cost optimization techniques, cost savings can be also achieved through cross-industry multi-bank efforts such as shared infrastructure, industry-wide utilities, smart outsourcing and strategic distribution partnerships. In many developed and emerging markets, non-strategic assets and activities such as ATM infrastructure and network management, call centres, KYC processes, payments processing etc. are being shared. Large banks or bank coalitions can position themselves as service providers/utility centres, selling their services to smaller banks, increasing their economies of scale. Another common route to efficiency is partnerships with companies from other industries and large digital and e-commerce platforms.

FOUR ESSENTIAL TRANSFORMATIONAL ENABLERS

Sharper customer segment and experience focus Smaller players should focus on (sub-) segments which are most attractive and where they are most able to compete and reduce commitments to noncore businesses to reduce organisational complexity and costs. There is a wide gap between leaders and laggards in UAE banking in terms of customer experience quality. Banks should aim to leverage this customer experience gap to their competitive advantage. Not all the advocacy drivers have the same impact for each bank. Identifying a bank’s unique formula for superior client experience given its competitive positioning in the market is key.

“FURTHER CONSOLIDATION MAY BE ONLY PART OF THE ANSWER. BANKS NEED TO THINK IN TERMS OF TRANSFORMATION RATHER TACTICAL MEASURES, HAVE A COMPREHENSIVE STRATEGY AND EXECUTIVE ALIGNMENT TO DEAL WITH THE ISSUES IN FRONT OF THEM AND MEET THE FUTURE OF THE INDUSTRY.”

Digitise intelligently or die Digital has the potential to enable stronger growth and lower costs. Digital fuels growth by allowing banks to create new products and propositions and do this much faster. It also improves customer acquisition and retention by enabling an integrated multichannel offering that deepens customer engagement, intelligent sales and service processes where RMs can take advantage of advanced analytics tools. Banks can extend their customer reach and distribution capacity, either partnering with online/offline players or positioning themselves as the hub of an ecosystem. On the cost side, digital allows banks to decrease cost of their customer sales and service interactions without sacrificing their richness. Furthermore, through digitising

— Dr Gokhan Ozevin

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POTENTIAL STRATEGIC LEVERS TO DRIVE SUSTAINABLE PROFITABILITY

eed to riorities right for en their

rs for in each r

Efficiency & productivity

Customer focus

Revenue/margin growth

– Zero-based cost optimisation for a step change in the cost base – Shared infrastructure, utilities, outsourcing, and strategic partnerships – Adding scale through inorganic growth – Digitizing and automating repetitive, rule-based processes – STP, RPA – AI-based apps to automate judgementbased tasks, e.g.: – Analysis of corporate financials – Retail credit underwriting – Customer service – Accelerate move to digital distribution – Branch/ATM network and format optimization

– Trimming non-core businesses – Superior customer experience across retail, SME and corporate businesses – Identify and focus on select high-impact advocacy drivers – Digitize the CX transforming transaction and banking journeys – Simplify onboarding and servicing with STP and automation – Centralize data collection across products to enable sale of multiple products – Personalize customer solutions leveraging behavioral data – Digitally enable RMs – Streamline client coverage by seamless teaming across RMs, product and delivery teams – Real-time analytics-driven CX management

– Portfolio and pricing optimization – Boosting F&CI through pricing, sales force discipline, and analytical levers – Increasing sales force effectiveness adopting best practices across the sales operating model – A renewed focus on Corporate Transaction Banking and Bancassurance – Holistic approach to effective acquisition of salary customers – Dominating payments to protect and grow customer intimacy – Expansion into digitally underserved segments – International expansion

Source: Kearney

and automating many time-consuming manual, non-STP processes they can reduce their reliance on branches, radically transform their CX, and take out a lot of cost. Using data and analytics to boost performance With the demand for faster information and decision making higher than ever, a progressive data strategy that effectively collects, integrates and manages data across the large numbers of customer touchpoints so that it can be acted on; adopting advanced analytics (big data analytics, AI/ML algorithms) and embedding them into operational workflows is both a key imperative and a low hanging fruit. Agile ways of working Leading banks in the UAE are adopting agile ways of working to tear down functional silos and cut down time to market of new products and services. Many have established digital factories, with the aim of accelerating transformation and eventually spreading the factory’s agile culture back to the larger organisation. Scaling agile to projects with dozens of teams working on complex products over multi-year horizons presents a serious challenge to incumbents and require a careful redesign of the operating model. Talent strategy for digital shift To manage the transition to digital and data driven era, banks need to align recruiting and digital strategy, adapt performance management and recognition processes, rethink career tracks and flatten organisational models. They need to reinvent their talent strategies to attract, train and keep quality digital talent.

STRONG FOUNDATIONAL CAPABILITIES: DIGITAL-READY IT, ROBUST CAPITAL AND RISK MANAGEMENT Banks that are serious about digital transformation will need to enhance their enterprise IT landscape along three

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

Kearney XX/ID

critical dimensions. Firstly, banks need to simplify their application and infrastructure architectures and decouple their application landscapes. Second, banks need to revamp their data management practises and provide a digital-ready data infrastructure. Third, banks need to adopt continuousdelivery and DevOps to automate their delivery processes to reduce time to market and increase development quality. Overall bank value metrics— EVA, RWA, etc.— must be consistently broken down across divisions and value creation targets should be integrated into target agreements for all business unit heads and must be regularly monitored. UAE banks must continue enhancing their ability to manage risk, considering new opportunities emanating from data, analytics and digital tools as well as emerging new risk types. There is ample room in the market to further automate credit underwriting processes and workflows and use advanced analytics techniques (e.g. ML/AI, ensemble models) to improve the accuracy and consistency of risk models.

WHERE DOES ALL THIS LEAVE BANKS? Further consolidation may be only part of the answer. Banks need to think in terms of transformation rather tactical measures, have a comprehensive strategy and executive alignment to deal with the issues in front of them and meet the future of the industry. This means seeking a sustainable business model, embracing a stronger customer focus, and intelligently investing in digital. UAE banks need to find ways to collaborate within the industry, firstly, to achieve a more efficient operating models, but more importantly, to effectively compete against nonbanks that are making inroads into financial services. At this inflection point for the industry, those willing to be make bold decisions and take decisive action are likely to emerge as winners. It is important to remember that 'in the middle of difficulty lies opportunity'.

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COVER STORY

“WE ARE EXCITED FOR OUR NEXT PHASE OF GROWTH IN 2020 AND HAVE ENTERED THE YEAR IN A STRONG OPERATING AND FINANCIAL POSITION WITH FULL CONFIDENCE FROM THE MARKET FOLLOWING THE SUCCESSFUL SUKUK ISSUANCE. THE SUKUK REPRESENTS A STAMP OF APPROVAL FROM REGIONAL AND INTERNATIONAL INVESTORS, AND IS AN ENDORSEMENT OF GFH’s SUCCESS AND MARKET POSITION.” — Hisham Alrayes

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

A solid market position GFH Financial Group’s landmark $300 million five-year Sukuk issuance was 2.5 times oversubscribed, with a book size exceeding $750 million. The successful issuance is a stamp of approval from regional and international investors on the Groups profile, strategy and dominant market position. Hisham Alrayes, CEO and Board Member of GFH, sits down with Banker Middle East to talk about this success and his plans for the year

FH Financial Group (GFH) successfully priced a $300 million five-year Sukuk in January. Dubbed to be a landmark transaction for the financial institution, placing it in the international debt capital market, the issuance was well-received garnering a strong demand from international investors.

SUKUK AUCTION The orderbook for the certificates saw an oversubscription of 2.5 times with a book size exceeding $750 million. International investors outside the region took up 47 per cent of the issuance, while the remaining 53 per cent was allocated to regional investors. In terms of the types of investors, 61 per cent were fund managers and 39 per cent were financial institutions. “While the issuance was met with strong market interest from both international and regional investors, it reinforces market confidence in our business and strategy,” said Hisham Alrayes, CEO of GFH. GFH Financial Group is a diversified business group with four business lines. This allows debt investors to invest in a company that is well diversified and hence not exposed to cyclical market factors of institutions with one business line, added Alrayes. The Sukuk was supported by a 'B' rating from both S&P and Fitch, which recognises GFH's healthy financial position, sound strategy and business model. The proceeds of the Sukuk issuance will be used to enhance the financial position of the group and to fund its next phase of growth.

