#186 - July 2016 by CPI Financial

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JULY-AUGUST 2016 | ISSUE 186

Balancing the scales Peter England, CEO of RAKBANK

Expected headwinds for GCC banks

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Challenging times ahead for Turkey

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Creating opportunity in adversity

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â&#x20AC;&#x153;From my experience over the years, if you get the service right, the sales will come.â&#x20AC;?

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CONTENTS

JULY-AUGUST 2016 | ISSUE 186

Editor’s Letter

CPI Financial

News analysis Weighing in on Brexit News bites

THE MARKETS 10 Expected headwinds for GCC banks 12 NBAD and FGB go full throttle with merger COVER INTERVIEW 16 Balancing the scales SOVEREIGN WEALTH FUND UPDATE 22 A time of re-evaluation COUNTRY REPORT 28 Challenging times ahead for Turkey HUMAN CAPITAL 32 Uncertain times bring changes to the job market 36 Honing leadership acumen 38 Sustainable value and risk management CASE STUDY 42 Improving operational efficiency www.bankerme.com

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UAE: key to GCC’s

wealth

Preparing for the

future

GCC bond markets akin to Latin America

Braving uncertainties in the Lebanese market

Financial centres: the gatekeepers of untapped opportunities

Balancing the scales

Peter England, CEO

CEO of RAKBANK

Get the next issue Banker MiddleofEast before it is published. Full details at: www.bankerme.com

ATM Channel Payments Roundtable

Expected headwinds for GCC banks

Challenging times ahead for Turkey

Creating opportunit y in adversity

Servicing a massive labour market

Get the next issue of Banker Middle East before it is published. Full details at: www.bankerme.com Follow us on Twitter: @bankermena

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Zone Authority

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and Media Free

Maintaining resilience

Achievement of a lifetime

Patrice Couvegnes, Group CEO of Banque Saudi Fransi

“From my experien ce over the years, if you get the service right, the sales will come.”

Dubai Technology

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

and Media Free

Group CEO of

Dubai Technology

Chilwan Bank Dr. Adnan Dubai Islamic of

Zone Authority

g ng vin ovi mo —m DIB— markets

“I believe that BSF is in a unique position to leverage on the new Saudi economic context.”

Dubai Technology and Media Free Zone Authority

market is asking “The question the do more?’ but now is not ‘can wecan we do?’ ‘how much more and ‘for how long?’”

Post sanctions—a cautious market

2016 | ISSUE 186

184 MAY 2016 | ISSUE

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JULY-AUGUST

JUNE 2016 | ISSUE 185

of RAKBANK

BankerMENA

Peter England, CEO

Managing Editor

Balancing the scales

Georgina Enzer

Achievement of a lifetime Patrice Couvegnes, Group CEO of Banque Saudi Fransi

his month has seen two pieces of massive news that have had an impact on the banking landscape regionally: the FGBNBAD merger, and globally with the leave vote on Brexit. The merger has been good news for the UAE banking sector, with some regional analysts predicting that this may be the first of many mergers between small and big banks, particularly since consolidation and improving operational efficiency are key tenets to maintaining market share during this period of economic uncertainty. Our coverage on the merger can be found on page 12; four pages of in-depth analysis looking at how the merger is going to be done and the outcomes of it. The other bit of big news, Brexit, changed the global trade landscape forever. As soon as the Brexit leave vote was announced, the UK markets went into a tail-spin in the face of uncertainties about how exactly the Brexit will affect trade relations with the EU and trade agreements globally. Interestingly, since this has been announced, non-EU countries such as Australia, South Korea, Canada, New Zealand, and India are lining up to trade with the UK. Perhaps this is the boost necessary to get the UK economy on track to be independent. Potentially even the US is considering trade deals, despite President Obama’s statement that the US would be at the back of the queue when it came to making deals with post-Brexit Britain. It may also be an opportunity for GCC investors to jump in, taking advantage of the weakening sterling. Our news analysis on page six takes a brief look at Brexit and its likely impact on the GCC. Our cover star, Peter England of RAKBANK, sat down with us and explained how the bank, known as the region’s biggest SME bank, is tackling the task of increasing market share and improving its offerings to its customers. RAKBANK is also boosting its customer engagement through digital innovation, a trend seen across the regional banks. Catch our very interesting interview on page 16. Happy reading!

3 14/07/2016 13:16

CONTENTS

JULY-AUGUST 2016 | ISSUE 185

ADVERTORIAL 44 Cybersecurity in banking IN DEPTH 46 Creating opportunity in adversity 48 Cross border transactions: shape up or ship out 52 Servicing a massive labour market 56 A cashless economy is the way forward

PERSONALITY 68 Marcus Gent, Managing Director of Middle East at Friends Provident International

LAST WORD 70 Firas Mallah, Managing Director, Middle East and North Africa, BMO Global Asset Management

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

Caring for your career

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

Checkt CPI Financial’s Jobs page

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

EVENT 58 Celebrating knowledge, inspiring generations TECH FOCUS 62 Social media accelerates bank growth 64 Mobile banking security

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NEWS ANALYSIS

Weighing on Brexit UK’s decision to leave believed to have minimal impact on GCC and the wider region.

readed by some and unexpected by most, UK’s unprecedented move to leave the EU has left global markets in disarray. Financial markets were affected on all levels—equity markets fell precipitously, government bonds saw mixed indications with a flight to safety, bond markets’ returns were mostly on the negative, currencies witnessed extreme volatility, and commodities also sent varied signals. “The ‘Leave’ vote paves the way for a period of political and economic uncertainty, which we expect to have a negative impact on UK growth, not helped by a huge twin deficit [current account and budget deficit].

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This in turn should see the pound weaken beyond the initial reaction to the Referendum results as the Bank of England is expected to loosen policy, potentially cutting interest rates in the near future. With the dirham pegged to the dollar, GCC based investors could see their currency strengthen in value with AED 4.5 per pound not inconceivable,” commented Brendan Dolan, regional director for the Middle East and Africa, Old Mutual International, part of Old Mutual Wealth. A recent commentary by Emirates NBD (ENBD) lightened the atmosphere for the Middle East citing limited implications for the region. Impacts of Brexit on the GCC and other Middle

Eastern countries are likely be minor but the Brexit may have a trickle-down effect through the weaker pound on trade, tourism and investment in the UAE as well as on the oil price. According to ENBD analysts, a weaker pound could have a positive impact on the UAE’s balance of payments by reducing this deficit, but data suggests that imports from the UK are quite price elastic, therefore a weaker exchange rate usually results in increased volumes of imports and the trade balance is fairly stable. On a longer term view, the bilateral trading landscape between the GCC and the UK may not necessarily be harmed by Brexit.

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The UK ranks third in the breakdown of visitors to Dubai, accounting for eight per cent of the total visitors to the Emirate. Depending on how sharp the decline in the British pound is, and how long such currency weakness lasts, it could significantly impact on tourist flows to the UAE. However at this stage, ENBD asserts that the sterling would need to fall by much more than it currently has, and remain there for a period of time, to have a similar impact on visitor numbers and related spending in Dubai. GCC investments into the UK may begin to look much more attractive considering the historically weak sterling levels that are beginning to be seen, representing something of a once in a life time opportunity to purchase UK assets. Unlike other regions, GCC investments into the UK are for most part not made with the motive of accessing European markets, but rather they are standalone investments made in their own right, in areas such as real estate and hospitality. Purchases of commercial property, however, may be more at risk especially if UK financial service companies begin to relocate some of their operations to the continent. For those invested in the property market, the deterioration in the value of sterling overnight will have erased any gains in recent years, according to Cluttons. This particularly affects buyers from the Gulf, whose currencies retain a fixed peg to the US dollar. The upside is for those eyeing a London residential asset—they will find it 31 per cent cheaper than it was during the last market peak in Q3 2007, suggesting that markets may be on the cusp of seeing a significant resumption in property investment activity in the British capital. There is also the potential for currency volatility to spread and have a bearing on other asset markets such as commodities, as well as on global monetary policy settings, all of which would have an

The upside is for those eyeing a London residential asset—they will find it

31%

cheaper than it was during the last market peak in Q3 2007

impact on this region. According to ENBD, this has indeed happened to some extent although the moves have not been huge. Oil prices declined immediately after the referendum but appear to have stabilised. Brexit-related weakness in the oil price is likely to be driven by concerns over the extent to which uncertainty in financial markets and slower growth in the UK and EU spillover into slower global growth overall (and thus weaker demand for oil). Credit rating agencies have stated that Brexit is a negative for the UK. Moody’s in a commentary states that the outcome heralds a prolonged period of policy uncertainty that will weigh on the UK’s economic and financial performance. Heightened uncertainty will likely dent investment flows and confidence, weighing on the UK’s growth prospects—a credit negative for the UK sovereign and other UK debt issuers. Key credit risks include potential changes to the UK’s commercial relations with the EU, regulatory regimes as well as access to funding and immigration policy. Brexit is less of a credit concern for EU-based issuers, although political risks within the union could increase. Moody’s expects that over time, the UK and the EU would come to an arrangement to preserve most, but not all of their current trading relationships.

As for the UK’s sovereign rating, S&P stated that a vote to leave would deter investment in the economy, decrease official demand for sterling reserves, and put UK’s financial services sector at a competitive disadvantage compared with other global financial centres. The vote to leave could affect growth performance, external funding, and the public balance sheet. S&P could lower UK’s sovereign rating by more than one notch if it is believed that the UK’s institutional strength and ability to formulate policy conducive to sustainable growth were negatively affected. As for the banking sector, S&P noted that the leave vote has no immediate impact on domestic commercial banks’ ratings in UK. The effects of a leave vote on these banks are deemed to be indirect, arising from potential adverse consequences for economic activity, new business volumes, asset prices, and demand for UK-related debt. Banks’ liquidity buffers provide a sizable cushion against market volatility as does the Bank of England’s previously announced contingency measures to ensure sufficient banking system liquidity. That said, volatility may interrupt wholesale debt issuance and affect the values of financial assets in the near term. Commenting on Brexit Sean Evers, Managing Partner at Gulf Intelligence said, “You cannot look at the consequence of Brexit for the Middle East through the prism of little Britain and a few pennies move on sterling, you have to take a view through a much wider geography lense of contagion with the possibility of a further break up of Europe driven from a strengthening of far right wing nationalistic politics, all combining to create great uncertainty that discourages investment and triggers a global economic slowdown and much lower oil prices. All in all time to go on summer holidays and hope all is still intact in September!”

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7 04/07/2016 15:08

NEWS BITES

DIB rights issue oversubscribed reaching AED 9 million

ubai Islamic Bank (DIB), has successfully raised capital through a rights issuance amounting to AED 3.2 billion. The transaction was one of UAE’s largest rights issuance, witnessing a tremendous investor interest. It was three times oversubscribed receiving a total subscription of nearly AED 9 billion.

RATINGS REVIEW Entity Saudi Arabia Kuwait

Abu Dhabi

Qatar

Ras Al Khaimah Bahrain Turkey

Lebanon

Egypt

LT IDR/LT Rtg (FC)

ST IDR/ST Rtg (FC)

Country Ceiling

AA-

F1+

AA+

Saudi Arabia

F1+

AA+

United Arab Emirates

AA+

United Arab Emirates

AA AA A

BB+

F1+ F1+

BBB+

B KEY

Positive Negative Evolving Stable

Under Review

AA+

BBB- B

AA+

BBB B

OUTLOOK

Country Kuwait Qatar

Bahrain Turkey

Lebanon Egypt

WATCH

Emirates NBD embarks on AED 500 million digital transformation plan

mirates NBD has announced that it will invest AED 500 million over the next three years towards digital innovation and multichannel transformation of its processes, products and services. The bank also revealed plans to launch the UAE’s first digital bank targeted at millennials. The bank’s investment focuses on five key areas, namely: end to end process transformation; smoother, faster and more responsive customer interface; omnichannel experience, fortification of cyber security and anti-fraud capabilities; and enhancement data management and analytics, all underpinned to the UAE’s ‘smart city’ initiatives to offer a seamless and enhanced customer experience. Separately, Moody’s in a commentary has upgraded the bank’s long-term deposit and senior unsecured ratings to A3 from Baa1 and the bank’s Counterparty Risk Assessment to A2(cr)/P1(cr) from A3(cr)/P-2(cr) following the upgrade of its baseline credit assessment to ba1 from ba2 and Moody’s maintenance of existing government support assumptions, which result in four notches of rating uplift. Concurrently, the rating agency affirmed the bank’s Prime-2 short-term deposit ratings. The outlook on the long-term ratings is stable. “The upgrade of ENBD’s BCA reflects the bank’s improved and resilient financial profile, primarily it’s improved asset quality that we expect to remain stable despite slowing economic growth in a low oil price environment, stronger loss-absorption buffers coupled with resilient profitability and strong funding and liquidity, despite a slowing economic environment in the UAE stemming from lower oil prices,” said Nondas Nicolaides, VP—Senior Credit Officer, and lead analyst for Emirates NBD.

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Noor Bank issues perpetual Sukuk worth $500 million

oor Bank has successfully priced its debut perpetual $500 million Tier 1 capital issuance. The bank was able to print its inaugural AT1 Sukuk at a very competitive pricing on the back of strong investor demand. Noor Bank was able to set an industry benchmark by printing the lowest priced contingent Basel III compliant Tier 1 paper in Dubai. This was the first perpetual Tier 1 issuance from UAE in 2016. The final pricing came at the back of global roadshows across Middle East, Asia and Europe with an order book crossing over $1 billion. Noor Bank made its foray in the international markets in April 2015 after successfully pricing its inaugural five-year $500 million Sukuk in 2015.

QNB’s potential acquisition of Finansbank brings gains

atar National Bank’s (QNB) planned acquisition of Turkish lender Finansbank offers considerable advantages for the group, but the large acquisition in a relatively volatile emerging market will expose the bank’s asset quality to downside risks and add to the headwinds in its domestic operations owing to low oil prices, said Moody’s in a recent report on the bank’s regional move. The research and ratings agency expects these risks to remain manageable given QNB’s high capital buffers, which will be restored following a planned capital injection and contributions from its strong earnings, offsetting the impact of higher credit costs post acquisition. “Finansbank is a good strategic fit for Qatar National Bank, with its balanced portfolio among various sectors and a well-established presence in the Turkish market, which offers high longterm growth potential. However, the acquisition comes with downside asset quality risks due to the geopolitical tensions, currency volatility and a slowdown in economic growth all which may weigh on Turkish borrowers’ repayment capacity. We believe that any potential asset quality pressures internationally and domestically, owing to protracted low oil prices which could impact confidence and asset prices in Qatar, can be offset by QNB’s strong capital buffers which we expect to be restored by a capital increase by the end of June 2016,” said Elena Panayiotou, Assistant Vice President—Analyst and author of the report.

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Saudi Arabia’s National Transformation Program 2020, a credit positive

oody’s in a recent commentary stated that the Saudi Arabian cabinet’s approval of the country’s National Transformation Program 2020 (NTP), an implementation plan for National Vision 2030, is a credit positive for the country. This is because the plan offers a credible path to achieving fiscal and economic diversification away from oil and will improve competitiveness. Although Moody’s sees significant implementation risks, the agency opines that even if Saudi Arabia implements part of the NTP, the plan will benefit the sovereign’s credit quality by supporting its fiscal and economic strength.

Saudi Arabia gears up for sovereign bond sale

n a bid to strengthen its finances Saudi Arabia has mandated J.P. Morgan, HSBC and Citigroup to assist in issuing its debut international bond, industry reports reveal. This follows the Kingdom’s finance minister, Dr. Ibrahim bin Abdulaziz Al-Assaf’s statement, announcing plans to tap the international markets. No exact time frame has been decided for the issuance, however reports have suggested that the bond may exceed the $9 billion bond issued by Qatar recently.

