#182 - March 2016 by CPI Financial

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MARCH 2016 | ISSUE 182

Dancing in the light Tirad Al Mahmoud

Chief Executive Oﬃcer of ADIB Get the next issue of Banker Middle East before it is published. Full details at: www.bankerme.com

Impact of IFRS 9 on banks across the Gulf

2016: a matter of check and balance

Investment banking strategies in hazy conditions

Digital payments—don’t get left behind

Dubai Technology and Media Free Zone Authority

“This is the Facebook generation so we want to be a Facebook bank for them.”

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CONTENTS

MARCH 2016 | ISSUE 182

Editor’s Letter

18 6

News analysis Kuwait implements corporate tax ahead of GCC’s VAT

7 News Bites MARKET WATCH 8 Qatar–maintaining momentum 10 Perfecting Islamic banking software solutions 12 Impact of IFRS 9 on banks across the GUlf GCC FOCUS 16 Surviving oil prices and economic slowdown COVER INTERVIEW 18 ADIB interview – Dancing in the light COUNTRY FOCUS 24 Oman turns to new economic horizons BRAND MANAGEMENT 30 Brand management at its best 2016 OUTLOOK 36 A matter of check and balance AWARDS 42 Saudi Arabia Product Awards www.bankerme.com

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light Tirad Al Mahmoud,

Saudi Arabia: life after oil

Chief Executive Oﬃcer of ADIB

AbdulAziz top Mashreq CEO Al Ghurair

Editor

Saudi Arabia: life after oil

View from the

Dancing in the light

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

Knowing your customer is essential

OPEC outlook 2016: energy exporters perspective

‘You had me at Abu Dhabi’

Building a booming sector

Facing the ﬁntech disruption

Tirad Al Mahmoud

Chief Executive

Impact of IFRS 9 banks across the on Gulf

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

2016: a matter of check and balance

Investment banking in hazy conditions strategies

Digital payments— don’t get left behind

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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Oﬃcer of ADIB

Zone Authority

and Media Free

“This is the Faceboo generation so we k to be a Facebook want bank for them.”

and Media Free

lifting What does the mean? of sanctions really

Dubai Technology and Media Free Zone Authority

Rate hike likely to impact the GCC

Dubai Technology

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

UAE banking faces a tough road ahead

Zone Authority

iz Al Ghurair

Mashreq CEO AbdulAz

Dubai Technology

top View from the

Nabilah Annuar

Dancing in the

FEBRUARY 2016 | ISSUE 181

| ISSUE 180

a satisﬁed “In order to have to have customer you need .” a satisﬁed employee

| ISSUE 182

MARCH 2016 | ISSUE 182

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MARCH 2016

FEBRUARY 2016 | ISSUE 181

| ISSUE 180 JANUARY 2016

JANUARY 2016

aking the helm of Banker Middle East this month, I will commence my journey shedding light on some of the most hotly debated topics across the industry in the region. This month’s edition discusses issues such as taxation, brand management, IFRS 9, energy and not to forget digital transformation. Following a flurry of interesting market developments in the news section and industry opinions on internal and external factors affecting financial institutions in our region, our cover story this month brings you an one-to-one interview with the CEO of Abu Dhabi Islamic Bank, Tirad Al Mahmoud as he provides his views on banking in the an era of rapid technological advancements (pg.18). Analysing global macroeconomic conditions and repercussions on hydrocarbon-dependant countries, the country focus this month zooms into Oman, as it addresses its fiscal woes, steering away to other sectors of the economy such as tourism and logistics (pg.24). The article features opinions from various analysts and provides a run-down of government initiatives in both segments of the Omani economy. Treading on the same path, our issue this month also presents an updated economic and financial outlook for 2016 with opinions from market observers namely, The Boston Consulting Group and K2 Advisors (pg. 36). Our case study this month takes elaborates on a lingering problem in the industry—professionalism and how it effects operations and efficiency in an organisation (pg.44). The Chartered Institute of Securities and Investment have stepped up to address these concerns as the lend support to regional banks in continuous professional development in the Middle East. Speaking to Warba Bank, this issue also provides an insight on investment banking strategies in challenging market conditions, evaluating pockets of opportunities across various markets and asset classes (pg 54). The later part of the March edition shines light on the importance of digital transformation, keeping up with technological advancements in banking services as well as customer satisfaction. In this regard, we hear from prominent players such as Mashreq Bank, Bank Audi, Avaya and Volante Technologies. As the global financial backdrop evolves moving into the second quarter of the year, including the lifting of sanctions in Iran, I am sure we can expect exciting developments ahead. I wish you a fruitful and productive read.