FUTURE PLANS GFH reported a total income of $335 million and a net profit of $80 million attributed to shareholders for 2019. Funds raised reached $2 billion in the equity and money market, a 100 per cent increase from 2018. The financial institution concluded six transactions at a total deal value of $557 million across the UK, US and GCC markets. Total assets of the group was recorded at $5.9 billion on 31 December 2019, compared to $5 billion in the previous year, reporting an increase of 18.2 per cent. Total assets and funds under management increased from $ 8.5 billion in 2018 to $10 billion in 2019. GFH’s revenue for 2019 was $335.69 million compared to $286.17 million last year, boasting an increase of 17.3 per cent. The financial institution attributed this to the continued growth and progress in GFH's core investment banking business, increased contributions from real estate activities and strong performance in the group’s growing treasury business. GFH is listed on the Bahrain Bourse, Kuwait Stock Exchange and Dubai Financial Market under the ticker “GFH”. Alrayes further expanded on the Group’s operating performance during the year. “We have achieved a good growth and results from across our core business lines characterised the Group’s performance in 2019. Key among these was continued growth of our portfolio of real estate assets in the US market where we have now concluded investments in excess of $1 billion over the past five years. Our newly established treasury line also exceeded expectations supporting income growth and adding further diversification to our business. These key areas of our business that we will be working to further diversify and grow in 2020.”

cpifinancial.net

COVER STORY

A POSITIVE TRAJECTORY Over the course of 2019, GFH continued to build its core business lines whilst diversifying in line with its mandate. The financial institution managed to significantly expand its investment banking business closing six transactions which are valued at $557 million in assets under management. Similarly, GFH witnessed substantial progress in its real estate activities, landmark projects, commencing sales in landmark developments as well as securing profitable and well-timed exits. Additionally, the Group's newly launched treasury business line performed extremely well and contributed to strong and improved income generation. Commenting on GFH’s progress, Alrayes said, “The progress of the past year has seen us emerge into 2020 with even stronger foundations upon which we will further build the business and advance our strategy to be a leading regional and international investor. As we pursue this mission and expand our international presence, GFH’s entrance into the international debt capital market with our recently issued Sukuk will further positively position our brand globally.” “Through the Sukuk, a greater number of international investors have now already been exposed to GFH and our business activities. We intend to capitalise on the recognition received as we go forward. Furthermore, GFH’s access to the international debt capital market has also served to diversify GFH’s funding sources, further strengthening the Group’s financial position and better allowing us to continue to source, execute and market unique, attractive investments and opportunities for shareholders and investors,” he added.

“WHILE THE ISSUANCE WAS MET WITH STRONG MARKET INTEREST FROM BOTH INTERNATIONAL AND REGIONAL, IT REINFORCES MARKET CONFIDENCE IN OUR BUSINESS AND STRATEGY.”

Hisham Alrayes, CEO and Board Memebr, GFH Financial Group

— Hisham Alrayes

GFH FINANCIAL GROUP $300 MILLION FIVE-YEAR SUKUK Issuer Obligor Size of Issue Profit Tenor Currency Global Coordinators Joint Lead Managers Legal Advisors for Issuer Listing Governing Law Rating Investor Breakdown Book Size Face value/Minimum Investment 24

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

GFH Sukuk Company GFH Financial Group $300 million 7.50 per cent 5 Years US dollar Societe Generale and Standard Chartered Emirates NBD Capital, Kamco Investment Company, Mashreqbank, SHUAA Capital, Societe Generale, Standard Chartered Bank and Warba Bank Allen & Overy / Zu’bi & Partners London Stock Exchange English Law Rated B, with a stable outlook, by Fitch and S&P 47 per cent International, 53 per cent regional More than $750 million / 2.5 times oversubscribed $200,000

CPI Financial 2020 Events Calendar April 14

June 10

Banker Middle East Banking Technology Summit & Awards The Banking Technology Summit sheds light on the most critical developments in banking technology and innovation in the region. It is an exclusive gathering of C-level executives from banks, regulators and technology leaders to discuss ways of enhancing business performance, foster innovation and maintain competitiveness.

Islamic Business & Finance Awards The awards ceremony is the longest-established Islamic banking and finance awards programme honoring outstanding performance in Shari’ah-compliant finance. The gala dinner is attended by over 150 of the top Islamic bankers in the region, as well as global leaders in Islamic finance. It rewards excellence and celebrates the achievements of the Islamic finance industry.

The summit is followed by the inaugural Banking Technology Awards recognising the achievements of banks and technology providers who are leaders at the forefront of digital transformation.

September 9

October 14

Banker Middle East Retail Product Awards

Banker Middle East Industry Awards

The Retail Product Awards celebrate the most successful financial products and services. It provides a benchmark for the financial services sector and recognises the most innovative retail banking products, services and solutions while celebrating exemplary institutions across the region that have designed remarkable financial solutions to better serve consumers.

The Industry Awards is the most prestigious event in the banking calendar, attended by over 350 C-level executives and key decisionmakers across the Middle East. The annual awards programme benchmarks and promotes banking and financial excellence in the region, giving due recognition to outstanding institutions that shape the market.

November 4

November 25

Emerging Technologies in Finance

Regulations & Compliance

The summit will explore the power of emerging technologies that shape the financial industry, putting a spotlight on regulation and risk management measures that entails. Issues such as innovating new products for a more sophisticated customer base, increasing financial inclusion and preparing for future cybersecurity and digitisation challenges will all be discussed at the event.

WEALTH Arabia Summit The summit is the only platform in the region that specifically caters to high net-worth individuals (HNWIs) and their most trusted representatives in wealth management. The summit brings together HNWIs, family offices, senior investment executives, wealth managers and private bankers for actionable investment advice from the world’s most informed individuals. This is an invitation-only event offering an intimate environment for focused discussion on key drivers shaping the future of investment.

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COUNTRY FOCUS

Fashionably late Kuwait's massive reserve has always allowed its economy to absorb geopolitical risks and oil price volatility. However, these macroeconomic shocks have finally given the government a nudge to implement long-overdue reforms to diversify the country's sources of revenue. We take a look at this wealthy nation's agendas

espite the strain on Kuwait’s finances, the country’s wealth still sets it apart. According to the International Monetary Fund (IMF)— boosted annually by mandatory transfers of 10 per cent of total revenue to the Future Generations Fund (FGF)—assets in the Kuwait sovereign wealth fund has amounted to over $400 billion. Kuwait, OPEC's fourth-largest oil producer, has been the slowest reformer in the GCC, partly due to government-legislator frictions and exceptionally large sovereign assets, which could finance decades’ worth of fiscal deficits. According to S&P Global, despite Kuwait's baby steps towards fiscal reforms, the economy remains tightly bound to oil. The country derives around 55 per cent of its GDP, more than 90 per cent of exports, and about 90 per cent of fiscal receipts from hydrocarbon products.

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

Global oil prices will continue to determine growth, but other economic sectors are picking up. In 2019, Kuwait recorded a three per cent non-oil revenue growth and the IMF projected a 3.5 per cent growth this year. Kuwait approved its 2020/21 budget last month projecting a KWD 9.2 billion ($30 billion) deficit, another huge deficit for the sixth year in a row due to lower oil prices and production curbs in line with the country’s commitment to the Organisation of Petroleum Exporting Countries (OPEC). The parliament has delayed the passing of a new debt law after the previous one expired in October 2017, blocking any debt issuance in 2018 and 2019. The tensions delaying Kuwait’s fiscal reforms have stalled the country’s economic transformation efforts. Lawmakers have resisted efforts by the government to reclaim access to debt, accusing it of mismanaging public finances and demanding a fix before it can borrow again, said Moody’s.

PHOTO CREDIT: Lukas Bischoff/iStock

Fitch Ratings stated that government resignations and subsequent cabinet reshuffles point to political frictions that could delay new debt issuance and weigh on broader fiscal and economic reforms. However, despite the tumultuous relationship between the government and politicians, Kuwait introduced financial and structural reforms to boost private sector growth and employment. The World Bank stated that Kuwait is undertaking reforms to improve the business climate, strengthen competition, reduce the role of the state in the economy, deepen capital markets, and foster the development of SMEs.

THE ECONOMICS OF KUWAIT VISION 2035 When the Emir of Kuwait opened the parliamentary session last year, he urged lawmakers not to allow higher oil prices to hold back economic reforms needed to protect future generations. For years Kuwait benefited from having the third-largest oil reserves in the world by investing in lucrative oil discovery projects. Now the government is eager to capitalise on human capital. Kuwait is taking bold steps towards a bright future with Kuwait Vision 2035 that is aimed at bolstering the country’s financial status to include a variety of income resources other than oil revenues. The government plans to privatise around 40 assets over the next 25 years. By privatising national assets, Kuwait is handing the private sector a stake in the country’s future. The Kuwait Vision 2035 was launched by HH the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah some two years ago to transform the country into an international hub for business and commerce. Its ultimate aim is to wean the country off from dependence on hydrocarbons, cut the red tape that hurts innovation, trim Kuwait’s massive public sector spending and spur private sector investment.