UAE GDP growth to accelerate, says IMF

ue to expected recovery in oil prices, GDP growth in the UAE is expected to rise in the medium term, while inflation in the country witnesses a decline from last year. The IMF has projected average inflation to decline to 3.2 per cent in 2016 from 4.1 per cent in 2015. An IMF mission in a visit to the UAE also pointed out anexpected improvement in oil prices is projected to accelerate growth over the medium-term. This is supported by increased investment ahead of the World Expo2020 hosted in Dubai, and more favourable external conditions. The country’s growth is expected to moderate in 2016 on the back of low oil prices with 2.4 per cent non-hydrocarbon growth due to sizeable fiscal consolidation, softer economic sentiment, and tighter monetary and financial conditions. According to the IMF, UAE’s banking sector is strong enough to withstand severe shocks. It remains resilient having enough liquidity and capital buffers to withstand severe shocks. Furthermore, the central bank’s actions to ensure adequate provisioning, phase in Basel III liquidity and capital requirements, as well as strengthen corporate governance, are positive steps in the right direction.

GIQ: Saudi Vision 2030 in Figures

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THE MARKETS

Expected headwinds for GCC banks Tighter monetary policy and liquidity squeeze expected to weigh on GCC banks, explains Jaap Meijer, Managing Director, Equity Research at Arqaam Capital

eadwinds from significant fiscal consolidation coupled with the repercussions of a tighter monetary policy and liquidity squeeze are two of the main challenges that banks in the Middle East and North Africa region will have to grapple with going forward, according to the MENA Financialsâ&#x20AC;&#x201D;Selective Opportunities report by Arqaam Capital. The report expects revenue growth for Gulf banks to be fairly limited as higher assets yields are being offset by a substantial increase in the cost of liquidity, with banks and governments having to source funding outside their home markets at

Jaap Meijer

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wider spreads. Additionally, some Gulf banks, particularly those in Qatar have to bring back substantial negative US dollar positions to below 25 per cent of shareholdersâ&#x20AC;&#x2122; equity, protecting the banks from a potential de-peg. With credit growth slowing down, limited possibilities to boost net interest margins (NIMs) and a market reduction in loan origination fees, banks are focusing on costs, though this is unlikely to provide a substantial cushion if the downturn were to worsen. We expect banks to slow down on hiring or even reduce staff levels and try to save on other costs as well. The easiest savings should come from non-staff costs (administrative costs). Saudi Arabian banks should benefit from one off bonuses accrued in the 2015 financial year. Having said that, most banks have reported excellent quality of earnings with very rich buildup in general provisions. We estimate understatements in reported earnings of 10 to 25 per cent over the last few years.

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Under the stress scenario where we model for a 50 basis points (bps) increase in additions to loan loss reserves, commercial banks will continue to report a double digit return on equity, thanks to solid preprovision profits, mainly reflecting fairly high NIMs by international standards and low operating costs. Encouragingly, most valuations have started to reflect this, despite the relief rally year-to-date of about 30 per cent. The report also highlights that the reported non-performing loans (NPL) evolution is understating the underlying deterioration in asset quality. This is due to NPL write-offs and using some of the over-provisioning. As economies further slow down and lending standards further tighten, NPL formation should further accelerate. We see only limited possibilities to cushion profits and loss statement from the worsening asset quality due to three reasons, namely the implementation of IFRS 9 rules, which forces banks to provision on expected losses rather than incurred losses, the relatively limited over-provisioning of existing NPLs given overall low NPL levels and the stress in the SME sector which is likely to start affecting larger corporates. We expect the cost of risk to increase to about 80 to 125 bps for the banking system, with probably higher levels next year when economic conditions are likely to be tougher. We see mitigation, because of continued restructuring of NPLs, much stronger general provisioning levels and improved coverage ratios. Single party exposures remain substantial due to low number of very large corporates, such as Bin Ladin (KSA), Saudi Oger (KSA) and Al Jaber (UAE). Having said this, banks have been bolstering their balance sheets with rich general provisions, and have been understating earnings and capital ratios, with general provisions of one to four per cent of risk weighted assets.

We expect banks to slow down on hiring or even reduce staff levels and try to save on other costs as well. – Jaap Meijer As a result, profit and losses may not worsen as much—if they slowdown the pace of additions to general provisions or would be allowed to dip into them in periods of stress. We see ample opportunities for banks in the region with strong and sustainable growth in economic profit and risk adjusted return on capital generation. These banks will be better positioned to tap liquidity and to some extent capital, which should allow them to capture more market share as other banks may slam on the brakes. We also see deep value in some stocks with price dislocation and in certain banks where restructuring could unlock substantial shareholder value.

In addition, regulatory reforms can also present great opportunities as is the case for certain insurance companies in Saudi Arabia helped by a huge privatisation drive and crackdown on poor underwriting and pricing practises. We prefer strong, low risk/risk adjusted return on capital generators at reasonable values. Winners in the region have generally strong returns, solid lending standards with low risk models, liquid balance sheets, access to stable deposits and wholesale debt, and a flexible cost base, allowing the banks to continue generating economic profits for shareholders, the key value driver for sustainable shareholders returns.

Lower downside risk—but Arqaam Capital remains cautious on macro Federal Open Market Committee backpedalling on rate hike expectations provides a breather for emerging markets and the Gulf, which should result in less tightening in monetary policies, though spreads are still widening. Higher oil prices, though still painfully low from a fiscal break-even point, puts less pressure on liquidity in the system, while foreign markets are also being tapped (such as KSA with a sovereign bond debut in 25 years) at still favourable conditions. However, banks will need to tap (wholesale) markets outside the GCC, as the liquidity pool in the GCC will unavoidably dry up, with the diversification of their funding pushing up their funding costs, more than potential repricing of assets/loans. The fiscal austerity is most likely going to be a multi-year adjustment, as so far governments have only done some minor tweaks, with the biggest fiscal challenges in Saudi Arabia, Oman and Bahrain. We expect the situation in 2017 to worsen compared to 2016, as opposed to the consensus. Having said that, the opportunities in Iran (80 million in population people compared to 30 million in Saudi Arabia) could prove to be a positive impetus for the UAE (as a hub to set up businesses in Iran) and Oman (logistics, funding). Source: Arqaam Capital

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THE MARKETS

NBAD and FGB go full throttle with merger The amalgamation will combine the strengths of both banks, creating a massive entityâ&#x20AC;&#x201D;the largest banking institution in MENA

H.H. Sheikh Tahnoon Bin Zayed Al Nahyan, Chairman of FGB and H.E. Nasser Ahmed Alsowaidi, Chairman of NBAD agree on the monumental merger.

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ord started to spread on the grapevine in the last week of June on the potential merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB), which has kept the market buzzing. A week later, on 3 July 2016, both parties officially announced that they will move forward with the merger, laying down the bricks and time frame for the amalgamation. The boards of directors for both NBAD and FGB have voted unanimously to recommend to shareholders a merger of the two Abu Dhabi-listed banks. The proposed merger will create a bank with the financial strength, expertise, and global network that is expected to support the UAE’s economic ambitions both locally and globally. “The new, well-balanced bank will be an engine of UAE growth, driving further investment and economic diversification, and advancing the ambitions of entrepreneurs and the people they employ. The bank will have the strength and expertise to support the development of the UAE’s private sector, from SMEs to large companies gathering strength to expand beyond their national borders. It is wellpositioned to be the strategic banking partner to the government and its agencies,” said H.H. Sheikh Tahnoon Bin Zayed Al Nahyan, Chairman of FGB. According to an official statement issued on the merger, the combined bank will retain NBAD’s legal registrations and the brand name of ‘National Bank of Abu Dhabi’. It will be the largest bank in the MENA region, with AED 642 billion ($175 billion) in assets and a combined market capitalisation of approximately AED 106.9 billion ($29.1 billion). It will be the leading financial institution in the UAE, with a 26 per cent cont. overleaf

The bank will have the strength and expertise to support the development of the UAE’s private sector, from SMEs to large companies gathering strength to expand beyond their national borders. – H.H. Sheikh Tahnoon Bin Zayed Al Nahyan, Chairman of FGB

Source: NBAD and FGB

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THE MARKETS

cont. from page 13

share of outstanding loans, and will operate an international network of branches and offices spanning 19 countries. Both entities will continue to operate independently until the merger becomes effective, which is expected in the first quarter of 2017.

STRATEGY

The proposed transaction will be structured as a merger of equals and will be executed through a share swap, with FGB shareholders receiving 1.254 NBAD shares for each FGB share they hold. The exchange ratio implies a discount to FGB’s shareholders of 3.9 per cent based on closing share prices on 30 June 2016, and a discount of 12.2 per cent to the three months’ average pre-leak share price as on 16 June 2016. Following the issue of the new NBAD shares, FGB shareholders will

AED 600 million ($163 million). The combined bank will offer the potential for revenue synergies with enhanced product suite of banking products and services across a larger, combined platform. It will have the capital strength and strong core liquidity to pursue a range of high growth opportunities. These include opportunities in home market, supporting UAE corporates with international ambitions, leveraging an enhanced technology platform, more effectively using the expanded distribution capabilities and increasing wealth management cross-selling activity. The merger is subject to a number of conditions, including the approval of the merger by at least 75 per cent by value of the shares represented at quorate general assembly meetings of FGB and NBAD. The merger is also subject to receipt of all required regulatory approvals.

The combined bank will have the capital, expertise and international networks to be the preferred financial partner for anyone doing business internationally, and for global businesses and governments that want to access regional and global markets.

– HE Nasser Ahmed Alsowaidi, Chairman of NBAD own approximately 52 per cent of the combined bank and NBAD shareholders will own approximately 48 per cent. The Government of Abu Dhabi and related entities will own approximately 37 per cent. On the effective date of the merger, FGB shares will be delisted from the Abu Dhabi Securities Exchange. According to the statement issued by both parties, economies of scale will help maintain a lean and efficiently run organisation. The merger is expected to deliver cost synergies of approximately AED 500 million ($136 million) annually. Cost benefits are expected to be realised over three years, and the one-time integration costs are expected at approximately

14 page 12-15 The Markets.indd 14

Credit Suisse and UBS Investment Bank are acting as financial adviser to NBAD and FGB, respectively, while Allen & Overy and Freshfields Bruckhaus Deringer are acting as legal adviser to NBAD and FGB, respectively.

STRUCTURE AND ORGANISATION

The combined bank’s board will include four nominated directors of FGB and four nominated directors of NBAD. H.H. Sheikh Tahnoon Bin Zayed Al Nahyan, who is currently Chairman of FGB, is the Chairman designate. H.E. Nasser Ahmed Alsowaidi, who is currently Chairman of NBAD, is the Vice Chairman designate, and Abdulhamid M. Saeed,

Source: NBAD and FGB

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14/07/2016 13:31

who is currently Board Member and Managing Director of FGB, is the Chief Executive Officer designate for the combined bank. The new board and management will assume their new roles when the merger becomes effective; until then Andre Sayegh and Alex Thursby will continue to lead their banks independently as Group Chief Executive Officers of FGB and NBAD respectively. In terms of human capital, the proposed entity plans to combine the two successful groups of employees into a unified, customer-driven culture, based on the shared values of enterprise, teamwork, empowerment and accountability. Attracting and developing high-performing UAE nationals is a central priority.

FINANCIAL BENEFITS

The combined bank is expected to benefit from strong financial metrics. Its pro forma tier one ratio is 15.7 per cent, well above the UAE Central Bank’s prescribed minimum of eight per cent, and its pro forma total capital ratio is 16.9 per cent. The combined bank’s funding profile will be diverse, with pro forma wholesale funding accounting for 30 per cent of the total, customer deposits making up 69 per cent and other liabilities accounting for one per cent. Pro forma deposits are well-diversified, with corporate deposits accounting for 33 per cent, government and other public sector deposits 33 per cent, and retail deposits 22 per cent. The combined bank’s pro forma loan-todeposit ratio is 94 per cent. Together, its key profitability metrics are among the best in the sector, with a pro forma net interest margin of 2.30 per cent, a cost-toincome ratio of 30 per cent and a return on average equity of 14.1 per cent.

BROAD OUTLOOK

Speaking exclusively to Banker Middle East, Khalid Howladar VP-Senior Credit Officer at Moody’s said, “Both banks have relatively high deposit ratings

Following the issue of the new NBAD shares, FGB shareholders will own approximately

of the combined bank and NBAD shareholders will own approximately

from Moody’s (FGB A2/stable and NBAD Aa3/Negative) reflecting their strong individual credit profiles. With regards the GCC, banks in general are facing a more pressured operating environment on both sides of the balance sheet; asset growth and quality is weakening due to lower economic growth and liabilities are much more expensive, as regional liquidity remains tight despite some recovery in the oil price and recent jumbo sovereign debt issuances. Nonetheless, compared to other parts of the world, GCC bank solvency profiles remain strong and they are still reasonably profitable, so the drive for consolidation is not as strong--particular in the stronger countries (Kuwait, Qatar, UAE and KSA). Regional and global ambitions may also play some role as these countries seek to expand their role in the global finance and diversify their economies away from oil.” “There is immense opportunity in our home market and in the countries where the UAE is building stronger economic relationships, especially those across the Middle East, Africa, and Asia. UAE’s process of economic diversification will involve further

investment in infrastructure, private sector development and will require a greater role from the private sector. The new bank will be well positioned to be the strategic banking partner to the government and its agencies. This will be a new kind of bank for the UAE, and a bank better positioned to provide an expanded range of products and services to our customers,” said Abdulhamid M. Saeed, Chief Executive Officer Designate, commenting on the merger. Sharing similar sentiments, H.E. Nasser Ahmed Alsowaidi, Chairman of NBAD said, “The combined bank will have the capital, expertise and international networks to be the preferred financial partner for anyone doing business internationally, and for global businesses and governments that want to access regional and global markets. Our scale, diversified assets and superior technology will provide the competitive advantage needed to lead in the new banking environment of more stringent regulation, digitalisation and demand for personalised services.” Playing on the strength of both banks, the merger will result in the combination of two best-in-class consumer and wholesale businesses. FGB has a prominent consumer banking franchise, with one of the strongest credit card offerings in the UAE and a long-standing National Housing Loan programme run for the Abu Dhabi Government, while NBAD is known for wholesale banking and capital markets advisory with strong international connectivity. The combined bank will be well-diversified, with loans to the corporate sector representing 52 per cent of the total loan book, loans to the retail sector accounting for 26 per cent, and loans to the sector representing 22 per cent. It will have presence in 19 countries, and be well-positioned in key financial centres including Singapore, Hong Kong, Geneva, London and Washington DC.

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15 14/07/2016 13:32

COVER INTERVIEW

Balancing the scales The largest SME bank in the UAE, RAKBANK plans to expand market share and take on all market segments in 2016 and beyond

Peter England, CEO of RAKBANK

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11/07/2016 16:25

ow would you describe RAKBANK’s performance in 2015?

I think the 2015 results were quite reasonable considering the challenging economic environment. We started to see a significant increase in provisions over the course of the year though despite that we had quite strong top-line growth. Overall the bank finished in reasonably good shape. We’re still number one in the GCC in terms of return on assets (ROA) and number two in the GCC in terms of return on equity (ROE). It was still a strong year for us. What we began to see throughout the course of 2015 was significant stress in the SME sector. Despite perceptions that RAKBANK is a retail bank, we’re actually more of a SME business bank than we are a retail bank. In fact we are the largest SME bank in the country, which in the current climate may not be so good. But the reality is, the bank is very strong in the sector. We’ve done tremendously well out of it, particularly for the last six to seven years. Regrettably this is a segment that began to start struggling over the course of 2015, and therefore that had some negative impact. This impact continued into the first quarter of 2016 and to an extent into the second quarter of 2016. However there are signs that we are seeing in the second quarter in the business environment indicating an improvement in this market segment. Hopefully from the second half onwards we will see level of provisions start to come down again. They have peaked in the second quarter. Overall, 2015 was a decent year for the bank but 2016 is going to be tougher because we still have relatively high provisions for the first half, and the top-line is beginning to struggle given the more challenging business environment.