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CONTENTS

MARCH 2016 | ISSUE 182

CASE STUDY 44 Rising demand for professionalism IN DEPTH 48 Metabanking: from Wall Street to all street 50 Bank-fintech partnerships key to success

54 Investment strategies in hazy conditions returns and societal impact

64 Mashreq enhances Snapp ergonomics

68 Tech focus: Digital payments–don’t get left behind

PERSONALITY 72 Zoe Cousens, Member of the UAE National

Advisory Board for the Chartered Institute for Securities & Investments

LAST WORD 74 Mark Hirst, Founder & CEO, Blue Beetle

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

58 TVM Capital Healthcare Partners eyes TECH FOCUS 60 Virtual banking business is UAE’s next step

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ADVERTISING sales@cpifinancial.net

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Editors SARAH OWERMOHLE sarah@cpifinancial.net Tel: +971 4 391 3726

WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718 JESSICA COMBES jessica@cpifinancial.net Tel: +971 4 364 2024 Contract Publishing Editor ISLA MACFARLANE isla@cpifinancial.net Tel: +971 4 391 3729

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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Contract Publishing Editor SARAH SPENDIFF sarah.spendiff@cpifinancial.net Tel: +971 4 391 3729

Business Development NIKHIL NIDHAN nikhil@cpifinancial.net Tel: +971 4 391 3717 DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526 MOHAMED MAKSOUD mohamed@cpifinancial.net Tel: +971 4 391 4680 LIAM O’CONNOR liam@cpifinancial.net Tel: +971 4 391 4680 Head of Contract Publishing & Business Development VINOD THANGOOR vinod@cpifinancial.net Tel: +971 4 391 3725

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WEBSITE www.cpifinancial.net ©2016 CPI Financial. All rights reserved. No part of this publication may be reproduced or used in any form of advertising without prior permission in writing from the editor. Registered at the Dubai Media City Printed by United Printing & Publishing - Abu Dhabi, UAE

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At Union Bancaire Privée, we apply our steadfast vision, our entrepreneurial spirit and our investment expertise to bring significant added value and long-term performance to our clients’ wealth management strategies.

Union Bancaire Privée (Middle East) Limited Al Fattan Currency House Tower 2 | Office 3001 | Level 30 | Dubai International Financial Centre PO box 33778 | Dubai | United Arab Emirates | T +971 4 818 48 00 | F 971 4 362 94 90 E ubp@ubp.com | www.ubp.com This marketing material is for information purposes only. It is not intended for or use in any jurisdiction where its distribution, publication, or use would be unlawful, nor is it directed to any person or entity to which it would be unlawful to direct it. This is not an offer to buy or sell or as solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. Past performance is not indicative of future performance.

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Depressed crude oil prices forcing fiscal reforms across the Gulf.

Kuwait implements corporate tax ahead of GCC’s VAT The Middle East looks at ways to plug budget deficits

ollowing indications made by the Government at the end of last year, the Kuwaiti cabinet approved the implementation of a standardised 10 per cent tax on corporate profits this month, alongside the re-pricing of some commodities and public services. The approvals are part of the Government’s fiscal reforms to combat the pressure of depressed oil prices and budget deficits. Corporate taxes were previously imposed at different rates for local and foreign companies. The IMF forecasted that the oil price plunge was the reason for Kuwait’s declining fiscal position in 2014-2015, which tightened to a surplus of 17.3 per cent, compared to a surplus of 34.7 per cent it recorded in 2013-2014. Government revenues reportedly fell by 60 per cent last year due to lower oil prices, as the finance ministry projects a deficit of KWD 12.2 billion in the fiscal year commencing 1 April 2016.

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The IMF suggested that the introduction of the tax regime would potentially increase revenues by KWD 500–800 million (1.3 to 2.1 per cent of gross domestic product (GDP)), while Kuwait expects it to generate between KWD 800 million and KWD 1 billion annually. The Government has also been reported to be looking at privatising stateowned assets including airports, ports and the management of schools as well as some facilities of Kuwait Petroleum Company. Nothing has yet been said as to the implementation of income tax for individuals. In trying times, most hydrocarbonreliant states across the GCC are considering cutting costs and boosting oil revenues to plug potential deficits. Kuwait has forged ahead with corporate taxation while other Gulf nations look at a different route exploring the introduction of value-added tax (VAT) in their respective economies.