“AT 420 PER CENT OF GDP, KUWAIT’S NET GENERAL ASSET POSITION WAS THE HIGHEST OF ALL RATED SOVEREIGNS AT THE END OF 2019.” — S&P Global Ratings

The Financial Times reported that the government’s grandiose infrastructural spending plans, alongside wideranging investment in energy, healthcare and education feed into the country’s long-term development vision. In 2019, the finance ministry said that $60 billion has already been injected into the economy as part of the reform plan, with another $100 billion set to be deployed through 2035. According to ProTenders, a Middle East construction market research company, there are $429 billion in planned projects in Kuwait, of which $239 billion in contracts are under construction. Kuwait’s Mubarak al-Kabeer port is the centrepiece of the country’s development plans. Located on Bubiyan Island near Kuwait’s northern border with Iraq, the Silk City project is planned as a free-trade zone. Backed by China, the North Gulf Gateway project is designed to attract a range of high-tech industries and tourism, and create between 200,000 and 400,000 new jobs. The government has positioned the project as a means to prepare Kuwait for an era of declining oil revenues. The project would fuse Kuwait into China’s Belt and Road Initiative, a 21st Century take on the Silk Road made up of a ‘belt’ of overland corridors and a maritime ‘road’ of shipping lanes.

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COUNTRY FOCUS

Kuwait is the first GCC country to sign up to China’s efforts to tie Southeast Asia to Eastern Europe and Africa, a swath of the globe that accounts for 71 countries, half the world’s population and a quarter of global GDP. In December 2019, the Capital Market Authority said that the sale of its stake in Boursa Kuwait to Kuwaiti citizens was more than 8.5 times oversubscribed, in the last stage of the company’s privatisation process. The first phase of Kuwait Stock Exchange's initial public offering took place in February 2019 through an open bidding process in which a consortium of domestic and international investors, including Hellenic Exchanges-Athens Stock Exchange Holding acquiring a 44 per cent stake in the company.

“THE GOVERNMENT HAS NEVER WAVERED ON ITS PROMISE TO DEPOSIT 10 PER CENT OF ALL OIL REVENUES INTO THE FUTURE GENERATIONS FUND, WHICH IS NOW BELIEVED TO BE WORTH $420 BILLION.” — Fitch Ratings

FINANCIAL CUSHION Although Kuwait is being confronted by a KWD 9.2 billion deficit as projected in the 2020/21 budget, the government will likely draw from the state reserve fund to finance the deficit. The country has long enjoyed the trappings of the world’s first sovereign wealth fund, which Sheikh Abdullah Al-Salem set up in 1953. The exact sum of the sovereign wealth fund remains a secret, as its assets are not disclosed. Kuwait has a law that prohibits the Kuwaiti Investment Authority (KIA) from revealing the size of its holdings. According to IMF estimates, KIA’s assets surpassed 420 per cent of GDP by end-2019, as the Future Generations Fund continues to receive mandatory transfers from the government and generated strong returns on its assets. This affords Kuwait significant buffers to respond to any potential future shocks. S&P stated that at 420 per cent of GDP, Kuwait’s net general asset position was the highest of all rated sovereigns at the end of 2019. Kuwait is also ranked at the third-highest investment grade level by Moody’s, S&P Global and Fitch Ratings, the three major credit assessors. Kuwait’s other financial cushion is the FGF created in 1976 to provide financial security for when Kuwait’s oil reserves finally dry up. The government has never wavered on its promise to deposit 10 per cent of all oil revenues into the fund, which is now believed to be worth $420 billion, according to Fitch Ratings. Kuwait’s General Reserve Fund (GRF) holds the accumulated government surpluses after transfers to the FGF, and the government draws on its assets for financing, including to pay for maturing debt. Fitch said that the GRF could sustain the country for five years before it runs out, however, the investment vehicle’s value is thought to have fallen for the fourth year in a row in 2019.

LEANING ON BANKS One of the country’s pillars of growth is a strong banking sector which comprise 23 banks, including 11 local lenders,

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

according to the National Bank of Kuwait (NBK). CBK reported that banks dominate the domestic financial sector, with $221 billion of assets in 2018 or 89 per cent total disclosed financial assets. Furthermore, the banking sector has also shown resilience in the face of the oil price decline, notching compound annual growth in assets of 4.7 per cent from 2014 through 2018. According to PwC, the Kuwait banking sector’s profile is expected to continue growing, with lenders positioning themselves as key partners for infrastructure projects and public-private partnerships. Vision 2035 also offers opportunities for banks to develop new corporate offers and credit facilities. Last year, credit growth in Kuwait accelerated, spurred by the central bank’s decision in 2018 to increase ceilings on personal loans and supported by favourable monetary conditions. The Central Bank of Kuwait (CBK) deployed various monetary policy instruments to support lending to the economy while maintaining the attractiveness of the dinar, said Moody’s. The World Bank lauded CBK’s plans to conduct a comprehensive inventory of macroprudential tools to ensure that they continue to promote financial sector resilience, prevent a build-up of systemic risks, and balance financial stability and growth objectives. Despite the challenging operating environment, S&P Global said that the Kuwait banking sector remains resilient with stable profitability and improved asset quality.

BOOSTING FDI To facilitate foreign direct investment (FDI), the government launched the Kuwait Direct Investment Promotion Authority (KDIPA) in 2013. Kuwait has also passed laws allowing 100 per cent foreign ownership of companies approved by the KDIPA and instituting tax holidays and customs exemptions. The merits of these policies are $3.2 billion in foreign investments between January 2015 and March 2019. According to KDIPA’s latest annual report, the investments were concentrated in the services sector such as information technology, oil and gas, construction, training, health, energy, consultancy, market research and entertainment services. KDIPA also said that the investment came from 37 global companies representing 16 foreign and Arab countries from developed and emerging economies. Kuwait is also opening up its bond market to foreign investors. Despite KIA being among the world’s largest sovereign wealth fund—with almost $548 billion (420 per cent of GDP) held in assets abroad—the state-issued $8 billion in five- and 10-year bonds in 2017. The debt issuance authorisation expired in October 2017. However, Kuwait is in the process of drafting a new law to allow issuance of 30-year bond. The new legislation would also let the country raise its debt ceiling from KWD 10 billion to KWD 25 billion and allow the issuance of sovereign Sukuk.

HYDROCARBON INCOME Data from Kuwait’s statistics bureau shows that hydrocarbons remain the backbone of Kuwait’s economy, although their share of GDP has dropped to 55 per cent from 61 per cent in 2014. As of 2018, Kuwait was estimated to be the world’s eighthlargest crude oil producer, with the ninth-largest oil reserves, said S&P. Assuming current production levels, the total proven oil reserves are equivalent to around 100 years while the cost of production is among the lowest globally.

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COUNTRY FOCUS

The physical nature of Kuwait’s oil and gas reserves means that the country enjoys some of the lowest costs of production of any oil province in the world. As such, it is hardly surprising that the country’s economic performance will remain largely determined by oil industry trends. Oil dependence worked in Kuwait’s favour in 2017/18 when oil prices were higher, lifting growth and bettering fiscal and external balances. However, 2020 might be a different story. S&P expects Kuwait’s oil production to average about 2.65 million bpd in 2020 compared to the 2.8 million bpd originally planned and included in the 2019/20 budget. Due to production curbs in compliance with OPEC+, Kuwait’s overall economy is projected to expand by a modest 0.5 per cent this year, similar to that of 2019 where the country’s real GDP was held back by OPEC+ decision to cut oil production.

Kuwait projected

KWD 9.2

billion

budget deficit in 2020/21

“THERE ARE $429 BILLION IN PLANNED PROJECTS IN KUWAIT, OUT OF WHICH $239 BILLION IN CONTRACTS ARE UNDER CONSTRUCTION.” — ProTenders

UNRESOLVED ISSUES Kuwait has an unpredictable monetary policy unique for an Arabian Gulf state and recently appointed the first female finance minister in the region. The country has an elected legislature but the acrimonious relationship between lawmakers and the government has resulted in eight administrations. Bloomberg reported that the fallout on fiscal policy is also becoming harder to contain because of the disputes between the legislators and appointed government. In her 2019/20 budget presentation, Mariam Al-Aqeel, the Kuwait Finance Minister, said that the debt law which was previously blocked by the lawmakers is now in parliament. The finance minister is expecting the government to fight for the law to be approved since the cost of borrowing is less than the cost of withdrawing from the reserves. The lack of a new public-debt law has made it impossible for the government to finance its deficit by borrowing, forcing it to rely on the GRF’s assets instead. Kuwait plans to plug its 2020/21 deficit through withdrawals from the GRF. According to Moody’s estimates, GRF assets has declined by KWD 14.7 billion from 2015-2016 to 2018-2019 fiscal years. Fitch Ratings expected parliamentary authorisation to issue or refinance debt to be approved in the fiscal year to end-March 2020 but given continued political acrimony, the rating agency said that it will be delayed until 2020/21. The pace of the decline in GRF assets slowed in 2016/17 on the back of heavy international and domestic bond issuance, but this largely changed in 2017/18 after the expiration of the public debt law. The parliament also blocked some crucial reforms, such as the introduction of value-added tax (VAT) and excise taxes in Kuwait. The prospect of new levies such as VAT might be even more remote this year as lawmakers gear up for parliamentary elections, with popular issues at the forefront. Nevertheless, in spite the various challenges the government is grappling with, Kuwait remains in a strong financial position independent of external help and is on the right course in developing it’s economy.