SMEs are a huge part of the bank’s business. However the bank has recently undergone a restructuring process. Tell us about this reform. Two years ago we set out a new strategic vision for the bank that we’ve only been able to fully implement from April last year. The intention is to have a much broader balance sheet—in the past we were very focused on small business, even in our retail book we were quite focused on business banking customers with retail products—for example auto loans and credit cards, they were given to small businesses rather than what you deem to be the normal retail customer. Our direction now, is to continue focusing on small businesses, but balance that up with a re-entrance into wholesale banking. And in regards to our retail business,

Business Banking makes up

of RAKBANK’s balance sheet Corporate Banking is expected grow from

0-4%

at the end of 2016

the intention is to become more retail—more salary and wages earners—pure retail banking. So the broad direction is to have a bigger bank, a bigger balance sheet—more balanced than it was [probably earning slightly lower ROA and ROE], but hopefully as result have a more balanced portfolio and therefore a more sustainable long-term profitability. In terms of broadening balance sheets, this year we have expanded the corporate banking book—we literally had no corporate banking business to speak of when I joined the bank two and a half years ago. We’ve re-entered into the wholesale market, but it is still at the very early stages representing a small percentage of our balance sheet. So loan growth this year will actually be flat at best—not because we are not growing where we want to grow but because the SME market is much smaller than it was due to less credit appetite and less demand. The rebalancing of the balance sheet is achieved through a combination of those factors. We’ve also become much more active in terms of new products, co-brands and various other things to begin to regain ground in the pure Retail segment.

Despite wanting to expand, RAKBANK also cut down its staff earlier this year. Why is this so?

We looked at this whole issue around business banking in January this year. In the past, RAKBANK had been successful in so many sectors, and for a period of time you start to get duplication. When I arrived at the bank about two and a half years ago, we had two units doing the same thing—we cont. overleaf

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17 13/07/2016 09:59

COVER INTERVIEW

cont. from page 17

had one which was in the retail bank offering a term loan product to small business customers, a RAKfinance product which was the largest part of the balance sheet. And we had another part—wholesale banking which was doing traditional trade finance and working capital lending. We therefore had two teams from the bank going to the customer, offering a different product, but at the end of the day servicing that same type of customer. So we took a decision in January to bring business banking together under one roof— we merged traditional trade finance, working capital and the RAKfinance term loan type product under one group which we called business banking and we took business banking out of retail banking—it is now two separate divisions. So right now we have retail banking, business banking, wholesale banking and treasury supporting those key functions. The restructuring and reduction in staff was predominantly because we wanted to eliminate any duplication in the job roles and also because we decided to approach things now more holistically. As a result, this has eliminated customer confusion.

What challenges do you anticipate for the rest of 2016?

I think the first half of 2016, particularly the first quarter, was affected by an ongoing challenge on the business banking/ SME side, but we have seen a remarkable improvement in the second quarter which will flow through into the third quarter numbers. We also see an increase in appetite and demand for lending, for these [business banking/SME] clients.

Contribution to Assets 100% 80%

2.9%

21.7% 2.8%

2.4% 1.9% 23.6% 6.9%

Retail Banking Treasury

72.6%

What are RAKBANK’s plans on the technology front?

We are in the process of converging our mobile and online platforms. RAKBANK, like any other bank in the world,

100%

5.7% 1.4%

1.0% 5.5% 2.8%

92.9%

90.7%

FY 2014

FY 2015

80%

65.2%

40% 20%

FY 2014 Wholesale Banking Insurance Others

Source: RAKBANK

So I think a lot of the issues that happened last year seemed to have stabilised. Banks are now behaving more sensibly than they had in the past—some of the banks withdrew from the market quite sharply and that had an impact. But I think things have now settled down to a reasonable equilibrium. I think financially this year will be quite challenging because the first quarter was difficult and the second quarter will carry similar sentiments, but because of the improvements we expect in the second half, things will not be as bad. Of course you’d hope that things will be even better but seeing how things are going right now, we will have a reasonably good year. What’s important is, if we see a significant improvement in the second half of the year, this should bode well for 2017.

60%

20% 0%

– Peter England, CEO of RAKBANK

Contribution to Operating Income

60% 40%

We do plan on increasing market share in wholesale banking and in retail such as with credit cards and personal loans. However in business banking I think it is more of maintaining our market share rather than increasing it.

FY 2015

0% Retail Banking Treasury

Wholesale Banking Insurance

Source: RAKBANK

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have an internet banking platform and a mobile banking platform and these things were completely different. This was a project that we started about a year ago and we should be live by the end of the year with a single converged platform, operating on both mobile devices and computers, having a single experience for customers. Once we have that proper underlying basic infrastructure platform, then we can start building the fun bits around it. We also intend to do more in the payments space. We’re working to bring more product innovation into that space but moving forward in 2017, we intend to do a lot more in payments generally. In remittances we currently have instant remittances into India, but we intend to add Philippines into the list by year-end. There is a lot going on in this space but the results of all this work won’t really be visible until November this year, when the new platform is up and you’ll see more coming from us going into 2017.

What has been the response so far to the Tablet App for credit card applications?

The Tablet App was something we put out for credit card applications for mobile sales. For the moment it is very specific—for credit cards only. We’re doing a lot of work on the back-end, integrating the front- and back-end tech to improve our turnaround times and customer experience. The initial reception for the Tablet App was positive—a lot of their data was filled in through their Emirates ID card. This platform will later on be expanded to other sales and products.

Deposit Value by Segment (31.12.2015)

9.1%

Retail Banking (Including SME) Source: RAKBANK

Wholesale Banking

In my opinion, I think RAKBANK did not really have a true premium banking proposition. There was Wealth Management and Al Momiaz, but it wasn’t a very distinguished service between the two. So we took a step back decided that we needed to build a proper premium banking proposition, not just a sales platform but based around a service proposition. From my experience over the years, if you get the service right, the sales will come. I think many banks make the mistake of focusing too much on the sales front and the service part is just somehow left to chance. We are now working on not just the product proposition but the whole service proposition to the client. The response has been good, but to be honest, we are now currently at 50 per cent of where we should be. I think we should get the service proposition nice and sharp, and working seamlessly so that customers genuinely feel that they benefit from being RAKelite customers.

How has RAKBANK Amal performed thus far?

We’ve had RAKBANK Amal for about three years now. To a large extent we try to ensure that Amal has the appropriate products to suit that segment. It is an area where I think there is a lot more that we can do, but for now the main priority is try to ensure that we have a competitive range of products. For example as we entered the wholesale market, we realised that we do not have the appropriate products suite that we need to compete on the Islamic side. The intention at this point is to continue with the Islamic window and have a full suite of product services for both conventional and Islamic banking across the entire business streams that we have—retail, wholesale, business banking and RAKelite. We will however become more active in terms of our marketing for Amal moving forward.

RAKBANK won Best Branding and Marketing Campaign at the BME Awards. What led to this success and how has this marketing helped the bank?

88.8%

2.1%

You introduced RAKelite in Q4 2015, how has the service been received and what plans do you have to grow in the premium sector?

Treasury

I think we have moved to become more mainstream in our marketing campaigns, compared to before where we were quite eccentric in our campaigns and ads. It has been effective in terms of demonstrating what the bank really is right now. It is about becoming more targeted in what you do. As and when we launch more innovative changes, we will then come back with campaigns to tell the world about it. To do that, you need more innovation, and that is the one thing that I believe RAKBANK have been sadly lacking for the past 6 years—real innovation. cont. overleaf

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COVER INTERVIEW

cont. from page 19

In celebrating 40 years we are saying that we are back in all parts of the UAE—we are here, we’ve been here for 40 years, we are now back in all of the segments. – Peter England, CEO of RAKBANK

To me, you’ve got to get that level of innovation coming first, then have your campaign talk about that innovation rather than complaining about your competitor.

Looking ahead, what is your outlook on the market?

On the SME side, I believe RAKBANK is a good proxy for what is going on in the market—majority of the banks in the market are experiencing similar issues with business banking—that the stress in the market segment have settled down. We feel that the worst is over. Others may have had challenges with liquidity, but we do not. For now, I think a lot of people are generally feeling much better than they were at the end of last year. Whilst our overall balance sheet is not growing so much, the rebalancing is absolutely happening. If you look at our numbers in 2015, our business banking makes up 25 per cent of the balance sheet. By the end of the year it will be 19 per cent of the balance sheet. So while the overall balance sheet might not be larger, the split of business will be more where we want it to be. Corporate banking has been expected to grow from 0 per cent to maybe 4 per cent at the end of 2016. Moving forward into 2017, that theme will continue. We do not expect business banking to shrink so much in 2017—it will probably be at a similar level to 2016. However because our balance sheet will be bigger, it will represent a smaller portion of the entire balance sheet. We do plan on increasing market share in wholesale banking and in retail such as with credit cards and personal loans. However in business banking I think it is more of maintaining our market share rather than increasing it. Also on the wholesale side we see opportunities for continued growth; more so because we’ve never really been in that segment for all these years. Some of the other banks have reached their caps on these things while customers have reached their caps on certain banks. So I think there is an opportunity for RAKBANK here in this market segment to get a reasonable share. In terms of liquidity I believe RAKBANK is in a very good position. There are no immediate plans to raise debt just yet. However if loan demand for business/SME banking picks up in the second half [this being a large portion of the bank’s business], we might be in a position to raise debt rather than going for customer money.

RAKBANK is celebrating its 40-year anniversary. What does this mean for the bank?

Celebrating 40 years, part of it is again tying back to being a more balanced bank. We are now back in the wholesale banking market and back in business in Ras Al-Khaimah— until 2014, we hardly did any business in Ras Al-Khaimah. We did some retail business but none in SME or wholesale. In celebrating 40 years we are saying that we are back in all parts of the UAE, we are here, we’ve been here for 40 years, we are now back in all of the segments, we believe strongly in the roots of Ras Al-Khaimah and we are proud of it. It is restating that we are operating across all markets, all nationalities, we’re here for everyone rather than just for certain segments or certain parts of the country as we were before. At this point in time we plan to remain in the UAE, there is no plan to go outside of UAE. We have recently acquired RAK Insurance and we would like to become a broader financial services company. And now as we have a much broader customer base, as we build our capabilities, we’d like to get involved in insurance, and perhaps stock broking, investment banking and other relevant sectors.

The National Bank of Ras Al Khaimah was founded in 1976. It underwent a major transformation in 2001 as it rebranded into RAKBANK and shifted its focus from Corporate Banking to Retail Banking. RAKBANK is a public joint stock company headquartered in the emirate of Ras Al Khaimah (RAK). It has 35 branches and over 250 ATMs in the UAE. In late January 2013, the Bank launched its Islamic Banking unit – AMAL. RAKBANK is listed on the Abu Dhabi Securities Exchange and 52.77 per cent of the Bank’s shares are owned directly and indirectly by the government of RAK. The market capitalisation of RAKBANK is AED 10.476 billion ($ 2.85 billion) as of 31 December 2015. The Board of Directors consists of the RAK ruling family and businessmen and professionals from UAE and Australia.

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Issued by HSBC Bank Middle East Limited U.A.E Branch, P.O.Box 66, Dubai, U.A.E, regulated by the Central Bank of the U.A.E for the purposes of this promotion and lead regulated by the Dubai Financial Services Authority. CRN 160471. ÂŠ Copyright HSBC Bank Middle East Limited 2016 ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank Middle East Limited.

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SOVEREIGN WEALTH FUNDS

A time of re-evaluation Markus Massi, Partner and Managing Director at Boston Consulting Group Middle East sheds light on the emerging trends in GCC’s ever-changing sovereign wealth fund landscape

t is no secret that, in recent years, macro- and micro-economic challenges—that range from navigating oil price volatility to preserving fiscal sustainability—have affected the GCC region. And these issues have in turn deeply impacted the activities carried out by the region’s Sovereign Wealth Funds (SWFs).

GCC countries previously enjoyed steadily high oil prices—a trend that allowed assets under management of government-owned SWFs to starkly increase. In the past, these funds served as rather passive vehicles of government ownership; however, this is no longer the case. In fact, they are now considered one of the

key pillars of national strategies for GCC governments. With over $6 trillion in assets under management, SWFs (in the GCC) are beginning to occupy a prominent place in the investment landscape. Through active or passive management mandates, SWFs provide traditional asset managers with a large revenue

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(Photocredit: Fotonium/Shutterstock.com)

pool. Moreover, today, GCC SWFs are also investing almost $100 billion in alternative assets, making them one of the largest investor groups in this asset class. Since most SWFs only have a five per cent allocation to alternative assets, any further change in asset allocation will undoubtedly increase the attractiveness of this group. In the GCC, SWFs have traditionally invested abroad (for instance, in Europe or Americas), which made them an attractive customer group for international institutional asset managers in London, Switzerland or

GCC SWFs have over

$6 tn

in assets under management

the US. These international managers are basically tasked with managing SWFsâ&#x20AC;&#x2122; discretionary portfolios in fixed income or global equities. As a consequence of lower oil prices, however, the rate of these investments has slowed down, been put on pause or even declined in some cases. That being said, top players continue to remain active in investing abroad, especially via direct investments. At the same time, due to widening budget deficits, local SWFs are facing mounting pressure from the regionâ&#x20AC;&#x2122;s governments to contribute positively to the fiscal budgetâ&#x20AC;&#x201D;by raising liquidity through asset sales.

They are also investing almost

$100 bn in alternative assets

Still, to date, most of these asset sales have been low-yielding liquid assets. Ultimately, GCC governments believe that SWFs have the potential to drive national economic diversification, actively manage stateowned enterprises, provide socioeconomic benefits beyond returns, and, essentially, ensure fiscal stability in times of financial distress. With this in mind, it is clear that SWFs currently play an important part in the economic development of GCC countries. Across the region, SWFs fulfil an increasingly pivotal role in the active management of government assets. cont. overleaf

Markus Massi says top players continue to invest abroad.