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

Despite the tumultuous relationship between the government and politicians, Kuwait introduced financial and structural reforms to boost private sector growth and employment. PHOTO CREDIT: Tasneem Alsultan/Bloomberg

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COUNTRY FOCUS

KUWAIT in numbers POPULATION

MEDIAN AGE

4.2 million

36.8 years

(2020)

Source: Worldometers

GDP NOMINAL GDP

$109 billion (2016) $120 billion (2017) $141 billion (2018) $137 billion (projected 2019) $143 billion (projected 2020) Source: IMF

REAL GDP GROWTH

2.9% (2016) -3.5% (2017) 1.7% 2018 (2018) 2.5% (projected 2019) 2.9% (projected 2020)

REAL NON-OIL GDP (annual percentage change)

1.4% (2016) 2.1% (2017) 2.5% (2018) 2.5% (2017) 3.0% (projected 2019) 3.0% (projected 2020) Source: IMF

GROSS DEBT (per cent of GDP)

10% (2016) 21% (2017) 14.8% (2018) 17.8% (projected 2019) 21% (projected 2020) Source: The World Bank

Source: IMF

OIL AND GAS SECTOR

GDP PER CAPITA

CRUDE OIL AND GAS EXPORTS (millions of bpd)

$24,800 (2016) $26,600 (2017) $30,600 (2018) $27,500 (projected 2019) $21,400 (projected 2020)

2.01 (2016) 1.71 (2017) 1.69 (2018) 1.70 (projected 2019) 1.72 (projected 2020)

Source: IMF

REAL OIL GDP (annual percentage change)

BREAKEVEN OIL PRICES (US$/barrel)

3.9% (2016) -7.2% (2017) 1.2% (2018) 2.0 (projected 2019) 2.5 (projected 2020)

43.4 (2016) 45.2 (2017) 48.3 (2018) 48.8 (projected 2019) 49.7 (projected 2020)

Source: IMF

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

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CAPITAL MARKETS

Tackling a triple-tranche In an exclusive, Mohammed Khnifer, a debt capital markets banker at a supranational banking institution, suggests a pricing strategy in a triple-tranche deal and how debt issuers can lower cost of funding

HOW THE CORRECTION ALL STARTED

ne of the fundamentals in conventional or Islamic debt capital markets is determining the right pricing for your cost of funding. This vital issue is a deal-breaker for potential issuers. Some of the biggest emerging market issuers are gradually equipping themselves with former “debt capital market” bankers in order to master the art of pricing and create value for stakeholders. One of the clearest examples of such a strategy is Saudi Arabia’s National Debt Management centre (NDMC). On 22 January 2020, the institution formerly known as Debt Management Office (DMO) priced a $5 billion multi-tranche bond. The story is not on the oversubscribed transaction (an order book of more than $23 billion) but rather on the implementation of the most aggressive pricing strategy since NDMC’s establishment. This led to the correction of the ‘yield curve’s distortion’ for the longer end of the tenor which (at the same time) created a ripple effect for the remaining tenors across the yield curve (which has been repriced as a result). What we have witnessed out of this trade is that Saudi Arabia has taught us how to price sovereign debt strategically. Here is how they did it.

The distortion to the yield curve started two years ago when the 31-year paper was printed at a spread of 210bps (compared to a spread of 180bps a year ago). The spread then widened to 230bps in 2019. In 2020, the 35-year bond was priced aggressively at 160bps over US Treasuries. This tranche saw a discount of around 65bps—the 35-year bonds were priced as if Saudi was issuing a 30-year maturity. The rationale behind this approach is to correct the longer end of the yield curve. Now there should be a ripple effect and we should see a repricing in the Saudi curve. This will be credit positive for new Saudi corporate issuers who will benefit from such pricing advantage.

LEAVING NOTHING ON THE TABLE NDMC took a particularly aggressive approach in terms of pricing after issuing the debt with no premium, not leaving anything on the table. Based on my hypothetical fair value for the new bond (after looking at the outstanding trading levels) the discount is in the range of 6bps to the seven years note and 23 bps to the 12 year one. The calculation is based on the last traded session that was on Friday, 17 January 2020 (as Monday was a holiday) and the deal was

KSA YIELD CURVE AND NEW BOND PRICING KSA Yield Curve (Interpolated)

% Yield

KSA New US$ Bonds

4.25

30Y

25Y

4.00

20Y

3.75

15Y

1Y 2Y 3Y

3.50

12Y

10Y

3.25 3.00

All three new US$ bonds were priced inside the existing curve which led to repricing of the yield curve

2.75 2.50 2.25

Source: Bloomerg/FAB

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

2055

2050

2049

2047

2048

2046

2045

2044

2043

2042

2041

2040

2039

2037

2038

2036

2035

2034

2033

2032

2031

2030

2029

2028

2027

2026

2025

2024

2023

2021

2022

2020

2.00

RELATIVE VALUE: KSA NEW US$ BONDS vs EXISTING ISSUES KSA New 01/55 35Y KSA 5.25 1/50 30Y KSA 5 4/49 29.2Y KSA 4.625 10/47 27.7Y KSA 4.5 10/46 26.8Y

+0.7 +0.1 +0.6 +3.8

KSA New 02/32 12Y KSA 4.5 4/30 10.2Y KSA 2.969 10/29 S 9.8Y

+3.4 +5.9

KSA 4.375 4/29 9.2Y KSA 4.303 1/29 S 9Y KSA 3.625 3/28 8.1Y KSA 3.628 4/27 7.2Y KSA New 02/27 7Y KSA 3.25 10/26 6.8Y KSA 4 4/25 5.2Y Yield to Maturity (%) 2.00

+10.6

Additional yield spread (in bps) offered by existing bonds over the new bonds issued (which should be repriced/ corrected in secondary markets)

+24.4 +26.2 +24.0

+8.3 +16.1 2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

Source: Bloomerg/FAB

~30 YEAR TENOR PRICING Issuer year

Tenor

Spread over benchmark in bps

Benchmark 30Y TY yield

Effective pricing

2016 2017

30Y

210

2.506

4.606

30Y

180

2.860

4.660

2018

31Y

210

3.025

5.125

2019

31Y

230

3.010

5.310

2020

35Y

160

2.240

3.840

Source: Bloomerg/FAB

Yield Conventional (%)

SAUDI DEBT THE LONG END OF THE CURVE IS BEING PRICED AT PREMIUM TO SIMILARLY A-RATED EMERGING MARKETS 4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6

Saudi yield curve at end of Dec. 2019

Saudi Arabia

A-Rated EMs

2Y 3Y 4Y 5Y 6Y

7Y 8Y 9Y 10Y

15Y Years to Maturity

20Y

25Y

30Y

Source: Bloomerg

announced on Tuesday. I did not take Tuesday's trading session in consideration because we knew that when a issuers decide to issue, usually their bonds will be under pressure on the same day.

of more than 35 basis points over Indonesia 2050. Across the Atlantic, the Chile 2050 trades 60 basis points inside KSA 2055 for just one notch better credit rating.”

JUSTIFICATION

FINAL THOUGHTS

This approach is justified as most investors know that some GCC states are better rated than others in emerging markets (EMs). Those EMs can issue at a reduced cost despite their lower credit ratings. The road for correcting the pricing variance (for GCC issuers against their EM peers) is still long. NDMC and Aramco has shown GCC issuers the importance of how to price strategically. Additionally, First Abu Dhabi Bank (FAB) has released a research note in which it explains the pricing difference with EMs. “At 3.84 per cent yield, the pricing of the 2055 35-year bond is the cheapest for Saudi Arabia as a borrower, while for investors it still offers substantial yield pick-up (against comparable peers) on a relative value basis. Indonesia priced its 2050 30-year bond on 7 January at 3.55 per cent yield and currently trades around 3.465 per cent. The KSA 2055 and 2050, rated three notches above Indonesia, still offer yield pick-up

Before 2020, the only Saudi entity that was very aggressive in the last four years was Saudi Arabian Oil Company (Aramco), which priced its bond offering inside the sovereign's yield curve. Saudi Arabia has demonstrated its sophistication (for an EM issuer) when it announced and printed an intraday trade, with no roadshow or investor call, against the backdrop of heightened geopolitical tension in the region. Saudi’s latest issue—a smaller size for the sovereign by historical standards—has enabled the Kingdom to execute its aggressive pricing approach. This could signal a change in the market when it comes to the pricing strategy of jumbo deals above $9 billion. With 16 per cent returns over the past year (compared to 12 per cent overall for the Bloomberg Barclays EM Sovereign index), the kingdom's sovereign debt has proven it is still in high demand.