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23 13/07/2016 10:02

SOVEREIGN WEALTH FUNDS

cont. from page 23

In response to this, some SWFs in the GCC have begun adopting a professional approach to designing a robust management and governance framework—and, they have been building dedicated teams to manage local assets accordingly. International experiences can be drawn from Asian SWFs such as Khazanah Nasional or Temasek Holdings, both of whom started managing local companies more actively 10 to 15 years ago. These SWFs have proven that an active management of stateowned enterprises can lead to better corporate governance, improved talent management or enhanced corporate social responsibility. Khazanah, for example, is publishing an annual report in which financial returns are

shown clearly and transparently—in parallel, the contribution of stateowned enterprises is also revealed via the number of training hours provided, the new jobs that were created or the scale of social projects and activities orchestrated. On their parts, governments in the region are re-evaluating the tradeoff between raising debts on the capital market or tapping into the sovereign reserves. So far, for the most part, liquid and low-yielding assets have been monetised. As the low oil price environment prevails and GCC countries continue to draw down their reserves, governments will most likely need to reassess their reserve and sovereign debt management strategies to achieve

an optimal liquidity and return profile. For some GCC countries, it may be cheaper—given the low ratio of sovereign debt to GDP—to raise debt on international capital markets compared to selling higher-yielding fixed income or equity investments. However, most GCC governments have not been active in the international capital market for over 15 years. The international investor community therefore lacks a real understanding of the current political, economic and social context that prompted the region’s governments to start—once again—tapping into global markets. As a result of this, GCC governments should actively put in place professional Debt Management Offices (DMOs) following the examples of cont. on page 26

Sovereign Wealth Fund Rankings Largest Sovereign Wealth Funds by Assets Under Management Country

Sovereign Wealth Fund Name

Norway UAE - Abu Dhabi China Saudi Arabia Kuwait China China - Hong Kong Singapore Qatar China Singapore UAE - Dubai Saudi Arabia UAE - Abu Dhabi Australia South Korea Kazakhstan Kazakhstan Russia UAE - Abu Dhabi UAE - Abu Dhabi

Government Pension Fund - Global Abu Dhabi Investment Authority China Investment Corporation SAMA Foreign Holdings Kuwait Investment Authority SAFE Investment Company Hong Kong Monetary Authority Investment Portfolio Government of Singapore Investment Corporation Qatar Investment Authority National Social Security Fund Temasek Holdings Investment Corporation of Dubai Public Investment Fund Abu Dhabi Investment Council Australian Future Fund Korea Investment Corporation Samruk-Kazyna JSC Kazakhstan National Fund National Welfare Fund International Petroleum Investment Company Mubadala Development Company

Assets USD-bil 847.6 792 746.7 598.4 592 474** 442.4 344 256 236 193.6 183 160 110 95 91.8 85.1 77 73.5 66.3 66.3

Inception 1990 1976 2007 n/a 1953 1997 1993 1981 2005 2000 1974 2006 2008 2007 2006 2005 2008 2000 2008 1984 2002

Origin Oil Oil Non-Commodity Oil Oil Non-Commodity Non-Commodity Non-Commodity Oil & Gas Non-Commodity Non-Commodity Non-Commodity Oil Oil Non-Commodity Non-Commodity Non-Commodity Oil Oil Oil Oil

** This number is a best guess estimation. Source: Sovereign Wealth Fund Institute

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SOVEREIGN WEALTH FUNDS

cont. from page 24

Sweden and the UK. These offices will be responsible for devising overall debt strategies, managing the capital market communication, monitoring the efficient usage of funds and reporting on ongoing economic and financial topics. In terms of credit ratings, it is true that GCC countries have recently experienced a negative rating trend— although this is mainly because of the negative oil price outlook and fiscal budget deficits. On the other hand, on a global level, the region’s high reserves and low debt-to-GDP ratio is perceived positively by international rating agencies. An effective debt management strategy, however, will enable international rating agencies and investors to weigh the different aspects of the economic and social reforms occurring in the GCC. Looking ahead, the region’s fiscal standing will be impacted by governments’ ability to reduce their fiscal budget deficits and diversify their income through non-oil revenues so they can eventually reach sustainable budget levels. Saudi Arabia’s Vision 2030 is an adequate example of a government that has embraced an active strategy to engage with its citizens as well as with the international community by thoroughly explaining and laying out its future plans and related expectations. By actively communicating its commitment to reform, Saudi Arabia is not only preparing its citizens for the challenges to come but also giving domestic companies a direction to operate in so that they can plan their investments for the future accordingly. The active leverage of SWFs to spearhead the development of new industry sectors or critical infrastructure can provide the initial incentives for the private sector to build its investment plans. As for how exactly the region’s SWF landscape will evolve, well that remains to be seen.

Ultimately, GCC governments believe that SWFs have the potential to drive national economic diversification, actively manage state-owned enterprises, provide socioeconomic benefits beyond returns, and, essentially, ensure fiscal stability in times of financial distress.

– Markus Massi, Partner and Managing Director at Boston Consulting Group Middle East What is certain is that SWFs will continue to top GCC governments’ national agendas. There is no denying that, in the near future, SWFs will become even more active in managing government assets and other projects with the aim of stimulating economic growth. From their standpoint, SWFs will also have to more clearly distinguish their mandates and define their investment strategies. After all, a number of regional SWFs has fulfilled several mandates—as a manager of local assets, a provider of liquidity to the government, a saver for future generations or a developer of new industries. And with each mandate requiring a unique set of capabilities and tailored investment strategies, SWFs have a tall order to fill. Whereas traditionally, SWFs developed in-house capabilities to passively or actively manage liquid assets, or chose third-party investment managers, as the ‘new normal’ will require them to build new abilities much more rapidly. In their function as active managers of local companies, SWFs have to deeply understand the various industry sectors to drive a strategic discussion with the management. In addition, they need to develop a best-in-class corporate governance plan to ensure an efficient system of decisionmaking and checks or control. These capabilities are not part of the typical asset management skills that SWFs were previously expected to master—

in reality, these capabilities are typically found in family conglomerates, private equity companies or management consulting companies. In their function as developers of new industries, SWFs have to actively identify white spaces in the industrial landscape—areas where private sector companies have yet to enter either due to longer payback horizons, lower expected returns or high initial investment amounts. These investments have to be chosen carefully to avoid crowding out private sector investments. Furthermore, these investments have to be evaluated based on financial returns as well as socio-economic benefits (from creating higher-value jobs to causing a ripple effect on other industries and diversifying the economy). Again, in the past, these capabilities were not considered typical asset management skills; interestingly, they are viewed as quasi-entrepreneurial— since they entail developing a project from the idea to implementation in a highly-uncertain environment. Today, such key competencies are usually found in venture capital companies or start-up companies. Still, for both talent groups, SWFs can offer a promising career perspective with immense opportunities. In line with this, moving forward, SWFs in the GCC will have to shift their focus to these very areas. Failing to do so may hinder their future growth and undermine their potential to become major actors of national development.

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COUNTRY FOCUS

Challenging times ahead for Turkey Following its meteoric rise in the last few years, Turkey has now become embattled with slow economic growth, geopolitical stresses and lower central bank reservesâ&#x20AC;&#x201D;but all is not bleak

he 17th largest economy in the world, Turkey has a gross domestic product (GDP) of $799.54 billion, according to World Bank numbers. Between 2002 and 2012 extreme poverty fell from 13 to 4.5 per cent and moderate poverty fell from 44 to 21 per cent, while access to health, education, and municipal

28 page 28-31 Country Focus.indd 28

services vastly improved for the less well-off. Since the global financial crisis, Turkey has created some 6.3 million jobs, although increases in the labour force, including a rise in the participation of women, has kept unemployment at around 10 per cent. In spite of its meteoric rise and a source of inspiration for other emerging

markets, the country is now pressured by both internal and external factors affecting its financial and economic standing. The country is now facing a sluggish growth. The Central Bank of the Republic of Turkey recently cut the overnight lending rate by 50 basis points, to nine per cent to stimulate low inflation levels and boost economic growth.

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While muted economic prospects will weigh on loan performance and profitability, the banking system remains well-capitalised. We expect delinquencies to rise to about 3.5 per cent or 3.8 per cent, in light of the lira’s depreciation and the slower economy.

(Photocredit: seregalsv/Shutterstock.com)

– Irakli Pipia, Vice President and Senior Credit Officer at Moody’s

CURRENT SITUATION

A recent commentary by Fitch Ratings appear to have placed Turkey in the clear. The agency in its most recent evaluation of Turkey in February affirmed the Republic’s long-term foreign and local currency issuer default ratings (IDR) at ‘BBB-’ and ‘BBB’, respectively, both with a stable outlook. The issue ratings on Turkey’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB-’ and ‘BBB’, respectively. Its country ceiling has been affirmed at ‘BBB’ and the short-term foreign currency IDR at ‘F3’.

According to Fitch, fiscal discipline remained in place in 2015 despite the holding of two closely contested parliamentary elections. The central government deficit narrowed slightly to 1.2 per cent of GDP, from 1.3 per cent of GDP in 2014. As a result, general government debt/GDP fell to 32.6 per cent at the end of 2015, compared with a peer median of 42.6 per cent of GDP. The implementation of pre-election spending commitments is expected to worsen the fiscal position in 2016, with the central government deficit expected to widen to two per cent of GDP, but debt/GDP will remain on a downward path. Refugee and security expenses pose expenditure pressures. Rising use of public private partnerships, which are not fully accounted for at the treasury, are another fiscal risk. In Fitch’s view, the geopolitical scene in the region has worsened. Turkey’s involvement in the Syrian conflict and the breakdown of the Kurdish peace process appear to have triggered several high-profile terrorist attacks claiming multiple fatalities. Issues that could further contribute to the deterioration of conditions in Turkey include—a materialisation of stresses stemming from external financing vulnerabilities; prolonged and deepened political instability, insecurity or geopolitical stresses that undermine economic performance and threaten economic policy credibility; a deterioration in the macro policy framework that results in a reversal in the declining trend in debt/GDP

and/or a worsening of external imbalances. These risk factors according to Fitch, individually, or collectively, could trigger negative rating action. Furthermore, Turkey’s external vulnerabilities are deemed to be a key credit weakness. The Republic’s net external debt is substantially large compared with its peers at an estimated 38.4 per cent of GDP at end-2015, compared with the ‘BBB’ median of 3.4 per cent, reflecting the financing of persistently large current account deficits. Fitch explained that lower oil prices have driven a cyclical decline in the current account deficit, which has halved in nominal terms between 2013 and 2015 and is forecast at a seven-year low of 3.5 per cent of GDP in 2016. There is however no evidence of a structural improvement in the external position. According to Fitch, Turkey’s gross external financing requirements are relatively large, at an estimated $197 billion (including short-term debt) in 2016 and the international liquidity ratio, at 71.6 per cent in 2015, is less than half the peer median, exposing Turkey to global financial market conditions. Reliance on short-term borrowing has declined notably due to macro-prudential policy and Fitch assesses that banks have sufficient sources of foreign exchange liquidity to withstand a severe financing shock. Uncertainties over the foreign asset position of Turkish corporates and the impact of higher financing costs are a potential source of vulnerability. Sovereign buffers to volatility in investor cont. overleaf

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COUNTRY FOCUS

cont. from page 29

sentiment have diminished. Foreign exchange reserves fell by $12.5 billion in 2015 and while still relatively large on a gross basis, at $115.1 billion at end-2015, they are around one-third of this in net terms. Nonetheless, external debt rollover rates continue to exceed 100 per cent. Growth is comfortably in excess of peers, averaging 4.4 per cent over 2011-2015 compared with a peer median of 3.2 per cent. Fitch forecasts a slight moderation in growth, to around 3.5 per cent in 2016 and 2017, and growth will be consumption-driven, reflecting the hike in the minimum wage, lower oil prices and a fairly loose policy stance.

BANKING SYSTEM

The Turkish banking sector has portrayed a strong front, growing from strength to strength over the last few years. However this position seems to have deteriorated this year as Moody’s in a recent report, conveyed a negative outlook on the Republic’s banking sector on the back of slower economic growth, increasing dollarisation of liabilities and volatile sentiment towards emerging markets. Furthermore, the Turkish banking sector’s dependency on external wholesale markets could contribute to higher funding costs in light of a weaker international investor confidence—all of which kept the banking system on a negative outlook. While muted economic prospects will weigh on loan performance and profitability, the banking system remains well-capitalised.

Turkey has a GDP of

$799.54 billion % 3

Economic growth is expected to average at above

per year over 2016-2019

Foreign exchange reserves fell by

$12.5 billion in 2015

We expect delinquencies to rise to about 3.5 per cent or 3.8 per cent, in light of the lira’s depreciation and the slower economy, said Irakli Pipia a Vice President and Senior Credit Officer at Moody’s. The rating agency sees problem loans rising by 40-60 basis points, although from a low base of 3.1 per cent at the end of 2015, with loans for consumers and small to mid-sized companies (SMEs) bearing the brunt. According to Moody’s, the sector’s growth is vulnerable to changing investor sentiment, given Turkey’s high external financing needs. Profitability of Turkish banks will face pressure from narrowing

Although Turkey’s overall economic structure and demographics are distinctly different from those of Gulf countries, we expect the Turkish Islamic banks’ market share to double to more than 10 per cent by year-end 2025. – S&P Global Ratings credit analyst Mohamed Damak

30 page 28-31 Country Focus.indd 30

net interest margins due to the banks’ rising borrowing costs, driven by their large foreign currency liabilities. Banks are believed to have solid capital buffers to absorb a rise in loan losses, with the average Tier 1 capital ratio for the system accounting at 13.3 per cent at the end of 2015. On balance, given Moody’s moderate credit growth expectation this year, system-wide capital ratios will likely remain broadly steady, although they are vulnerable to any further local currency depreciation due the large volumes of foreign currency assets on banks’ balance sheets. Moody’s expect Turkish banks to depend heavily on capital market borrowing to finance a substantial part of their lending reflected in the loan to deposit ratio of 123 per cent at the end of last year. Foreign currencydenominated short-term wholesale funding is a growing liability for the banking sector. Although relationshipdriven interbank borrowings

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(about 40 per cent of the total wholesale funding) are expected to rollover during 2016, the rating agency notes that this refinancing may incur higher borrowing costs in the context of investors’ cautious appetite towards emerging markets. Adding salt to the wound, the probability of government bail-outs for troubled banks are becoming more unlikely as the government plans to enact legislation to impose losses on creditors to recapitalise an ailing bank should it be required. Furthermore, the central bank’s depleting forex reserves is projected to make the authorities’ support for the banking system more selective.

5 $42.4 billion

Participation banks’ assets make up

of overall banking assets or

at the end of 2015

Annual volume of Sukuk issuance increased from

$100 million $2 billion in 2010 to almost

PARTICIPATION BANKING

On the brighter side of things, Turkey’s Islamic banking market, also known as participation banking, is witnessing a healthy, exponential growth. Islamic finance in the Republic has grown at a markedly faster pace than conventional finance over the past 10 years. According to S&P, Islamic banks in Turkey— participation banks—have doubled their share of overall banking assets over the past decade to around five per cent or $42.2 billion at year-end 2015. The annual volume of Sukuk issuance increased by about 20 times over the same period, to close to $2 billion end of last year, from $100 million in 2010. “Although Turkey’s overall economic structure and demographics are distinctly different from those of Gulf countries, we expect the Turkish Islamic banks’ market share to double to more

at the end of 2015

than 10 per cent by year-end 2025,” said S&P Global Ratings credit analyst Mohamed Damak. The research and ratings agency expects recent government initiatives supporting the growth of this market segment, to spur momentum for Turkey’s fast-growing Islamic banking market. Additional capital deployed by new participation banks is expected to provide significant stimulus for the sector. Stricter regulations (on the back of Turkey being an official Basel III-compliant country) will also act as challenges for this sector. Nevertheless, S&P remains bullish, expecting the participation

banking system’s credit growth to remain well above the rates displayed by its conventional counterparts. S&P projects economic growth in Turkey to average at above three per cent per year over 2016-2019. In spite of this, it also sees a distinct slowdown in credit growth after years of fast-paced growth. This means that although Islamic banks are expected to continue to capture overall market share in Turkey’s banking system, S&P still anticipates average growth rates for the Turkish banking system to decelerate to around 11 per cent between 2016 and 2019.

Long Term Issuer Default Rating Long Term Issuer Default Rating Short Term Issuer Default Rating Local Currency Long Term Issuer Default Rating Country Ceiling

BBBF3 BBB BBB

26-Feb-2016 26-Feb-2016 26-Feb-2016 26-Feb-2016

Affirmed Affirmed Affirmed Affirmed

Source: Fitch Ratings

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31 04/07/2016 15:02

HUMAN CAPITAL

Uncertain times bring changes to the job market Sanjay Modi, Managing Director of Monster.com, breaks down the state of the human capital sector in the Middle East in the first part of the year

oday’s business environment is volatile, uncertain, complex and ambiguous— the impact of the headwinds in the global and regional markets is so strong in fact, that experts have introduced a new acronym to describe the current economic scenario: ‘VUCA’ (volatility, uncertainty, complexity and ambiguity). How popular this name will become in the minds of the public remains yet to be seen. What is certain, however, is that the combination of China’s economic slowdown, negative interest rates, social and regulatory circumstances is taking its toll on the global employment arena. Even so, the current scenario is not all negative in the Gulf. According to the Monster Employment Index (MEI), job demand for the GCC region exhibited the first positive monthly growth since November 2015, up by seven per cent. This trend is expected to continue, as hiring activity exceeded the year-ago level by eight per cent in March 2016. Despite negative economic projections, growth momentum Sanjay Modi in the GCC is still positive.

There is no doubt that falling oil prices have hit the economy hard; we see this on the back of banks’ tightening liquidity and governments’ austerity measures to curb budget deficits, resulting in employers’ cautious approach to hiring this year. Scepticism is particularly visible in the UAE’s financial services sector and energy sectors, where a number of banks are anticipating a contraction in economic growth, thus already announcing job cuts in response to the changed economic reality. Despite such significant macroeconomic challenges, online recruitment activity in the UAE rose by 24 per cent in March 2016 as compared to the same time a year ago, March 2015; and while the annual growth momentum eased 21 percentage points between February and March 2016, the country still remains one of the best performing GCC markets in terms of employment opportunities. When comparing MEI findings, the UAE performed better than its neighbouring countries Egypt, Saudi Arabia, Bahrain, Oman and Qatar; Kuwait overtook the UAE by only two percentage points. Analysing the effect of a sustained decline in oil prices on the UAE’s job market, the country saw a lot of fluctuations in the UAE job market since the decline. This year especially, it is as if the UAE economy is sending cont. on page 34

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HUMAN CAPITAL

cont. from page 32

mixed signals—when UAE banks announced their financial results for the first quarter of 2016, these were extremely mixed in terms of profitability. While some posted a net profit increase on the back of higher revenue and setting aside less cash for bad debts, others reported losses. While there is no doubt that economic growth is adversely impacting hiring activity of a number of businesses, there are other sectors such as healthcare which are still hiring robustly. Looking at MEI data from Q1 of 2016, the outlook for the UAE healthcare market is positive. Although the road has been bumpy, healthcare is leading the industry growth charts in the UAE for the second month in a row with a 38 per cent growth in online job posts in March 2016, as compared to March 2015. The job demand in the industry is not surprising, given the development of the Dubai 2021 Health Strategy to improve the quality and cost effectiveness of health services in the Emirate, and strengthen the collaboration between the public and private sectors. With these plans in place, the healthcare market in the UAE is projected to reach $19.5 billion in 2020.

Online recruitment activity in the UAE rose by

in March 2016 compared to March 2015

Taking the example of healthcare, the rise of public private partnerships becomes almost inevitable to save on costs. What the economy needs in times of austerity is to create a new order for promoting the growth of the UAE—and welcoming private sector participation will certainly help the governments to do exactly that: manage the rising costs. So far, the UAE seems to have done well in securing robust hiring activity in non-oil sectors. In the month of March, the second best performing industry is retail/trade and logistics, with 36 per cent growth in online job posts. This is followed by consumer goods, food and packaged food, home appliance, garments/textiles/leather as well as

Monster Employment Index 40%

180

30%

160

20%

140

10%

120

100

-10%

-20%

Oc t-1 4 No v-1 De 4 c-1 Ja 4 n-1 Fe 5 b-1 Ma 5 r-1 5 Ap r-1 Ma 5 y-1 Ju 5 n-1 5 Ju l-1 Au 5 g-1 5 Se p-1 5 Oc t-1 5 No v-1 De 5 c-1 Ja 5 n-1 6 Fe b-1 Ma 6 r-1 6

200

Index Source: Monster Employment Index

YoY

gems and jewellery, with a growth of 32 per cent in job opportunities posted online year-on-year to March 2016. The outlook was gloomier for job seekers in advertising, market research, public relations, media and entertainment; hospitality; and oil and gas sectors, which exhibited a negative drop of 13 per cent, 17 per cent and 22 per cent respectively. According to the International Monetary Fund, the reason why the UAE continues to achieve new levels of economic growth despite a strong US dollar and low oil prices is due to its ‘prudent financial policies and sound economic methodology’. Early market liberalisation and deregulation has successfully led the country to open up its banking sector to domestic and foreign financial institutions, while also attracting major non-oil foreign trading partners and suppliers. In 2015, the UAE’s non-oil trade hit AED 1.56 trillion and represented about 68 per cent of the total trade volume in that year. This is significant when viewed against a backdrop of prolonged economic turbulences, and shows how successful the Emirates has been in diversifying the economy when expanding the non-oil sector over the past couple of years. As one of the most diversified economies among the GCC countries, the IMF predicts a 2.5 per cent growth for the UAE this year—a figure which is to improve even further, should oil prices recover next year as foreseen. Whatever the growth outlook for the UAE might be, oil price fluctuations should not be a barrier to employment growth. Analysing past MEI data, the UAE in particular seems to be wellequipped to rise to the challenge of the post-oil era—and with a new order for promoting the growth in the UAE, businesses might soon be able to get off this bumpy road that, today, seems so full of potholes.

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HUMAN CAPITAL (Photocredit: Jirsak/Shutterstock.com)

Honing leadership acumen Mike Hoff, Founder and CEO of Mike Hoff Consulting, provides his views on the vital leadership skills required in building a great team

oday, leadership in a corporate environment is so much more than just being able to rake in profits. The new generation of business leaders is embracing a more holistic understanding of the concept of leadership, focusing on getting the best out of their teams for a mutually beneficial relationship. When it comes to running a successful company, leadership is undoubtedly one of the most important elements in the mix. Fifty two per cent of companies with quality leadership enjoy an overall enhanced business experience, with increased productivity and service levels that result in higher customer satisfaction scores, ultimately leading to a better financial performance. Some leadership qualities are highly essential when it comes to inspiring a top-performance team.

Share your vision and goals

Every organisation has goals. These goals need to be analysed and broken down so members of your top team can share the same vision and buy in to management strategies to achieve it. As a leader, you may see prudence in the timing of specific information sharing, yet studies show 82 per cent of people don’t trust business leaders to tell the truth. Transparency builds trust and in the long run, reinforces loyalty.

Be gracious

Perhaps obvious in its simplicity, it’s amazing how far a simple ‘thank you’ can go. Offer praise for jobs well done and decisions well taken. Remember to thank your team for their efforts and diligence, and respect their time by encouraging a culture of prompt, effective communication and a healthy work-life balance. Demonstrate empathy. It isn’t always easy, but a tool worth learning to use wisely.

Communicate effectively

How you communicate is one of the most important considerations when leading a team. Body language and tone of voice, as much as what you actually say, are critical. As a leader you set the precedent for your business heads in terms of how to address your colleagues and teams. Honest, transparent, and authentic communication is central to effective leadership and it affects every type of interaction whether it’s phone calls to overseas partners, face-toface meetings with customers, or emails to stakeholders.

Facilitate growth

Armed with a complete and thorough understanding of every person within your team, you will be well equipped to help them not only with their respective functions, but also develop their expertise levels. Recognise that each team member brings a unique skill-set to the table and lead them so as to best utilise and grow their existing capabilities, mentoring and coaching to set them up for success.

Continue learning

Thanks to strategic leadership programmes, 86 per cent of companies are able to successfully respond to changes in the business environment–technological advances, best practices, training programmes and fluctuating cost of living standards–the list is endless. It’s important to hone your leadership skill set to best suit the needs of your team and of your business environment. Knowledge is power and by maintaining an open mind to new ways of understanding your workforce and working with them, you will in turn become a better leader. Leadership skills don’t appear overnight. They need to be understood, embraced, implemented and their outcomes monitored. Don’t wait for the perfect time to make changes; start today.

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HUMAN CAPITAL

Sustainable value and risk management Imelda Dunlop, Executive Director of the Pearl Initiative, elaborates on how integrated thinking assists in creating sustainable value and manage risks efficiently

2013 survey by Deloitte found that 73 per cent of CFOs believe there is a strong link between increased sustainability and business performance. Another recent survey of CFOs during a Pearl Initiative roundtable in the Gulf region found that more than 50 per cent of the CFOs polled believe that the integration of environmental, social and governance factors in strategic decision-making can create significant value for an organisation. This clearly indicates that in today’s world an organisation cannot define its success or efficiency solely on the merit of financial results or revenue earned. However, current financial reporting practices do not capture each of the aforementioned factors. It is necessary for CFOs and finance departments of an organisation to consider how financial practises work in synergy with sustainability practises to produce long term success for the organisation. This will help them simultaneously understand the different factors that impact value creation and also ensure that the information is communicated and reported in a manner that supports all internal processes and decisions.

38 page 38-40 Human Capital.indd 38

Imelda Dunlop

73%

of CFOs believe there is a strong link between increased sustainability and business performance

Integrated thinking provides organisations with such a framework to enable them to look towards a broader, longer-term vision of value creation through providing a more thorough understanding of how value is created in the first place. The concept is made up of a set of processes and organisational changes that ultimately drive a company to take a more holistic approach to value creation spanning several dimensions. This approach invites an organisation’s board, senior management and other employees to proactively consider a wide variety of ‘capitals’—beyond financial and manufactured capital. In doing so, the company can better understand the cross-section of capitals that are likely to impact its financial performance. In this manner integrated thinking can add value for investors and other stakeholders. The long-term result of integrated thinking should be to ensure more cohesive internal processes and increased organisational alignment towards strategic goals—all the while keeping in mind the changing business environment. With CFOs no longer perceived as just financial experts but rather as integral business partners and advisors, integrated thinking provides a more cont. on page 40

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HUMAN CAPITAL

cont. from page 38

full-fledged narrative for CFOs and their finance teams to work with. Ultimately, integrated thinking seeks to connect all the realities and priorities of a company’s strategy and decision-making processes with what is reported externally—using a much broader lens than traditional finance and accounting measures. The model of integrated thinking is not a prescribed one. Instead, integrated thinking maps out broad areas for companies and CFOs to pay close attention to when looking for sources of value creation. With the global economy entering a new era, perhaps most important is the company’s ability to create and maintain sustainable value within the context of the external business environment.

uncertain nature and timescale of these trends through sustained planning measures, which can be implemented across the organisation. Through analysing the impact of major economic, environmental and social trends, considering the company’s impact on society and markets, as well as understanding the company’s public perception, CFOs gain an external value focus. This serves as a critical starting point to help them understand and articulate the interdependency of various forms of capital for creating value within their business. An example of one such company is The Crown Estate in the UK that established a resource management framework to identify all

Integrated thinking provides organisations with such a framework to enable them to look towards a broader, longer-term vision of value creation through providing a more thorough understanding of how value is created in the first place. – Imelda Dunlop, Executive Director of the Pearl Initiative In today’s world, issues such as the over-consumption of finite natural resources, climate change, population growth and the increase in demand for food, water and energy are creating new challenges and opportunities. Given that the global population is growing at a rate of approximately 80 million people a year, by 2030 it is estimated that the world will need 30 per cent more water, 50 per cent more energy and 50 per cent more food. A key challenge for businesses is the uncertainty that surrounds these trends. An integrated approach brings businesses one step closer to identifying the macro sustainability trends that can impact them. This process then allows them to map out how to deal with the

40 page 38-40 Human Capital.indd 40

the natural resources in its portfolio. This framework was then used to identify and understand the services that these resources deliver—enabling the organisation to make strategic and operational decisions that better reflected the long-term viability of its portfolio and highlighted priority issues. Evaluating the demands and challenges of the business environment more thoroughly can also help CFOs and finance teams restructure budgeting processes in a way that best meets the needs of the organisation. Over time, this results in less wastage of the company’s resources, more responsible decision-making and ultimately, reduced costs. In addition, implementing the

sustainability measure in assessing integrated processes presents a new way of looking at forecasts and risks that are a core aspect of decision-making within an organisation. Integrated thinking involves making decisions and setting objectives that aim to create sustainable value and growth–that also includes managing risk. Through this approach, information with regard to risks is directly linked to the organisation’s objectives and ability to create value over time. The approach consequently ensures that CFOs are better prepared to identify and anticipate risks from afar and prepare strategies to deal with them. Another UK company, Yorkshire Water, assessed the macro sustainability trends that the business is exposed to and identified the long-term sustainability risks and the necessary strategic responses required to maintain business resilience. These indicators gave the organisation a greater awareness of the dynamic nature of the water sector and the factors that would impact the company’s ability to meet customer demand. Through this approach, Yorkshire Water was able to reduce energy costs and deliver 300 tonnes of carbon savings annually. Integrated thinking is essentially about better understanding the business and its capitals using a connected approach—so that value is created in the short, medium and long-term. CFOs are an integral part of this puzzle, playing a pivotal role in developing leading edge tools to measure and report on effective use of tangible and intangible assets that create value. To successfully implement integrated thinking, a combined effort is required from a company’s entire leadership team. For CFOs, the approach is an opportunity to really shape and develop their organisations into more efficient, resilient, agile and sustainable entities in the long-run.

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Improving operational efficiency Greg Rung, Partner at Oliver Wyman’s Financial Services practise in the MEA region illustrates how to enable a bank to boost productivity by 25 per cent while operating at a 35 per cent cost-income ratio

decrease in the organisation’s costith today’s challenging income ratio, even though it already market conditions, stood at a healthy level of 34 per cent. financial institutions To add to the bank’s concerns, an are focusing intently anticipated worsening of economic on improving operational efficiency, conditions was expected to dampen streamlining core processes and prospects for future revenue growth remaining competitive. and perhaps necessitate sweeping This was a challenge faced by a changes to the client’s business mix. regional mid-sized bank, which was In the midst of these challenges, the experiencing robust revenue growth, bank consulted with Oliver Wyman, but was understandably anxious to asking the firm to implement a exert a measure of control over its complete end-to-end review of backrising operational costs. The bank’s office operational efficiency. There growth strategy, which included an were two goals set for the engagement. expansion of its branch network and First, to increase flexibility in service a comprehensive overhaul of its retail delivery to both internal and external business, had led to a compound annual customers and, secondly, to build a growth-rate (CAGR) of 13 per cent in scalable operational unit. its top line over the previous five years. However, while somewhat encouraging, that growth in revenue had not been BREAKING DOWN accompanied by a significant increase in THE PROBLEM operational productivity. In assessing how to initiate measures The bank’s cost-income ratio was that would lead to a demonstrable appreciably low, sitting at less than enhancement of the bank’s operational 35 per cent, which meant that this efficiency, Oliver Wyman broke was already a considerably lean down the overall concept of efficient organisation, but operating costs per operations into sub-components. The customer were significantly higher project team realised that any explicit than the market average. This had,Sanjay over Modi improvements meant processing a time, led to a slower-than-expected greater volume of transactions with

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(Photocredit: Billion Photos/Shutterstock.com)

CASE STUDY

fewer resources on hand. This could be achieved in one of two ways. The first was an increase in productivity– essentially, faster processing by existing resources. The second was through a decrease in demand for non-business-related transactions. Other subtler ways to increase productivity included introducing methods to ensure resources were exerting less effort per transaction, leading in turn to faster processing. In addition, an optimisation of the extant organisational structure could be undertaken, in order to remove redundant management layers. This, coupled with the establishment of proper capacity-planning tools, would inevitably achieve higher resourceutilisation levels. Oliver Wyman defined typical efficiency-improvement levers for the bank that would serve as a guide during the engagement process. For example, process automation and simplification for process efficiency; performance culture changes and outsourcing for performance management; and service-level agreement simplification and product rationalisation for demand management.

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THE ENGAGEMENT PROCESS

Oliver Wyman applied a three-pronged approach when devising a solution to the bank’s challenges. The first step was an objective, front-to-back, as-is assessment of the client’s operational procedures, conducted through Oliver Wyman’s proprietary front-to-back complexity framework and use of detailed local and regional industry benchmarks. Formal benchmarking formed an important part of this step because it is, and has always been, a basic yet vital tool when assessing efficiency. For example, it is relatively straightforward to compare the straight-through-processing (STP) rate of a bank’s processes with bestpractise standards, as well as the span of control, the number of management layers, the usage of outsourcing and centralisation of operations. However, the accurate assessment of other efficiency levers required more creativity. For example, to assess capacity planning and resource availability by units, Oliver Wyman analysed the working hours of the bank’s employees, and determined that some units had redundant capacity because a substantial number of employees in those sections were working fewer than eight hours a day.

Greg Rung

Other subtler ways to increase productivity included introducing methods to ensure resources were exerting less effort per transaction, leading in turn to faster processing. – Greg Rung When the assessment step was complete, Oliver Wyman was able to deliver an overview of the operational efficiency for each model component, including business model; operations and processes; information technology; and governance and organisation. Along with these overviews was delivered an initial list of remedial initiatives that would facilitate action planning for the bank’s management team.