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ISLAMIC FINANCE

Meeting the global demand The region’s rising demand for Islamic finance calls for experienced international financial centres, says Faizal Bhana, Director for the Middle East and Africa at Jersey Finance

Faizal Bhana

hari'ah-compliant wealth management is experiencing a period of growth with high penetration levels in the GCC. Given our longstanding presence in the market and discussions with partners and Jersey firms, alongside our research in the market, it has been highlighted that there is a shortage in supply of Islamic finance wealth management solutions and products, albeit the exact size remains unknown. What is clear, is that the demand for Islamic finance wealth management in the UAE, while still in its infancy, has enormous potential for rapid expansion from wealthy individuals and families in the predominantly Muslim countries within the Middle East, Asia, Africa and indeed worldwide. Our recent report The Evolution of Wealth Management in the World of Islamic Finance—Views from the Islamic Finance Wealth Management Community, commissioned by Jersey Finance and Hubbis, revealed that almost 59 per cent of people aged between 50 and 70 currently use Islamic wealth management products and solutions. Nonetheless, 60 per cent of the increase in demand in the next five years will come from those aged between 25 and 50. These younger and largely Western-educated generation have more of a natural disposition for Islamic wealth management, as it tends to represent a more socially-conscious model. These individuals are expected to account for more than 55 per cent of this increase, compared to 33 per cent from family offices and 12 per cent from institutions.

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

This is set to positively affect the already existing imbalance between supply and demand, presenting an excellent opportunity for reputable and experienced international financial centres (IFCs) to work with such individuals and offer their expertise. The research shows that there is an increasing appetite for Shari'ah compliant wealth management solutions amongst wealthy and ultra-wealthy Muslims, especially in younger generations. However, most industry experts would agree that Shari'ah compliant financial products and Islamic finance solutions of any type are not simple to devise. Once such products and solutions are created, they are often subject to different interpretations amongst scholars, industry protagonists and clients about their religious compliance. While there might one day be an industry standardisation, the likelihood of this happening in the foreseeable future remains slim. Other important challenges that must be addressed include the shortage of expertise available in the region, complex legal and Shari'ah interpretation issues, documentation concerns and the lack of scale—production costs of investment solutions have become significantly higher. In addition, returns on Islamic wealth management solutions are generally lower than conventional offerings, due to, amongst other factors, costs associated with documenting complex Shari'ah compliant structures. However, industry players and regulators recognise many of these challenges and are working to improve diversity, costs and returns. The first step in meeting this growing demand is to attract and nurture the right expertise in Islamic finance wealth management. The offerings that IFCs provide are vital in supporting this demand. The opportunity ahead for IFCs is enormous, especially considering the region’s requirements for generational wealth planning. IFCs with special purpose vehicles (SPVs) who have firsthand experience with Shari'ah-compliant Islamic capital market transactions will have an advantage in terms of bridging the gap in supply. Furthermore, product knowledge coupled with international expertise in Islamic finance wealth management solutions, alongside a healthy regulatory environment, equips IFCs with the necessary tools to answer the region’s high demand. Perhaps most importantly, a deep understanding of the local market requirements is necessary to ensure the smooth implementation of international Islamic finance wealth management solutions. Jersey Finance has long recognised this and its physical presence in the region allows for a better understanding of local market nuances such as the key themes driving client trends.

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Spearheading a digital future In an exclusive, David Parker, Co-Chief Investment Officer of Bahrain EDB and Board Member of Bahrain Fintech Bay, shares his vision on technology in Islamic finance for Bahrain

ow far has the Islamic fintech space come in the last few years?

Not as far as we would like. We are interested in Islamic fintech from several different angles. First of all, we want to see more Islamic banks innovating. We’re starting to see banks such as Al Baraka Bank, for example, increasingly engaging with start-ups globally and are very focused on the fintech agenda. One of them recently joined the board of Bahrain Fintech Bay. We want to continue to work with the existing financial institutions in that space to help them embrace digital disruption and innovation. Second, we’re very key to work with Islamic fintechs in different parts of the world and invite them to come to Bahrain and test their products and services here. We were delighted to welcome into our sandbox for example Wahed Invest, which is a Shari’ah-compliant robo-advisory firm. The third area, in which I believe there is a lot of potential, is to what extent can we engage with companies doing interesting things in the conventional space which have the potential to develop a Shari’ah-compliant version of that product? We worked with Rain in Bahrain, who were the first graduates from our regulatory sandbox, and were the first platform to become licensed for crypto trading in the country. They have now developed a Shari’ah-compliant focus in their product. We’re starting to see companies that are looking at the Muslim market and the Islamic fintech space as an opportunity. I think that’s where it gets really exciting from a fintech perspective. This is an industry you could argue that Bahrain has always been at the forefront of. Bahrain pioneered Islamic finance decades ago, and we think fintech is the next phase of that. The only other location that we look at that we see do some interesting things is Malaysia. Something we’d love to do from a Bahrain perspective is see how we could tie in with the relevant authorities in Malaysia, as for us it’s all about building bridges. Malaysia frequently ranks number one in the world for Islamic finance. We know there are some interesting things going on in Malaysia and the Islamic fintech space. We are in different parts of the world—they are very much a part of the ASEAN economy, we’re a part of the Gulf economy. Could we build bridges? That question excites me.

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ISLAMIC FINANCE

We also are asking what else is going on in Pakistan, Indonesia, parts of Africa, London and Luxembourg, which is also looking at the Islamic finance and fintech space. We are trying to build bridges with those other hubs.

Could you tell me more about what your focus is? My personal brief covers four areas, all of which in some way or another link to Islamic finance and the Islamic financial sector. I’m responsible for financial services, so we do a lot of work with both the conventional and the Islamic players in Bahrain. I’m responsible for the ICT and start up sector. We’re very keen to attract more innovators, more fintechs, into Bahrain. We think the Islamic finance space is something that’s really ripe for innovation. If you take blockchain technology for example, if you look at the principles of blockchain it’s all about transparency that drives trust. Well, isn’t that one of the underlying principles of Islamic finance?

What are some of the challenges in getting traditional institutions to embrace innovation?

David Parker

“ONE THING WE’RE VERY GRATEFUL FOR IN BAHRAIN IS THAT WE HAVE ONE SINGLE SUPER-REGULATOR, THE CENTRAL BANK OF BAHRAIN, WHO HAVE SHOWN REAL LEADERSHIP.” — David Parker, Co-Chief Investment Officer, Bahrain EDB and Board Member, Bahrain Fintech

I think that the main challenge in terms of getting traditional institutions to embrace innovation is to appreciate both the opportunities and the threats. From an opportunity perspective, obviously it’s a way in which institutions can become more efficient, drive down costs, and to go back to the point I made earlier, that they can further reinforce the principles behind Islamic finance through technologies like blockchain. The threat, for me, is that they don’t one day find that other players have moved into the financial services space and eating their lunch so to speak. We’re seeing now the emergence not just of fintech but techfin—technology companies starting to develop financial platforms and financial services. I was at an event recently and someone said: “people don’t need banks. They need banking services.” If you think about it, if new players start to come into this space and do things more efficiently and more effectively than banks, and I’m thinking technology companies for example, that’s a threat. What we don’t want to see is institutions in Bahrain that we have high regard for, that are important parts for our financial centre, starting to run into difficulties. We want to encourage a degree of disruption; we want to encourage more innovation. We want to shake things up a little bit. We don’t want, however, to lose those long-standing and trusted institutions. They are looking at this space very aggressively. Bahrain Islamic Bank, thanks to the leadership of its chief executive Hassan Jarrar, have been leading the way. He and I recently visited Singapore recently attending the Singapore Fintech Festival, and we took the opportunity to visit some of the banks in Singapore to see what they were doing to embrace the digital agenda and what institutions in Bahrain could learn from that. There are opportunities, there are threats, and some are moving quicker than others. We think the insurance space will start to move as well, and we will see Takaful and ReTakaful companies embrace innovation and digital transformation in the way that the banks have started to do. It’s a combination of the financial institutions, the innovators, and to some degree the investment community, but also the regulator.

What part does the Bahrain Central Bank play? One thing we’re very grateful for in Bahrain is that we have one single super-regulator, the Central Bank of Bahrain, who have shown real leadership. This is not an easy place to be if

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you’re a regulator, because you want to embrace innovation but you also want to ensure consumer protection, anti-money laundering and all the things good regulators do. That creates a problem. How do you get that balance right? How do you get the balance between driving innovation on the one hand and encouraging an environment that is innovation friendly while also ensuring that you have tight regulation and tight controls to protect consumers? The CBB stand up against any other regulator in the world in the way they’ve got that balance right. Right from the outset, they have been driving this agenda. When we introduced crowdfunding regulations in Bahrain, they put in place Shari’ah-compliant regulations. They put Shari’ah-compliant crypto regulations with Rain. At each stage, they’ve been really very mindful of the Shari’ahcompliant agenda with all new innovations and regulations.

What percentage of Islamic institutions are pushing in innovation? It’s difficult to put a percentage on it because it’s almost like a conveyer belt. At the beginning, you have complete ignorance—banks who don’t appreciate the opportunities or the threats that this digital transformation presents to them. I’m not engaged with anyone anymore in the banking space who is still in that stage. They’re all in what I would describe as stage two which I would describe as curious. They appreciate that this is something that can’t be ignored, so they’re looking to learn. They have possibly identified key stuff and are starting to adapt accordingly. Then you have those who are actively engaged in the digital space, and following them are the ones who I would describe as outright pioneers in driving this agenda. I’m not going to go on record on which institutions those are, as I’d rather leave it for others to judge, but I’ve already mention one who has impressed me with vision and leadership in this space and that’s Hassan Jarrar from Bahrain Islamic Bank, and some of the initiatives coming out of Al Baraka.