INITIATIVES AND PRIORITISATION

The second engagement phase involved the detailing of specific initiatives and a prioritisation of tasks. This was accomplished through a series of stakeholders workshops in which the bank collaboratively identified a top10 list of schemes that would begin to close the gaps that existed between the current and target operating models. Deliverables from the second step included this list, along with projected quantiﬁcations for the implementation of each initiative, covering costs, quality, scalability, and risk reduction. Prioritisation of each proposal was based upon impact and ease of implementation. Stakeholders also submitted a list of quick-win proposals. In the third step, Oliver Wyman worked with the client’s senior management, in one-to-one meetings and workshops, to build a business case and roadmap for overall operational efficiency, which included three-year targets with reference to 27 separate KPIs. Each KPI was carefully assessed so as to choose only those that were feasible, measurable and subject to automation.

The roadmap showed detailed activities, timelines, owners, risks and dependencies. Following the implementation of the proposals, Oliver Wyman achieved a 25 per cent productivity improvement, which subsequently led to a cost-income ratio of about 30 per cent for the bank. Taken in combination, the initiatives led to an operational efficiency increase of 15 per cent to 25 per cent in year one and 25 per cent realised in year two. This would, in turn, be translated into substantial annual savings for the bank of up to 20 per cent of existing budget in monetary terms. Required investments from the client were limited to adding a management information system (MIS) that would enact workflow for the purposes of KPI tracking; an e-documents management system; and additional time from internal management resources. Further operational expenses took the form of extra resources for business process management and optimisation; capacity planning and model maintenance; and MIS development.

EXPERIENCE AT OTHER CLIENTS

The success experienced during the engagement with the bank has led Oliver Wyman to offer the proposed initiatives to a wider client base. The operational efficiency solutions can be offered in a variety of formats. To make the experience more tangible, relevant and educational, the suggestions are tailored to the unique circumstances of each organisation and are set up to use company-specific metrics, including cost-to-income ratio and back office to total operating costs.

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03/07/2016 13:55

IN-DEPTH

Creating opportunity in adversity Michel Longhini, CEO of Private Banking at Union Bancaire Privée, examines the private banking landscape in the GCC, its challenges and opportunities, amidst a tough global economic backdrop

escribe private banking in the region.

The sector, just like every other in the world, is going through siginificant changes linked to two main factors—exceptionally challenging market conditions, particularly for interest rates across the globe and the significant increase in terms of regulations around cross-border activity, suitability and knowledge of clients. These have impacted cost base and client interaction. The industry has been under pressure in terms of revenues and cost due to these regulations. This is happening on both a regional and a global scale. On top of that, the trend in the price of oil also has an effect on wealth especially in this region. The industry has been quite challenging this year and another trend impacting the Gulf is consolidation in the banking industry. For example, we have made four acquisitions in the past five years, and two of them had a really significant impact on our presence in this part of the world. There remain a lot of changes and challenges facing

46 page 46-47 In Depth.indd 46

the region. In this area however, I think we’ve found an opportunity for us to develop quite significantly as a pure private bank.

Has the fall in oil prices had an effect on private banking?

There is an indirect effect—clearly the oil price has affected several sectors in the banking industry such as project finance, commercial banking and investment banking areas which are all directly hit by the fall in oil prices. And on the private banking side it has an indirect impact in that there is less wealth creation in the region and that inevitably influences the wealth management industry. However, as a pure wealth manager we have not yet experienced any significant impacts.

Where exactly is the Middle Eastern market right now and where do you see it going?

The client base here is still firmly in the wealth creation phase, but there is still “old money” too—it’s not simply emerging wealth as it is in certain countries such as Vietnam

Michel Longhini

or some African countries. There are many existing consolidating wealth families who are in the second or third generation. So, you continue to have real estate transactions and companies that are bought and sold— which create wealth right now. This means there is also a healthy level of wealth creation in the market, but perhaps a bit less now due to the oil price. We see wealth generation taking place among our clients and prospects where they are making additional money, growing their wealth through investments, selling their companies, etc. So it’s a good balance between both— wealth creation and accumulation—a mix of the old families such as the merchants and the new entrepreneurs in sectors like IT and real estate.

What is currently the most sought after asset class in the region?

Real estate-linked investments are attractive as usual, as they play a big part in wealth creation in any region. Real estate typically thrives because

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03/07/2016 13:57

of the yields available. As investors are all hunting for better yields, they would firstly gravitate towards the growing area of high-yield bonds often from emerging markets. On the other hand, they are looking seriously at real estate where we have a specialist suite of products to offer.. So these are two areas, and on top of that—equities— they are a resilient asset class.

What challenges do wealth managers face in the region?

I think they are similar to the ones we face in other parts of the world. We are currently existing in a much more regulated environment—meaning that the framework that we work in is so much more complex. The client’s interactions and processes are more stringent and complicated than before. This is a worldwide trend impacting the region right here. There is also a lot of competition putting margins under pressure. The biggest challenge is to build size and presence to ensure profitability. This is because many players who are too small have difficulties in increasing market share and reaching the right level of profitability. That is a challenge which I think exists for most players and also a reason for some to exit. This is a phenomenon which is happening in Asia, Europe and the Middle East.

How are wealth managers dealing with market volatility in maintaining asset rich clients?

This is clearly the time where wealth managers are needed more than ever. Due to global volatility [since the beginning of the year] especially in equity markets, you really have to take the time to advise your clients, manage their assets and offer them advice at the right moment about investing and exploiting opportunities. We are seeing an interesting time due

to market correction and this is a good period to build structured products and invest in equities. Here, we are in a ‘trading range’ type of market where, although there is high volatility, the market stays within a certain limit. This is where a wealth manager has to be proactive with his client—with the right advice at the right time. On the bond side, you face pressure to find the right fixed income investment. Therefore you need to build and diversify fixed income portfolios and find the right balance of risk; to do this requires an experienced wealth manager. It was previously very straightforward to invest in bonds,

is an asset class—so when you get to a time where there is excess volatility, you can find good opportunities to build structures. Volatility creates very specific opportunities only available in these market conditions, which require the ability and skill to capture them when they come. On the other hand, what clients are interested in today are direct investments such as real estate deals, direct equity investments and club deals where clients find very solid investments. We see a lot of appetite for these types of investments—for example real estate club deals that deliver strong yields.

I think there are different kinds of opportunities. First there are opportunities linked to high volatility— volatility itself is an asset class—so when you get to a time where there is access volatility, you can find good opportunities to build structures. – Michel Longhini but now if you go into government bonds, you can get a low or negative yield, while in high-yield bonds you get high risk. that is why you really need to provide clients with the right advice, the right diversification and portfolio construction accruing positive yields with minimal risk exposure. In a wealth manager you need good skills, great analytical capacity as well as an understanding of market trends and liquidity positions in global markets. All these can have a major impact on a portfolio.

What opportunities do you see available in current market conditions? I think there are different kinds of opportunities. First there are those linked to high volatility—volatility itself

We also see interest in private debt, where people invest directly into private loans. there is also an appetite for other specialist areas and what we try to offer is access to these types of asset classes. These are new things that clients look for as they are always on the hunt for yield.

What is your outlook on private banking in the region? Within the market we see a very positive trend for us. And globally, we see the lower oil prices limiting growth these days, but this hasn’t had a major impact on the group so far. The consolidation of the industry is providing opportunities for committed players to take advantage of the accumulating wealth here in the GCC.

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(Photocredit: polygraphus/Shutterstock.com)

IN-DEPTH

Cross border transactions: shape up or ship out Dr. Saeeda Jaffar and James Daniell of Alvarez and Marsal investigate cross-border transactions

t a global level, the tightening of banking regulations in recent years around money laundering and sanctions enforcement has been an important weapon in the ongoing fight against organised crime and terrorism. Between 2012 and 2015, US regulators levied fines in excess of $16 billion on multiple banks on the grounds that they failed to meet international standards. Those fines have sent a powerful signal to the worldâ&#x20AC;&#x2122;s largest financial institutions that compliance failures will not be tolerated. But the fines have had a domino effect that now threatens to have a significant impact on the UAE banking sector. Outside of banking circles, correspondent banking is little known or understood. But it refers to the cross-border clearing facilities that

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major banks provide to local partners engaging in international trade. It is these relationships that are increasingly at risk, as international financial institutions, hurt by the size of the fines, push compliance requirements onto regional and local banks. There has been recent evidence of several global banks reducing their correspondent relationships. This is marginalising local banks and forcing customers into an unregulated banking system. In a recent survey conducted by the World Bank, it was highlighted that more than half of local and regional banks surveyed had experienced a recent decline in correspondent relationships. Cross-border transactions are a cornerstone of the Gulf Cooperation Council (GCC) banking ecosystem. The GCC economies are highly trade driven

with total international trade in 2014 reaching $1.8 trillion, or 111 per cent of the regionâ&#x20AC;&#x2122;s GDP. By comparison, international trade accounts for an average of 61 per cent of global GDP, and is much lower (between 30 per cent and 93 per cent) for some of the major international trading countries.

EXPATRIATES

The GCC is also home to a large expatriate population. Based on the latest population figures released by GCC states, 48 per cent of the regionâ&#x20AC;&#x2122;s 50 million inhabitants were expatriates. This segment typically remits large amounts of money back to their home countries. Over the last five years, the total volume of remittances has steadily grown from $62 billion to $100 billion in 2014, cont. on page 50

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IN-DEPTH

cont. from page 48

at an average rate of 10 per cent per year. Based on publicly available data, we estimate that approximately 75 per cent of international currency flowing through the GCC is in US dollars, and accounts for significantly more than the circulation of UAE dirhams. The derisking of relationships by the correspondent banks thus represents a genuine threat to the health of the regional economy. The impact is most significant for money transfer operators, remittance companies, and small and medium sized domestic banks. But large regional banks with operations in US and Europe are also at risk of being shut out of the global economy. There is abundant evidence that falling short on compliance is costly— from press headlines about penalties to large fines and loss of business. But there is also growing evidence that treating compliance as a strategic priority adds value to the business and ultimately helps serve customers. Improved standards of compliance can be achieved, firstly, by undertaking a detailed assessment of customers, products, service and other strategic or operational factors that help identify financial crime risks, alongside developing a risk-based approach to compliance. In the GCC and wider region, the most problematic risks typically arise from the bank’s customer base and geographies. Controls need to be put in place to mitigate against these issues. For institutions that are serious about improving their compliance standards, the Board will need to take the lead in elevating governance to international levels of best practise. Taking ultimate responsibility for financial crimes compliance, creating a compliance conscious culture throughout the bank, setting policies and procedures, and creating independent controls are all areas where the Board has a critical role to play.

A documented and approved set of policies and procedures should be drafted to set out the bank’s approach to financial crime risk mitigation. This should contain requirements in relation to a range of processes, including on-boarding of customers, monitoring transactions and activity, and investigation and reporting of suspicious transactions. Each process must be rigorously tested against local and international regulatory requirements along with best practises to develop streamlined solutions that balance controls with the customer experience. Strengthening data integrity is another key requirement that regional and domestic banks need to address. Data sets are often incomplete or missing key fields, contain spelling mistakes and out of date information. These need to be cleansed, and technology updated to help institutions detect suspicious activity and ensure that transactions with persons on the sanctions lists are not allowed to proceed. Keeping technology current includes such methods as endto-end data validation for screening systems to test fuzzy logic; development, validation and ongoing review of transaction monitoring scenarios; lookback reviews to independently identify suspicious activity or potential screening matches; and calibration of transaction monitoring scenario rules and screening thresholds. Finally, effective oversight of the compliance programme is dependent on the strength of the bank’s proactive and systematic monitoring systems, providing senior management sufficient information to understand risk exposure and take action to manage those risks. Reporting must be robust and trends driven, including key risk and performance indicators, keeping track of the developing risk profile of the bank. In this regard, efficient, transparent and risk-based procedures for detection management, screening and monitoring

are essential for using compliance resources effectively. Review, investigation, escalation and decision making procedures in managing detections must be streamlined, along with suspicious activity reporting from within the customer facing units of a bank to the regulator. Large backlogs of detection are common in organisations where the levels of authority and approvals are not clearly defined, and everything is delegated up. In order to maintain their correspondent banking relationships, the onus is on regional banks to improve their standards. However, it is important to stress that the process of derisking, while daunting, also represents an opportunity for those banks to show that their compliance is world class. Higher standards will drive current competition out of the marketplace. In a region so dependent on cross border transactions, the potential upside is very significant indeed.

Dr. Saeeda Jaffar is Managing Director at the consultants Alvarez & Marsal in Dubai. An Emirati by birth, she studied at Boston University and M.I.T. before embarking on her consultancy career with McKinsey & Company. She subsequently worked at Bain & Co, where she became a Principal, prior to joining Alvarez & Marsal in 2015. James Daniell is a Senior Director with Alvarez & Marsal’s Global Forensic and Disputes practise in Dubai, with more than 12 years of experience in financial investigations and dispute advisory services. He is a certified anti-money laundering specialist and advises clients on implementation of financial crime compliance programmes.

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IN-DEPTH

Servicing a massive labour market Having won several accolades from Banker Middle East this year, including the Best Remittance Award in KSA, National Commercial Bank discusses the forex landscape in the Kingdom

escribe the current foreign exchange and remittances landscape in Saudi Arabia?

KSA is the largest market in the GCC region and considered to be the second in the world, with more than SAR 150 billion in volumes serving customers from all nationalities. All major banks in KSA have established a business for this service offering. Al-Rajhi is the biggest player with around 40 per cent market share being a pioneer in this segment, but National Commercial Bank (NCB) continues to grow year-on-year. NCB’s Retail Banking Group focuses on customer service and provides banking services and solutions that exceed customer expectations, as well as meeting their immediate and future needs and fulfilling the promise embedded in NCB’s motto: Realise Tomorrow. A key to our success during 2015 has been our ability to provide advanced products, services, and solutions to meet our customers’ needs. This has contributed to increasing the number of customers we serve to over 4.86 million in 2015 and the volume of transactions to more than 185 million, 94 per cent of which were carried out through our digital channels. The expansion of our branch network and service centres also helped us maintain our success. In 2015, the Bank opened 11

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One of NCB's 138 QuickPay centres in the Kingdom.

new branches, including seven NextGen branches supported by the latest technology and modern designs. This brings the total number of NCB branches to 352, including 106 with ladies’ sections. The number of ATMs has increased to 2,927 and the most important improvement in 2015 was that 89 per cent of branch customers were served within 10 minutes. Among NCB’s remittance business (QuickPay) achievements were: a 54 per cent increase in customer-base to 1.6 million, a 41 per cent increase in the volume of transactions to SAR 7.3 million, and opening of 41 new centres bringing the total to 138.

Have there been any change in regulations for foreign exchange and remittances? How has it affected the sector?

In the past few years, the remittance market did not experience a major change when it comes to regulations, except the direction of applying the Wages Protection System and encouraging all banks towards the implementation of that in parallel with introducing electronic-based services due to its better security measurements and the ease of tracking money resources and empowering anti-money laundry regulations. cont. on page 54

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What are the issues and opportunities present in Saudi Arabia’s foreign exchange and remittances sector?

The major challenge comes from the labours layoff at some sectors resulting in shrinking of customer portfolio, requiring more investments and higher cost to acquire new customers, amidst the prevailing strong competition among banks. NCB addresses this by its continuous efforts in enhancing ‘customer experience’ through the use of technology and improvements in reach and distribution by opening QuickPay centres. Most of this market consist of expat labourers who are important for all mega projects taking place in the Kingdom to support its economic growth and strategic initiatives. The annual growth rate in this market varies around six per cent. Apart from major customers from India and Philippines, Saudi nationals also represent a promising opportunity in this market, in catering to their constant needs for money-transfer service that is speedy, reliable and convenient—especially for students studying abroad in addition to labourers in Saudi households.