How does the Bahrain Fintech Bay fit in? It gets exciting for me when we talk about all the different component parts of the ecosystem. We have the Bahrain Fintech Bay which has given us an ecosystem under one roof—the beating heart of conventional and Islamic finance and innovation in one space. When we set it up, we didn’t want it to simply be a co-working space—we wanted it to be an ecosystem. You can’t have an ecosystem without the incumbents. It’s great that some of the Islamic institutions are founding partners of the Bahrain Fintech Bay who are working with the Bay to contribute to the wider ecosystem. That, in this part of the world, stands Bahrain apart. The different players are working together to push this agenda, to drive the ecosystem and the future growth of the ecosystem through the Bahrain Fintech Bay initiative. The Bahrain Economic Development Board then intervenes to try to make this process go faster, as well. These are the key component parts of our ecosystem. None of that would stand up if we didn’t have the skills and the talent. We have many years, many decades, of strength and talent as a financial centre. Next year we actually are celebrating 100 years of banking in Bahrain, as Standard Chartered set up shop 100 years ago in Bahrain. We’re very proud of that. We’ve been a pioneer in Islamic finance for 50 years, which is again something we’re very proud of. When we’re talking about fintech in terms of skills and talent, in

“WE WORKED WITH RAIN IN BAHRAIN, WHO WERE THE FIRST GRADUATES FROM OUR REGULATORY SANDBOX, AND WERE THE FIRST PLATFORM TO BECOME LICENSED FOR CRYPTO TRADING IN THE COUNTRY. THEY HAVE NOW DEVELOPED A SHARI’AH-COMPLIANT FOCUS IN THEIR PRODUCT. WE’RE STARTING TO SEE COMPANIES THAT ARE LOOKING AT THE MUSLIM MARKET AND THE ISLAMIC FINTECH SPACE AS AN OPPORTUNITY. I THINK THAT’S WHERE IT GETS REALLY EXCITING FROM A FINTECH PERSPECTIVE.” — David Parker

terms of ‘fin’ we have talent, but in terms of ‘tech’ that’s one area that we’ve really had to adapt. We don’t have a longstanding track record as a country in technology. From many years, we made our revenues in oil, though we didn’t have quite as much of it as our neighboring countries of course. We’ve always had to diversify which is why we became a financial centre but we’ve never been a tech hub. In the emergence of Silicon Valley, you won’t see much mention of Bahrain. We want to be on the forefront of the fourth industrial revolution—the internet age. This is driven by the vision of his Royal Highness the Crown Prince who is also the chairman of the EDB, to embrace innovation as the new oil and embrace this digitalised economy.

So how do we address the talent gap? We’ve done a few things. We’re starting at grass roots, and we’ve started to take this into schools and colleges to work with our homegrown universities. Bahrain Polytechnic University and the University of Bahrain have been very active in this space. We’ve also reached out internationally to drive this agenda properly. Fintech Bay has partnered with Georgetown University in Washington DC USA to develop the national fintech talent programme, involving individuals not just going through development in Bahrain but taking secondments in other parts of the world using our partnerships in New York, Silicon Valley and Singapore so they can get more closely involved with the things that are developing this space. Hopefully this allows us to point young Bahrainis in the right direction in terms of the skills that they’re going to need to pursue their future career paths in this brave new world of fintech and digital transformation. That’s really exciting as well.

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INVESTMENTS

The ROI in sustainability Several countries in the region such as Egypt, Kuwait and the UAE, have SDGs embedded in policy planning within their institutional development frameworks and governance structures

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ince the founding of the World Economic Forum (WEF) by Klaus Schwab in 1971, for the first time on record, environmental risks occupied the group’s top five long-term concerns, with corporate executives saying that they are increasingly concerned about environmental issues. The appearance of Greta Thunberg, the 17-year old Swedish climate activist, and her message at Davos was a striking sign that the debate on how to stop global warming has become a legitimate concern in business circles. The debate on climate change is forcing decision makers from all kinds of sectors to respond to demands to stop carbon dioxide and other greenhouse gas emissions. A report by Oliver Wyman, A Decade of Action: Delivering Sustainable Development Goals in the Gulf, pointed out that Gulf countries must accelerate their efforts if they were to meet the 2030 Agenda for Sustainable Development Goals (SDGs). The SDGs provide governments with an organised and unified structure to address interconnected developmental issues such as poverty, economic inequality, education, the climate crisis, peace, justice, and responsible consumption and production. For over 20 years since the adoption of 17 United Nations SDGs globally, governments are coming together to discuss issues like climate change, their impact on the planet and how to address it.

“GREEN SUKUK ISSUANCE TO INCREASE IN 2020 AS MORE INVESTORS COMMIT TO RESPONSIBLE INVESTMENT AND THE STRUCTURES AND BENEFITS BECOME MORE APPARENT.” — S&P Global

FIVE BUILDING BLOCKS OF THE SDGs IMPLEMENTATION FRAMEWORK Data

Small and Medium Enterprise Data

Policy

Financing

Private Sector

SMEs

Policy Private Sector

Financing Source: Oliver Wyman

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INVESTMENTS

Exhibit 5: DFA analytical framework DFA ANALYTICAL FRAMEWORK PUBLIC

PRIVATE Domestic

International

Domestic

International

Integrated planning and financing

Public-private collaboration

Transparency & accountability

Monitoring review

Source: Oliver Wyman

The signing of the Paris Accord in 2016—which is rooted in SDG 13 (climate action)—marked a watershed moment on governments’ approach and ambition, demonstrating their ability andto convene and commit to driving real change. PwC has pointed out that the primary responsibility for achieving the SDGs lies with governments, but it is also now widely recognised that they will not be able to make the dramatic level of change without the help of businesses.

SUSTAINABLE FINANCING The Oliver Wyman report found that the use of Islamic finance has become an increasingly important source of development funding globally. Islamic finance is rapidly becoming a part of the mainstream financial market on the back of healthy growth in the market. S&P Global expects green Sukuk issuance to increase in 2020 as more investors commit to responsible investment and the structures and benefits become more apparent. Several core Islamic finance countries like Malaysia and the GCC have committed to diversifying their energy mix with a significant contribution from green energy generation. As GCC countries begin their transition towards less carbon-intensive economies, green projects are set to flourish and some of these projects will likely be funded via the Sukuk market, said PwC. Last year, the Dubai Financial Market (DFM) and the Dubai International Finance Centre (DIFC) launched the Dubai Sustainable Finance Working Group, which is mandated to work towards achieving the UAE’s nationally determined contributions to the UN’s Sustainable Development Goals and the strategic objectives of Dubai Plan 2021. Similarlythe Dubai Islamic Economy Development Centre also partnered with the DIFC to promote green Sukuk issuance in the UAE, in addition to developing the standards of certification for green Sukuk in line with the Climate Bonds Standard and Certification Scheme.

“AS GCC COUNTRIES BEGIN THEIR TRANSITION TOWARDS LESS CARBON-INTENSIVE ECONOMIES, GREEN PROJECTS ARE SET TO FLOURISH AND SOME OF THESE PROJECTS WILL LIKELY BE FUNDED VIA THE SUKUK MARKET.” — PwC

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Sustainable debt tools, both conventional and Islamic, are a potential way for companies to fund transition activities towards a more environmentally and socially sustainable future. UAE-based developer and shopping mall operator, Majid Al Futtaim, issued Middle East’s first corporate green Sukuk valued at $600 million in May 2019 to finance and refinance the company’s existing, and future green projects such as green buildings, renewable energy, sustainable water management, and energy efficiency. Green bonds are a growing category of fixed-income securities and green Sukuk could further widen the appeal of Islamic bonds beyond traditional markets in South Asia and the Middle East to include ethical investors in Western countries. Saudi-based Islamic Development Bank is also considering issuing its debut green Sukuk, having finalised a Sustainable Finance Framework to help issue such bonds that will be used for green projects in the lender’s member countries. In keeping with the global trend, Islamic finance has emerged as a critical component of the financial markets in the Gulf, where the market share of Islamic banking assets, for example, has almost reached 35 per cent of all banking assets, said Oliver Wyman. This underscores the importance of Islamic financing in the context of policymaking and implementation as GCC economies move to accomplish their SDGs objectives in time. Islamic sustainable finance offers significant potential as it meets Shari’ah objectives (and as a result the requirements of a wide variety of investors).