How has NCB performed over the past year and what is your outlook on this market segment moving forward?

In 2015, NCB’s net income increased by five per cent (SAR 434 million) to SAR 9.1 billion, the highest in the Bank’s history and up from SAR 8.7 billion the previous year. Earnings per share were SAR 4.56, compared to SAR 4.34 in 2014. Such growth illustrates the Bank’s ability to deploy its assets to best effect and diversify its sources of income, as well as meeting strategic objectives that satisfy shareholders’ expectations and fulfil the needs of customers

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The market might experience a high number of inbound labourers to support Saudi Arabia’s newly launched “2030 Vision” that presents many promising opportunities and are expected to result in growths in all sectors, including remittance market. – NCB

NCB saw a

41 SAR 7.3 million %

increase in the volume of transactions to

and employees. Concurrently, the Bank has maintained its leadership in development, innovation, and risk management. The growth and diversification of NCB’s finance and investment products has grown from SAR 91 billion in January 2014 to SAR 132 billion at end-December 2015; Annual Industry Growth was 3.5 per cent in 2015 versus eight per cent in 2014, and Annual NCB Growth is 6.5 per cent in 2015 versus 14.5 per cent in 2014.

NCB’s assets grew by 3.3 per cent to SAR 449 billion. Total shareholders’ equity increased to SAR 48.5 billion, while return on average equity was 19.24 per cent, the highest of all Saudi banks. The market might experience a high number of inbound labourers to support Saudi Arabia’s newly launched ‘2030 Vision’ that presents many promising opportunities and are expected to result in growths in all sectors, including remittance market.

The National Commercial Bank was the first Saudi bank to be licensed in the Kingdom. In 1999, the Government through the Ministry of Finance’s Public Investment Fund (PIF) acquired a majority holding in the Bank. The National Commercial Bank owns 90.71 per cent of NCB Capital, its premier investment arm, and owns 67.03 per cent of Türkiye Finans Katılım Bankası, a leading participation bank in Turkey. Considered as the largest bank in Saudi Arabia, its paid-up capital is SAR 20 billion ($5.33 billion). Total assets at year-end 2015 totaled at SAR 449.34 million ($ 119.82 billion). Net profit for the year 2015 totaled at SAR 9.09 billion ($2.42 billion). Shareholders’ equity at year-end 2015 totaled at SAR 48.46 billion ($ 12.923 billion). Return on average shareholder’s equity for the fiscal year 2015 is 19.24 per cent. Earnings per share for the year 2015 amounted to SAR 4.56 ($1.21). Source: National Commercial Bank website

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11/07/2016 11:42

IN-DEPTH

A cashless economy is the way forward Experts weigh in on recent and upcoming policy shifts in Egypt’s bid to go cashless and inclusive

oody’s Investor Services estimates that SME clients make up just five to 10 per cent of Egyptian banks’ lending. This desire the fact that SMEs with 10 or fewer employees account for 97 per cent of businesses and 75 per cent of employment in Egypt, according to the World Bank and the African Economic Outlook. While SME lending is considered risky across markets, one major, unavoidable barrier in Egypt is a cash-heavy culture that leaves many of these businesses in the ‘informal’ or unbanked economy. The Center for International Private Enterprise (CIPE), an affiliate of the US Chamber of Commerce, along with the Federation of Egyptian Banks and the Federation of Egyptian Industries, recently issued a report on the challenges Egypt has faced in realising a cashless economy. Randa Zoghbi, Country Director of the Egypt Office for CIPE, said that most of all, the report’s research demonstrates the significant problems with the Egyptian legal framework. “The legal framework suffers from major deficiencies in several critical provisions that are key to Egypt’s transition to a cashless economy. As shown, in most cases, the law does not obligate the Government or a bank to use specific payment methods in their

56 page 56-57 In Depth.indd 56

transactions, whatever the nature of the transactions is. In fact, some provisions explicitly mandate the use of cash payments to the concerned entity’s treasury,” she said. “Yet, on the positive side, Egypt’s demographics, with youth comprising the majority of the population, and the prevalence of internet use, have sparked numerous initiatives that rely on modern technologies, all of which contribute to transitioning to a cashless economy,” Zoghbi added.

ROADBLOCKS TO GOING CASH FREE

Hands down the most commonly cited problem in going cashless is the massive informal sector, but its continued existence says a lot about the hurdles standing in many business owners’ way. Report contributors gave a dozen reasons for the challenges that business and banks face. “One thing will not do the trick,” Tarek Tawfik, Vice Chairman of the Federation of Egyptian Industries (FEI), said. “Number one [in bringing informal businesses in] will be the ease of doing business—the registration of properties, land allocation, licences being given by the Government— which is very cumbersome and one of the reasons that SMEs veer outside the formal economy.”

In Egypt, small businesses such as market stalls rely on cash, leaving many outside the formal economy.

Tawfik said that the FEI, which counts more than 65,000 Egyptian businesses in its community, has been working aggressively with the government to streamline these operations and introduce a bankruptcy law. It is also working in tandem with the Federation of Banks to lobby for reforms and updates to some 11 or 12 laws related to banking and business, he said. Zoghbi said that besides the informal economy, factors from low financial inclusion to high rates of corruption and tax evasion hinder a shift towards cashless transactions. However there are some ways that Egypt’s shift towards digital diverges from other countries’ paths. While the general trend in digital banking means abandoning brick-and-mortar branches, in Egypt some level of bank presence is still key to bringing people into the financial fold.

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archiving system; many Egyptian banks still rely on paper records. “Adopting an electronic archiving system within the banking system would dramatically reduce the cost of opening a bank account for a small individual because I think we have to keep records up to five years, some cases 10 years,” he said. Zoghbi also highlighted banks’ lack of digital infrastructure. The report found that many banks lacked up-to-date database infrastructure in particular, but also the physical infrastructure that allowed for banks to perform basic services across the country. “In the absence of banks and ATMs in many rural places, postal service offices are essentially filling the gaps in financial services coverage. So these services are not accessible to everyone in Egypt,” Zoghbi said.

“Shortage in ATMs is considered the primary barrier preventing many from setting up bank accounts, and more so, it is expected to pose a significant challenge to Egypt’s shift to a cashless economy,” Zoghbi said. She estimates that there are 40 banks in Egypt but “insufficient competition, insufficient network of branches” and an ATM shortage in rural areas are holding the sector back. In many ways, financial inclusion requires classic bank presence. This may go a long way in breaking down cultural hesitation that Zoghbi also mentions. “Some firmly held beliefs and habits in the Egyptian society constitute a challenge that could hamper the move to a cashless economy,” she said. “For example, a firm belief regarding difficulties in interacting with the banking sector, a strong preference for relying on cash saved at home, doubts and questioning of the conformity of banking transactions with Shari’ah, and reluctance to disclose financial or

personal information are among the key cultural factors contributing to the prevailing cash culture.”

BANKING ON CASHLESS GROWTH

On 11 January 2016, the Central Bank of Egypt made headlines with a new directive that banks allocate 20 per cent of their loan books to SMEs. Though several rating agencies warned that the strategy shift could put pressure in the quality of some banks’ loan books, the initiative was largely welcomed as an impetus to bring Egypt’s significant small business owner population into the formal economy. Asked about the new policy, Tawfik said, “It’s a nice initiative but it will not materials until we reform the ‘doing business’ aspect. It’s nice to have money at a low interest rate but if you’re not able to get into the formal sector you’ll not get the benefits of it.” One additional reform in Tawfik’s book would be a re-haul of the

NEW TRANSACTION CHANNELS

On a consumer level, both Zoghbi and Tawfik pointed to the possibilities mobile banking held. In the report, Kenya was cited as an example of the mobile potential. “We’re seeing a trend towards mobile banking transactions. There is a good reach—in Egypt, there are more mobile phones than the existing population. We have almost 100 million cell lines for a population of 90 million,” Tawfik said. “I think the phone companies have been taking the lead in this direction along with the industries.” Though mobile banking in the Kenyan model often relies on SMS or airtime transactions, increased smartphone usage could deepen the level of financial services offered remotely. “Nowadays the number of people using smartphones is progressively increasing; the high penetration of smartphones in Egypt will allow more and more people from all social classes to use digital transactions to make payments and transfer funds,” Zoghbi said.

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EVENTS

Celebrating knowledge, inspiring generations Acknowledging key industry movers at the fourth Abdullah Bin Hamad Al Attiyah International Energy Awards

ow oil prices and the world’s insatiable appetite for energy—today’s population of 7.4 billion is expected to soar to 9.6 billion by 2050—have created a challenging landscape for energy professionals. Oil prices have fallen by nearly 80 per cent since mid-2014 and are now hovering just below $50 per barrel, which places considerable economic pressure on all energy entities in the Gulf and beyond. “2016 is a year that will mark the ability of OPEC and the oil producing countries to adjust to the new oil price cycle by promoting continued market vigilance and cooperation with other stakeholders to bring back stability to the oil market and by taking the necessary country reforms for such adjustment,” said H.E. Dr. Majid A. Al-Moneef, the Advisor to the Royal Court of the Kingdom of Saudi Arabia and winner of the Lifetime Achievement Award for the Advancement of Organization of the Petroleum Exporting Countries (OPEC), at the Abdullah Bin Hamad Al-Attiyah International Energy Awards. “The next half of the year will witness a gradual market recovery to a new and more sustainable equilibrium—the beginning of which is already underway.” While hydrocarbons will remain integral to the global energy mix for

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decades to come, the use of renewables in mainstream energy markets is gaining traction. Steep research and development and implementation costs have long been cited as the prime deterrent for solar, wind and even tidal technologies. Yet, the cost of solar panels has fallen by 80 per cent since 2010. Doubling the share of renewable energy in the global energy mix to 36 per cent by 2030 could save up to $4.2 trillion every year, which is 15 times higher than the costs, according to International Renewable Energy Agency’s research. “The business case for renewable energy is stronger than ever. Renewable energy capacity grew at its fastest rate ever in 2015, while investment reached a record $284 billion,” said Adnan Z. Amin, the Director General at IRENA and the winner of the Lifetime Achievement Award for the Advancement of Renewable Energy. There is little doubt that the next generation of energy professionals in the Gulf and beyond face a rocky road,

H.E. Abdullah Bin Hamad Al Attiyah gives his speech at the ceremony.

one beset by a myriad of obstacles. But, passing on today’s knowledge and technological knowhow gives the thinkers of tomorrow a vital toolkit and now it is up to them to use it. “Innovation, critical thinking and commitment are the cornerstones of success in the global energy sphere, with each requiring decades to fine

I am sure that history will recognise HE Al-Naimi as one of the greatest energy leaders of the last 100 years. His long career saw him literally rise from the shop floor to become the world’s most powerful oil executive for 30 years. – H.E. Abdullah Bin Hamad Al-Attiyah

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2016 is a year that will mark the ability of OPEC and the oil producing countries to adjust to the new oil price cycle by promoting continued market vigilance and cooperation with other stakeholders to bring back stability to the oil market and by taking the necessary country reforms for such adjustment.

– H.E. Dr. Majid A. Al-Moneef, the Advisor to the Royal Court of the Kingdom of Saudi Arabia

Global energy consumption will climb

48% by 2040

Winners at the awards gala dinner.

tune,” said Sean Evers, the Founder and Managing Partner of Gulf Intelligence, a UAE-based consultancy firm which produced the Awards. “Luckily for all of us, such professionals use their wisdom to break down the boundaries of what we know today to create a more sustainable energy ecosystem for tomorrow—their knowledge is gold dust.” Knowledge is a precious commodity that is underpinned by talent and infinite passion, which is especially crucial to today’s energy sector as it faces multifaceted challenges. Global energy consumption will climb 48 per cent by 2040, according to the US’ Energy Information Administration (EIA) and

650 million people lack access to clean water—both are sobering statistics. Recognising and celebrating today’s talent helps inspire the thinkers of tomorrow and will strengthen the global energy ecosystem for centuries to come. The Abdullah Bin Hamad Al-Attiyah International Energy Awards, which are in their fourth year, are the foremost honour to recognise individuals for their lifetime achievement in the advancement of the global energy industry. There are six award categories of recognition each year—Qatar Energy Industry, OPEC, Renewable Energy, Producer-Consumer Dialogue, Education, and Journalism—and the nominees are reviewed by an esteemed

International Selection Committee (names are in pull out box on page 54). The Al-Attiyah Foundation board of trustees bestows one Honorary Award each year to an outstanding global energy industry leader, with the 2016 accolade presented to H.E. Al-Naimi during the gala dinner at the Museum of Islamic Art in Doha on 24 May. H.E. Al-Naimi’s remarkable journey to become the most influential man in the global oil markets began 70 years ago. He joined Saudi Arabia’s stateowned oil company Saudi Aramco as an office boy and climbed the ranks to become its first Saudi President, before becoming the country’s Minister of Petroleum and Mineral Resources in 1995. Decades of hard work— something H.E. Al-Naimi cites for his astonishing professional evolution— put him at the helm of the world’s largest crude exporting organisation. “I am sure that history will recognise H.E. Al-Naimi as one of the greatest energy leaders of the last 100 years,” said H.E. Abdullah Bin Hamad Al-Attiyah. “His long career saw him literally rise from the shop floor to become the world’s most powerful oil executive for 30 years.” cont. overleaf

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As the OPEC linchpin, Saudi Arabia and H.E. Al-Naimi’s influence stretched far beyond the country’s borders and he was regularly called upon to calm oil markets through turbulent political and economic waters in the Middle East and beyond. Plus, during his tenure as President and CEO of Saudi Aramco, the company emphasised the need for education and innovation for 21st-century energy challenges. Each of the six winners at the awards has excelled in their own field and are recognised as influential thinkers who have seen the energy markets enjoy successes and navigate challenges. The winners’ longevity in energy markets has

enhanced their contextual awareness— they are walking energy encyclopaedias. “I remember the beginning of the dialogue process in the early nineties, when the political authorities in most consuming countries were so anxious that they were telling us we could discuss any topic except quantities and prices,” said Claude Mandil, the former Executive Director of the International Energy Agency, who won the Lifetime Achievement Award for the Advancement of Producer-Consumer Dialogue. “Thanks to some leaders— and of course H.E. Minister Al-Attiyah is among the most prominent ones—we have made some progress!”.

I remember the beginning of the dialogue process in the early nineties, when the political authorities in most consuming countries were so anxious that they were telling us we could discuss any topic except quantities and prices.