COLLECTIVE GOODWILL Several countries in the region such as Egypt, Kuwait and the UAE, have SDGs embedded in policy planning within their institutional development frameworks and governance structures. There are new models of collaborative and multi-stakeholder partnerships emerging, across agents from both public and private sectors. Oliver Wyman said that a similar public-private alliance model could be emulated in the Arabian Gulf states. Both the private sector and stateowned entities across the Middle East are increasingly getting involved in conversations around sustainable development, putting environmental, social and governance matters (ESG) in their investment charters. The UAE and the Netherlands are examples of countries incorporated the SDGs into their foreign humanitarian aid strategy, and this is a model that the other Gulf countries can replicate, said Oliver Wyman. The UAE recently allocated $2 billion in investment, development projects and soft loans for Mauritania—a sum that equals roughly a third of the West African country’s GDP. Given the scrutiny that is on corporates globally and the pressure they are facing to take more responsibility for socioeconomic problems, this is a good time for governments to engage them more coherently and actively to foster greater participation. Last month, Abu Dhabi National Oil Company (ADNOC) signed an agreement with Italy’s Eni to explore new opportunities for collaboration in carbon capture utilisation and storage (CCUS) and additional opportunities in research and development (R&D) across the oil and gas value chain. ADNOC plans to decrease its greenhouse gas emissions intensity by 25 per cent by 2030. According to the International Association of Oil & Gas Producers (IOGP), the company currently ranks top five for the lowest GHG emitters in the oil and gas industry and has one of the lowest methane intensities of 0.01 per cent. Additionally, Abu Dhabi’s Masdar, the renewable energy and sustainable real estate company, also recently launched a sustainable real estate investment trust (REIT) with an initial valuation of between AED 950 million and AED 1 billion. The REIT will initially include four commercial properties within Masdar City, Abu Dhabi’s sustainable urban community that is focused on low-carbon urban development and it will cover more than 57 thousand square metres of net leasable area.

KEY 6: BUILDING BLOCKS Exhibit Key building blocks of INFFOF INFF

Governance and Coordination

Financing needs Coordination tools Institutional mechanisms

Review and accountability Monitoring for results

Assessment and diagnostics

Financing landscape Risk assessment Policy and institutional binding constraints Policies for public finance Policies for private finance Policies for non-financial MoI Financing strategy

Monitoring and review

Source: United Nations, Inter-agency Task Force on Financing forFinancing Development. Financing for Sustainable Development Report Source: United Nations, Inter-agency Task Force on for2019 Development. 2019 Financing for Sustainable Development Report

STAKEHOLDERS SUPPORTING SDGs IN THE UAE

Exhibit 8: Stakeholders supporting SDGs in the UAE

Chairs the National Committee and oversees data collection on SDG indicators

Federal Competitiveness and Statistics Authority

Private Sector Advisory Council

Launched by the FCSA in 2018, its purpose is to provide a platform for youth to share their ideas on SDG-related topics

Youth Advisory Council On SDGs

National Committee On SDGs

Launched in 2018, PSAC serves as a link between the private sector and the government to promote SDGs

Formed in 2017, the Committee engages all government stakeholders on SDGS. In 2012, it conducted the thematic mapping of the National Priorities of Vision 2021 to the SDGs

Source: Oliver Wyman

Since 2006, Masdar Clean Energy has invested in renewable energy projects with a combined value of $8.5 billion. Masdar’s renewable energy projects currently span across the UAE, Jordan, Mauritania, Egypt, Morocco, UK, Serbia, and Spain. The electricity generating capacity of these projects, which are either fully developed or under development, is 2.7 gigawatts (GW) gross. Earlier in January, BlackRock joined Climate Action 100+, a group of more than 370 investment managers with a combined $41 trillion in assets. The investment giant announced plans to exit investments with high sustainabilityrelated risk as climate concerns drive a sweeping change in the way the world’s largest asset manager invests its $7 trillion in assets. BlackRock is hardly alone when it comes to big financial institutions buying into sustainability in a serious way. Citigroup, Barclays as well as BNP Paribas, Crédit Agricole and Standard Chartered are also among big financial institutions going green. Delivering the SDGs remains a formidable governance challenge for all countries globally, irrespective of their stage of development or income levels. Oil-rich GCC economies have had a head-start over many of their peers in emerging markets as they have not been severely financially constrained. However, that has not been enough when it comes to addressing the most pressing sustainable development challenges.

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ISSUE 10

EMERGING TECH AND ITS POTENTIAL Savio Tovar Dias, Senior Director, Avaya International

1200 attendees 1200 attendees

93% Director level or above 93% Director level or above

70+ EXPERT SPEAKERS 70+ EXPERT SPEAKERS

80% of all 2018-2019 Issuers attended 80% of all 2018-2019 Issuers attended

TECHNOLOGY

EMERGING TECH AND ITS POTENTIAL Savio Tovar Dias, Senior Director at Avaya International, shares his projections on emerging technologies and how it will impact the financial services sector

hat emerging technology are you most excited about at the moment?

For banks to meet and exceed today’s customer expectations, they need to deliver consistently excellent service across all channels, provide a hyper-personalised experience, support mobility with security, and empower employees for better collaboration and customer support. Artificial Intelligence (AI) is a fundamental enabler of these objectives. However, presently, most AI projects in the sector are focused solely on entry-level chatbots that automate basic customer service interactions. We believe the potential for AI to positively impact customer experience extends far beyond this. This is why we are focused on delivering solutions that augment the intelligence of machines. By giving machines knowledge from all channels, we empower AI to create the right outcomes based on the right information. This in turn enables banks to drive intelligent self-service and significantly reduce errors during customer interactions—all leading to improved brand reputation and trust. Mashreq Bank stands as prime example of a regional bank that has successfully implemented AI to its customers’ benefit. Working together with Avaya, they have deployed the region’s first digital engagement banking bot which acts as a visual and conversational virtual assistant. This enables their customers to access banking services and complete service requests almost entirely through an AI-powered ‘agent’. The ‘chatbot agent’ can verify customers, complete transactions, and sign up for new services on the customer’s behalf— from anywhere and through any device.

What are your projections on technology and its impact on the financial services sector this year?

Savio Tovar Dias

In our latest Avaya Global CX Happiness Index report, we uncovered that for the banking sector, staff knowledgeability, using digital technologies to enhance efficiency, and providing a consistent level of service every time, are among the top five factors driving customer happiness.

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TECHNOLOGY

Agent Scripting, a flexible, browser-based call flow scripting platform that provides the ability to define in- and out-bound call flows. Addressing inconsistencies in agent skill sets with a clear rules-based script that adapts in realtime as conversations progress, Agent Scripting provides on-screen, step-by-step guidance to better navigate customer interactions. And through integration with CRM and other back-end systems, the capability can also make invaluable customer data instantly available to agents, enabling more effective service and contributing to a faster time to resolution. AI Routing, which enables enterprises to leverage AI to more effectively pair customers with the most suitable agents. With a user-friendly dashboard, the solution provides real-time insights and actionable management controls so that even the most demanding customers can have their issues resolved by being paired with the best-trained agents. Avaya IX Teamspace, which deepens integration with the back office by providing open, rich media chat and messaging capabilities between customers, agents and backoffice staff, for easier, faster, real-time communication and collaboration. By making back-office subject matter experts easily accessible to customers and front-line agents and providing them real-time context of the customer journey, IX Teamspace can drastically increase resolution speed for customer queries and issues for improved business results.

What would you say is the biggest challenge for banks right now? The banking sector, across the globe, is at the forefront of digital transformation—in fact, according to Ovum's recent ICT Enterprise Insights report, the banking sector recorded a digital maturity progression index score of 42 per cent, a close second to the telecom sector at 43.9 per cent. This commitment to innovation has had a measurable positive impact on customer satisfaction. According to research conducted by Avaya—SuperServe: Five Strategies For Superior Customer Service—20 per cent of consumers found that banks most exceeded their customer service expectations, a number that is more than double that of consumers who said the same of other service-centric industries such as airlines, hotels, restaurants and retail.

“FOR THE BANKING SECTOR, STAFF KNOWLEDGEABILITY, USING DIGITAL TECHNOLOGIES TO ENHANCE EFFICIENCY, AND PROVIDING A CONSISTENT LEVEL OF SERVICE EVERY TIME, ARE AMONG THE TOP FIVE FACTORS DRIVING CUSTOMER HAPPINESS.” — Savio Tovar Dias, Senior Director, Avaya International

As fintech technologies, that were once revolutionary, now begin to reach maturity, banks have the challenge of identifying the next set of cutting-edge solutions that are now so vital in gaining the differentiating digital edge. At the same time, the sector is bound by strong compliance and governance regulations, so any innovation must conform to these restrictions. So the key challenge CXOs and IT decision makers in banks face is defining a long-term vision and ensuring the speed of execution to stay at the forefront of the market.

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Tell us more about Avaya Spaces and how important it is for the Middle East market? The way teams interact with data, technology and their colleagues is rapidly evolving into a richer environment of converged digital channels and modes of communication. Gartner forecasts that by 2023, fewer than one-third of digital workers will choose the office as their preferred place to work. Organisations need to empower teams to work in more effective and productive ways with their preferred channels and touchpoints, wherever they may be and using whatever devices and platforms they choose. Avaya is giving organisations the ability to meet these needs with Spaces. This easy-to-use app integrates web meetings and team collaboration, allowing users to create cloud workspaces where they can message, meet, share content and manage tasks. Because Spaces is cloud-based, it is conveniently accessible from any device, via a browser or mobile device. This makes seamless collaboration and communication possible from anywhere, and at any time.