– Claude Mandil, former Executive Director of the International Energy Agency

The 2016 Winners:

 Lifetime Achievement Award for the Advancement of the Qatar Energy Industry Hamad Rashid Al Mohannadi, Senior Advisor, Qatar Petroleum  Lifetime Achievement Award for the Advancement of the organisation of Petroleum Exporting Countries H.E. Dr. Majid A. Al-Moneef, Advisor to the Royal Court of the Kingdom of Saudi Arabia  Lifetime Achievement Award for the Advancement of Renewable Energy Adnan Z. Amin, Director-General, International Renewable Energy Agency (IRENA)  Lifetime Achievement Award for the Advancement of Producer-Consumer Dialogue Claude Mandil, Former Executive Director, International Energy Agency  Lifetime Achievement Award for the Advancement of Education for Future Energy Leaders Dr. Bassam Fattouh, Director, Oxford Institute for Energy Studies  Lifetime Achievement Award for the Advancement of International Energy Journalism Margaret McQuaile, Former Senior Correspondent, Platts  Honorary Lifetime Achievement Award for the Advancement of International Energy Policy & Diplomacy H.E. Ali Ibrahim Al-Naimi, Former Minister of Petroleum & Mineral Resources, Kingdom of Saudi Arabia Source: Gulf Intelligence

The 2016 International Selection Committee:

      

H.E. Abdalla Salem El-Badri, Secretary General, OPEC Dr. Fatih Birol, Executive Director, International Energy Agency Dr. Ramzi Salman, Former Deputy Secretary General, OPEC Nasser Khalil Al-Jaidah, Board Member, Qatar Petroleum Professor Giacomo Luciani, Executive Master in Oil & Gas Leadership, IHEID, Geneva And Master in International Energy, PSIA, SciencesPo, Paris Narendra Taneja, Chairman, Energy Security Group, Federation of Indian Chambers of Commerce and Industry Dr. Rabia Ferroukhi, Deputy Director - Knowledge, Policy and Finance Centre, IRENA

Source: Gulf Intelligence

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TECH FOCUS

Social media accelerates bank growth GCC banks should look beyond social media as a simple marketing tool but rather see it as an essential factor in customer interaction, says Orient Planet Research

he GCC banking sector has been urged to implement a shift towards becoming more interactive and consumerengaged through diverse social media platforms. A recent research report, Social Media and its impact on the GCC Banking Sector, by Orient Planet Research (OPR), a subsidiary of Orient Planet Group, recommends that the region’s banking and financial institutions should not ignore the widespread consumer adoption and the potential power of today’s social media. In the move to develop relevant actionable insights and gain real value from consumer interaction, GCC banks should look beyond social media as a simple marketing tool but rather see it as an essential factor. OPR in its study identified 15 of the GCC region’s leading banks and their respective standings across various social media channels. Banks named in the study include Qatar National Bank, National Commercial Bank, National Bank of Abu Dhabi, Emirates NBD, Al Rajhi Banking Corporation, National Bank of Kuwait, Kuwait Finance House, Samba Financial Group, First Gulf Bank, Riyad Bank, Abu Dhabi Commercial Bank, Banque Saudi Fransi, Saudi British Bank, Arab National Bank and Dubai Islamic Bank. Challenges in implementing social media tactics include impact on traditional banking operations and

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need to train personnel in handling social media accounts. Qatar National Bank, Saudi British Bank and Emirates NBD were top on the list of GCC banks with highest presence on Facebook. National Commercial Bank, Al Rahji Banking Corporation and Saudi British Bank on the other hand, had the highest presence on Twitter in the GCC, while NBAD, Dubai Islamic Bank

and Emirates NBD had the highest presence on LinkedIn. On Instagram, the champions were National Bank of Kuwait, Kuwait Finance House and Qatar National Bank. National Bank of Kuwait, Al Rahji Banking Corporation and National Commercial Bank were on top of the list of GCC banks with highest number of subscribers on YouTube.

Source: Orient Planet Research

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The report found that the emergence of social media has given rise to the significance of following metrics and the need to listen to what their customers have to say. This newfound consumer behaviour towards social media has prompted the region’s financial and banking institutions to implement online campaigns using popular social media platforms such as Facebook, Twitter, YouTube and LinkedIn, among others. Despite the benefits to be gained from utilising these social networks, the report cautions that there are still challenges to be addressed—particularly how it will impact traditional banking operations and training personnel on the management and interaction of social media accounts. Other issues that need to be overcome include the determination of reliable analysis from collated data and how to deal with cybersecurity risks and threats. The large online following of these banks demonstrates that financial and banking institutions have now become more increasingly aware of the value that an efficient online strategy can provide in terms of attracting new customers, maintaining current clientele and enhancing customer confidence and satisfaction. In addition, GCC banks that have already implemented a social

Social media can provide these banks with vital data and stronger business intelligence through the proper analysis of customer profiles and surveys while also having the ability to identify emerging trends based on public insight. – Nidal Abou Zaki, Managing Director, Orient Planet Group

By 2018, the GCC’s internet users are expected to reach

47.24 mn 77% at a

penetration rate

media strategy get the advantage of seeing a clearer picture of their business as they are now able to monitor their products and services offered, brand engagement and competitor activity through a demographic picture of their social audience and engagers. Commenting on the matter, Nidal Abou Zaki, Managing Director, Orient Planet Group, said, “GCC banks must

focus on cultivating their social media presence in order to ensure their competitive advantage. Social media can provide these banks with vital data and stronger business intelligence through the proper analysis of customer profiles and surveys while also having the ability to identify emerging trends based on public insight. Based on the findings of this report, top GCC banks now consider social media as an essential tool for growth and development. As a result, we are expecting to see these banks continuing in investing in relevant online strategies that will lead to increased online penetration across the region.” By 2018, the GCC’s internet users are expected to reach 47.24 million at a 77 per cent penetration rate. Such numbers indicate a need to implement inclusive and efficient online campaigns and digital marketing tools for addressing the needs of the public and augment the expansion of organisations.

As of 31 March 2016, the following figures have been determined:

 In terms of Facebook ranking, Qatar National Bank leads the list with over 2.08 million likes and is followed by Saudi British Bank and Emirates NBD.  In terms of Twitter ranking, National Commercial Bank leads the list with over 618,000 followers and is followed by Al Rahji Banking Corporation and Saudi British Bank.  In terms of LinkedIn ranking, National Bank of Abu Dhabi (NBAD) leads the list with over 134,000 followers and is followed by Dubai Islamic Bank and Emirates NBD.  In terms of Instagram ranking, National Bank of Kuwait leads the list with over 168,000 followers and is followed by Kuwait Finance House and Qatar National Bank.  In terms of YouTube subscription, National Bank of Kuwait again leads the list with over 17,500 subscribers and is followed by Al Rajhi Banking Corporation and National Commercial Bank.  For the GCC region alone, the total number of followers across the social media accounts of these 15 leading GCC banks have reached high numbers—Facebook (5,148,673 users); Twitter (2,445,324 users); LinkedIn (865,503 users); Instagram (366,686 users) and YouTube (56,478 subscribers). Source: Orient Planet Research

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TECH FOCUS

Trying up lose ends Michael Lynch, Chief Strategy Officer at InAuth discusses the importance of tightening mobile banking security

ny discussion on banking cybersecurity trends in the Middle East invariably has to start with a conversation about mobile. Never before in history has a technology spread to so many people so quickly. The numbers are astounding. There are now approximately as many mobile phone subscriptions—seven billion of them in 2014—as there are people on the earth. In the Middle East and African (MEA) region alone, there are an estimated 606 million users. This region is second only to the Asia-Pacific (APAC) region in terms of the number of mobile users. Even more astonishing are the projected growth rates. The MEA market is poised to see rapid growth over the next few years, with experts predicting the total mobile population in the Middle East and Africa will pass 789 million in 2019.

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Because of mobile’s widespread distribution in this region, it is becoming the online channel of choice. According to a 2015 study, 93 per cent of those going online in Lebanon, Qatar, UAE, Saudi Arabia, Tunisia, and Egypt did so with their mobile device, compared to 73 per cent who used a desktop or laptop computer. And interestingly, consumers accessing the internet using a mobile device does not result in them spending any less time online. A 2015 survey found time spent on the internet on a mobile device surpassed all other media including TV, radio stations, newspapers, and magazines in all six Middle Eastern countries studied. All these studies make it abundantly clear—mobile use in the MEA market is widespread, growing exponentially, and their users are active. What are the implications of this trajectory on banking in this region?

Michael Lynch

As you might imagine, this rise in the number of mobile devices is leading to greater customer demand for more mobile banking services. In fact, these services are already becoming the norm in Middle Eastern countries with widespread mobile ownership, such as in the UAE. According to one study, 32 per cent of the banking population in the UAE are frequent users of their mobile cont. on page 66

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banking app. Other Middle Eastern countries are expected to follow suit as the technology becomes more widely distributed throughout the region. But customer demand isn’t just for more types of services. It’s also for a more streamlined overall mobile banking experience. From the customer’s perspective, this includes less friction to their transactions, less hassle, the same functionality on mobile as they receive on other bank channels, contextual services—banking apps that recognise who they are and what they need without multiple challenges, and secure experience—customers want reassurance their transactions and assets are safe. In order to meet these demands, mobile device authentication and recognition technology must be front and centre. Such technology is needed in order to enable the mobile device itself to serve as a unique identifier for users. When handled in this fashion, we can look at cybersecurity as enabling and enhancing transactions and customer service levels, rather than being a barrier to them. Much of the current mobile technology creates cumbersome security layers. But that is an outdated model. In the new paradigm, security will enhance the customer experience. The mobile banking experience is expected to move in a direction where security is built into the digital experience, similar to how Uber handles payments. Once you have your credentials established with Uber, you just take a ride and the payment is in the background of the process. Often, you forget you even paid for the ride. Another good example of this frictionless transaction experience is Amazon’s mobile app, which is both secure and simple. The entire process of logging in, locating and purchasing products involves very few steps. It’s all handled within the app, with the device itself acting as a unique identifier for the user to ensure security.

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There are an estimated

606 million mobile users in the Middle East and Africa Total mobile population in the Middle East and Africa expected to pass

789million in 2019

Mobile device authentication and risk assessment technology will continue to support and drive these already proven models to widespread adoption, providing an environment where once the device is properly secured, it can become more secure than traditional PCs. Financial organisations that embrace technology which enables them to execute the majority of their transactions in a way that makes them frictionless, delivered via just a few clicks on the customer’s device, will rapidly gain significant competitive advantages in their ability to innovate and attract, as well as retain, customers. Another global trend financial institutions in the Middle East face in the near future is the opportunity to provide real-time payments. Two services, Singapore’s FAST and the UK’s Faster Payment Service, provide infrastructure blueprints that could make such an offering to MEA-based customers possible.

Real-time payment systems are popular with both consumers and financial institutions—consumers gain immediate availability of funds while banks enjoy reduced costs in doing business. However, real-time payments have enormous security implications for financial institutions that need to be addressed. Real-time transaction systems pose significant challenges, from account takeover via credentials that have been compromised, to malware, phishing and social engineering. With the advent of faster payments, there is no time for manual risk review. Risk decisions must be immediate and threats must be mitigated in real-time. Also, faster transactions mean more transactions, which opens up more opportunities for fraud. Already, we’re seeing this in new account openings. As important to revenue generation and gaining market share as they are, new accounts must be validated so there is no risk they will be used illegally. Yet, fraud models and manual reviews in the back office are no longer a great defence. Instead, banks need to invest in real-time device authentication, risk analysis and fraud detection solutions. These cybersecurity solutions work by sorting the good, authenticated customers into a fast and frictionless channel, separately from the highrisk devices and transactions that will endure greater scrutiny. The bottom line is clear—banks need to align their security solutions to keep up with the faster infrastructure. While the trend towards faster mobile banking services poses security challenges that need to be surmounted, it also presents a world of opportunity for banking in the Middle East. Mobile technology is making the world of banking available and accessible to more people than ever before.

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11th Islamic Business & Finance

Awards 2016

Excellence through innovation Rewarding pioneers in Islamic finance

SUBMISSION DEADLINE

SEPTEMB6ER

1, 201

23rd november 2016

SUPPORTED BY:

Emirates Towers Hotel, Dubai, UAE

For sponsorship and nominations opportunities please contact: Nap Estampador, Business Development Manager Tel: +971 4 391 4680 or Email: nap@cpifinancial.net bleed guide.indd 1

For other information please contact CPI Financialâ&#x20AC;&#x2122;s events team Tel: +971 4 391 4682 or Email: events@cpifinancial.net 10/07/2016 10:22

PERSONALITY

Marcus Gent

Managing Director of Middle East at Friends Provident International I’ve been in the financial services industry for 23 years—the last two of which have been spent working here in the UAE. Sometimes it feels like too long! I considered a couple of career options—the alternative was a career as a computer programmer. Instead I took a job as an actuarial trainee in Bristol, in the UK, and soon became hooked on the drug of a pay rise each time I passed an exam. Sometimes sadly the pay rise was spent long before the exam was passed. I’m proud of overseeing the growth of Friends Provident International’s (FPI) Dubai office from around 50 people two years ago to a projected complement of staff of more than 100 by the end of this year. Adding to that, I have been involved with the takeover of our business by Aviva, growing the business by 20 per cent and the implementation of a huge transformation programme. In addition I have relocated my family of five from the UK to the UAE. Needless to say, there has rarely been a dull moment in the last couple of years and it has been a great adventure so far. A typical working day starts at 7:30, after helping get the kids out of bed for school. I try to block out ‘thinking time’ in the morning to decide what I want to achieve during the day, before the inevitable round of meetings starts. Otherwise it’s very easy to spend time simply reacting to things coming into the inbox. On a typical day I attend three to four hours of meetings, often on international conference calls, but this could easily be as much as 10 hours. This makes the time walking around the office just talking to people much more valuable and enjoyable. I have developed a habit to help cope with the demands on my time, and that involves taking a pile of reading to a secluded corner of a coffee shop. The ability to make a difference is what I like most about my job—to make decisions that benefit our customers, business partners and employees, and to change things for the better. Even when they’re difficult decisions it’s the sense of having done something to facilitate positive change that is important. I’m currently reading The Sudden Appearance of Hope by Claire North. It’s a really good ‘slightly sci-fi’ book. My all-time favourite is probably The Silmarillion by Tolkien—at least it’s the one I’ve read most often—if only to understand it! I enjoy reading, plus I’m a big American football fan so I try and keep up with that—which is much easier now you can stream all the games on the internet. Apart from that I’m slowly trying to push back the onset of time by going to the gym. The market in a word—volatile! Markets have gone up and down a lot over the last decade but never seem to show the sustained growth which we hope for in the insurance industry. The market here in UAE is steadily emerging and growing in professionalism, but still has a way to go in order to give real consumer confidence and trust. Although it seems that trust is an issue in financial markets the world over. Long term I’m an optimist; in the short term I think the market will probably continue to be a rollercoaster ride, with the UK potentially leaving the EU, sanctions, US elections etc. Overall I’d like to see more simple and transparent offerings in the retail market and a real separation between mass-market customers and professional investors.

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LAST WORD

Firas Mallah

Managing Director, Middle East and North Africa, BMO Global Asset Management On risk exposures of the banking sector in the GCC What services does the company provide? BMO Global Asset Management is the asset management arm of BMO Financial Group, founded in 1817.We provide investment management services across the globe, operating from our four major investment centres in London, Toronto, Chicago and Hong Kong in 24 offices in 14 countries. Our expertise spans equities, fixed income, real estate and private equity on various geographies, including our Abu Dhabi office which opened in 2012.

Which areas does the company seek to focus on this year? This year, we believe there are significant opportunities for investors in the Middle East and North Africa region in European equities, emerging markets, Asian equities, global fixed income and European real estate, as well as frontier markets, on which the GCC has a particularly important impact.

What do you think is the biggest weakness of the GCC’s banking and finance industry? Concentration—the banking sector has, in my opinion, too much exposure to local and regional risk, which can prove to be a growth engine in positive economic cycles but can also be drag when the economy slows down. In the past few years we have seen an increased diversification effort but the industry still has more to do in that direction.

What do you think is your greatest success in your career? I am proud of having successfully built the MENA business from the ground up for a global financial institution…not once, but twice!

What does your day to day job entail and what do you like most about your job? My role is to develop the relationship between BMO Global Asset Management and institutional investors in the MENA region. This includes investor relations, business development, and brand building. What I love about my job is that is has the right balance between cultural understanding, people skills and sophisticated financial solutions, which in my opinion is the perfect mix.

What is your favourite book? That is a tough one! Some of my favourites include 1984 by Orwell, and The Prophet by Khalil Gibran. But a recent favourite of mine is a much lighter read, The 48 Laws of Power by Robert Greene. It perfectly mixes management lessons with thousands of years of historical examples—never has history been made more relevant to business.

Who would you like most to have dinner with? Either Warren Buffet or George Soros, or maybe both! It’s a difficult choice.

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What are your hobbies? I enjoy scuba diving, and love skiing, especially with my kids. I’m also passionate about reading.

What is your outlook on the region’s financial market over the next year? The region’s financial outlook will depend on the oil prices and regional geopolitics. It is hard to predict the direction of markets. However, the current environment has presented the regulators with an opportunity to improve governance in capital markets while increasingly opening up to new sources of external capital, while governments are adapting their finances to become leaner and more resilient. This can only lead to a more efficient and developed financial market across the region, which is very positive news regardless of direction.

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