Avaya IX Spaces (Source: Avaya)

Moreover, Avaya Spaces will soon be available in over 60 countries, including the UAE, Saudi Arabia and Egypt, and can support up to 500 video meeting participants. The app features connectivity with existing Avaya IX Collaboration Unit CU360 huddle and SIP-based video room systems and integrations with Google, Slack, Microsoft Office 365, Outlook, and Teams.

What can the market look forward from Avaya in 2020? In the coming year, we will focus on augmenting the intelligence of machines by giving them knowledge from all channels. By enabling AI to create the right outcomes based on the right information, we are enabling organisations to drive intelligent self-service and significantly reduce errors during customer interactions. An example of our innovation in this area is the conversational interactive voice response (IVR) with embedded biometrics that can identify customers and provide the option of continuing through visual IVR.

We are also empowering humans to choose the right customer experience and employee experience journeys by giving customers the ability to choose the channel of their choice with the guarantee of consistently exceptional service. We recognise that by 2020, customer journey analytics will be the main customer analytics investment, with 85 per cent of organisations investing to optimise cross-channel experiences. In line with this, through the application of analytics, we are personalising interactions across the entire customer journey. For example, by identifying subtle and valuable patterns in human interactions, we facilitate better pairings between customers and agents, to drive better outcomes from resulting conversations. These analytics also feed into our powerful workforce enablement tools, delivering the ability to transform each employee into a super-agent and brand champion.

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TECHNOLOGY

BANKING AND TECHNOLOGY: ARE THEY ON THE SAME PAGE? Speaking to Banker Middle East, Vivek Raghavan, CEO, United MakGroup Technologies, detangles the cords to marry the needs of a bankâ&#x20AC;&#x2122;s business and the technologies required to achieve mandated objectives

Vivek Raghavan

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STRENGTH IN SCALE, NOT NUMBERS? n our experience with both large and small local and international banks in this region, we have seen that most of them have a great willingness to adapt to new technologies and digital innovations. They are often headed by teams of extremely tech savvy personnel which further helps fuel the quickness to adoption and have the prowess and maturity to foresee potential bottlenecks in the roll outs. As consolidations and mergers bring some of the larger players together, we can see that this has helped drive fintech innovation to improve efficiencies and collaborations. Regional banks have the advantage of not being burdened by legacy solutions, have lower dependencies on branch networks, higher connectivity all of which help fortify their positions. They have now used this to their advantage and are now looking to be present in major financial capitals of the world. This expansion will lay the foundation and requirement for improved technology adoption that spans borders and matches their international counterparts. Then there is the whole other potential to invest in digitalisation, cloud solutions, customer experience, robotic process automation/intelligent process automation and process intelligence. We do strongly feel that majority of banks and financial institutions will see that their main resource is within the Big Data they all have available to them. This sets a solid foundation which allows them to invest in future technologies.

SETTING PRIORITIES STRAIGHT Banks have increasingly become tech companies trying to save time by cutting down process steps in every client transaction. Banks therefore, have to become more efficient and measure their efficiency in how many more transactions they can do per second (loans, deposits, wealth management, trade finance pass throughs). Robotic process automation is the natural choice to secure the utmost efficiency while artificial intelligence is a must to support mass personalisation based on client profiles. Majority of clients have dipped their hands into it and are now at the stage of deciding how exactly this fits into the grand scheme of things. When considering automating processes, we recommend clear process intelligence needs to be applied to understand actual workflows. These solutions lead to the challenging question regarding the road map for future cloud deployments. The question of which, what, and how is the of most discussions and often hinders current adoption of a solution based on the grounds of future viability of the same solution on the cloud. This also automatically raises concerns surrounding security and compliance angles which have taken much more significance today (in comparison to the past). The business and technology sides, now more than ever, need to agree before any technology solution is implemented. Cybersecurity is a major concern and hence any solution that the business wants to adopt needs to pass through very stringent security and data compliance requirements set by the respective bank’s technology departments. Banks are bound more tightly now to be in line with global policies and regulations in order to fight off potential financial and economic crimes. This has resulted in them being extra cautious about deployments and scope of work for any project. Since banks collect a lot of customer data and, when a technology solution is implemented in the bank, the vendor gets access to this data and governance around how this is being handled and what safeguards are available, are all major criteria in deciding the solutions.

The key for any customer when faced with technology challenges is to partner with someone who will take full ownership of a project. When deploying a solution, for example, the bank needs someone who will understand their particular challenge and situation and look for a solution holistically. In an ideal world, a client would be able to hire their own experts in each of the technology solutions they have deployed. However, in today’s economic climate and with rapid changes in technology, this is neither possible nor viable. Furthermore, in mission critical environments at banks where data, integrations, compliance and security are extremely vital areas of concern, you need to have a partner that has a substantial amount of experience in that very same space. Systems integrators working within this area need to have a clear understanding of the security architecture followed by both global and local organisations and be ready to meet and support these requirements. Some examples of this include the ability to recognise and combat vulnerability scanning as a security threat, and counter data storage security and compliance requirements.

“THE BIGGEST, OR RATHER THE MOST COMPLEX, OBSTACLE WE HAVE SEEN FINANCIAL INSTITUTIONS FACE HERE IS WITH ALIGNING THEIR BUSINESS REQUIREMENTS WITH TECHNOLOGY SOLUTIONS AVAILABLE. THEY NEED TO FOCUS AND ENTRUST THIS ALIGNMENT TO EXPERTS IN THE MARKET WHO HAVE THE DEDICATED RESOURCES, LONG TERM STABILITY, TECHNOLOGICAL KNOWHOW AND CUSTOMERORIENTED APPROACH.” — Vivek Raghavan

GROWING PAINS The biggest, or rather the most complex, obstacle we have seen financial institutions face here is with aligning their business requirements with technology solutions available. They need to focus and entrust this alignment to experts in the market who have the dedicated resources, long term stability, technological knowhow and customer-oriented approach. We have occasionally observed a tendency in the market for organisations looking for transactional deals—be it client side or vendor side. Technology must be seen as a tool to help banks in achieving their strategic goals and they must focus on aligning the solutions out there to their own requirements and not merely mimic what others are doing or take on solutions simply because they are the most gainful in the short run.

2020 PLANS

While many systems integrators are buckling under the pressure of the current economic situation, we are using this as an opportunity to strengthen our position in this market. We are confident about our presence in this region and are looking to further expand our current footprint with new full-fledged sales and support offices in neighbouring markets. We are using this current time of volatility in the market to look inside our own organisation to further enhance efficiencies, upskill ourselves, add to our portfolio and create new opportunities for growth.

cpifinancial.net

TECHNOLOGY

FIRST LINE OF DEFENCE We have a quick chat with Shoaib Yousuf, Principal at Boston Consulting Group, on cybersecurity trends for 2020

hat cyberthreats should we look out for this year?

Cybercriminals continue to rob banks ‘because that is where the money is’, and they are becoming more sophisticated. A rising number of digital touchpoints creates an expanding choice of windows through which cyber attackers can enter. Today, attackers will often use ransomware or distributed denial-of-service (DDoS) attack as a noisy diversion, while quietly making fraudulent fund transfers. Nation-states are also getting increasingly bold. The role of banking systems is vital to the economic climate of countries, which makes them sensitive targets. In fact, we see more and more examples of destructive cyberattacks carried out not for monetary, but for political objectives. As digitisation booms, the problem is becoming ever more serious.

Where do you see areas of improvement for banks in cybersecurity? As cyberthreats intensify, financial institutions are becoming more proactive in protecting themselves and their customers. We have observed an increasing number of banks focusing on implementing technologies to counter cyberthreats, which is a good start. However, our research shows that most breaches happen due human erors and process shortcomings, and technology alone could not have prevented the breach. For instance, cloud breaches is an area that is in dire need of better security processes. Several of the biggest banking breaches of the last year can be traced back to failures of cloud security process—not being vigilant about which employees get access rights or lacking a process to monitor data flows. Shoaib Yousuf

“BUDGET IS IMPORTANT, BUT EVEN MORE IMPORTANT IS CULTURE AND LEADERSHIP. HACKERS LOOK FOR THE WEAK SPOTS, SO GOOD SECURITY PRACTISES MUST BE INTEGRATED ACROSS EVERY BUSINESS UNIT AND BACKOFFICE PROCESS.” — Shoaib Yousuf

BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228

How to best approach cybersecurity issues? In Europe and the US, the largest banks have recognised cybersecurity as a strategic issue for the C-Suite and Board of Directors. Some of these banks have defined cybersecurity to be an ‘existential risk’ and have granted their chief information security officer (CISOs) vast budgets to tackle the challenge. Budget is important, but even more important is culture and leadership. Hackers look for the weak spots, so good security practises must be integrated across every business unit and back-office process. Executive leadership and drive is often the difference between having a cyberdefence plan that looks good on paper and having an integrated cyber programme that properly works when tested.

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