Obaid Humaid Al Tayer, UAE Minister of State for Financial Affairs, in late February officially announced plans for VAT to be developed and implemented over the next two to three years. Al Tayer made the announcement at a press conference with Christine Lagarde, Managing Director of IMF at the Dubai International Finance Centre (DIFC). He said that GCC countries are working in tandem on a framework now, which he expects to be agreed upon and made public in June of this year. Following the framework, member countries will have to implement VAT by 1 January 2019. “A lot of groundwork needs to be done before implementing VAT,” he said, noting that governments would have to move at their own pace. Notably, healthcare and education will be exempt from the UAE’s VAT. Lagarde had underlined the need for VAT and potentially corporate tax in the region’s ‘new economic reality’ of low oil prices and decreased government revenues. “Indirect taxation is generally easier to put in place, and that is typically the case with VAT. Direct taxation is a bit more complicated and we’re certainly not recommending to put income tax in place right away, because income tax requires that you have the institutional capacity to actually assess the revenue, organise for that taxation, think about that distributional aspect of it, and decide exactly how you want to design it,” she added. Lagarde estimated that even a single-digit VAT rate in Gulf countries could generate revenues in the range of two per cent of GDP. With previous efforts towards diversification and good capital buffers, the UAE is believed to be well-placed to build a careful tax system. The potential for corporate tax was also discussed. “Tax rates play a part, but are not a dominant factor,” she said in response to concerns over whether businesses would divest from the region. Lagarde insisted that it should not drive away business for the UAE.

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NEWS ANALYSIS

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NEWS BITES

Moody’s revises outlook for Saudi Arabia to negative

oody’s in a statement has revised its outlook for the Saudi Arabian banking system to negative from stable, primarily to reflect the rating agency’s expectation that the persistently low oil prices and resultant government spending declines will ultimately weigh on the Saudi banking sector. Moody’s forecasts real GDP growth to slow to 1.5 per cent for 2016 and two per cent for 2017 (well below the 3.4 per cent growth of 2015) and for average oil prices to stay at $33 a barrel in 2016 and $38 in 2017. As a result, the rating agency expects loan growth to slow down to between three and five per cent for 2016, from eight per cent in 2015 (and 12 per cent in 2014). Although Moody’s expects government support for the Saudi banking system to remain high, this support could be further challenged on the basis of fiscal pressure for the Saudi government, signalling a potential reduction of government capacity to support banks in case of need.

RATINGS REVIEW Entity

Abu Dhabi

Ras Al Khaimah Bahrain Kuwait Qatar

Saudi Arabia Egypt

Lebanon Iraq

LT IDR/LT Rtg (FC) AA

BBBAA AA AA

B B

OUTLOOK UR

Under Review

F1+ F1 F3

F1+ F1+ F1+ B B

F1+

Country

United Arab Emirates United Arab Emirates Bahrain Kuwait Qatar

Saudi Arabia Egypt

Lebanon Iraq KEY

Negative Stable

Asian buyers shifted their attention back to Saudi Arabian crude oil

ccording to the OPEC Oil Research and Forecasts report for February 2016, crude exports declined marginally in February despite production falling by 280,000 barrel per day (bpd). OPEC pushed 24 million bpd in international markets, only 30,000 bpd lower from the revised aggregate of 24.03 million bpd for January. The analysis also found that largest Asian buyers (China, India, Japan and South Korea) shifted their attention back to Saudi Arabian crude oil, importing less from other OPEC members. China in particular was the only country that reduced its share of Saudi crude from 34 per cent in January to 30 per cent in February as emphasis was given to Iraqi crude and crude from other non-Middle East members like Venezuela and non-OPEC crudes such as Russian ESPO. Saudi exports was reported to soften in February in line with lower crude output. The Kingdom exported 7.8 million bpd, 60,000 bpd lower compared to 7.86 million bpd in January. Flows to Africa and Europe surged by 96 per cent and 159 per cent respectively to 0.24 million bpd and 0.18 million bpd. Exports towards the Americas declined by 31 per cent to 0.85 million bpd, while Asian buying remained very strong at 5.40 million bpd.

HNWI shifts towards conservative investments, with strong sentiments towards UAE and Qatar Investor sentiment on the economic situation at both a global and a Gulf level are more negative than last year, says Emirates Investment Bank in its recent 2016 GCC Wealth Insight Report. Thirty-six per cent of high net worth individuals (HNWIs) (individuals with $2 million or more in investable assets) see regional economy as worsening, a fourfold increase from the nine per cent in 2015. Nevertheless 83 per cent express optimism over the five year horizon. The report further found that there is a clear shift towards conservative investments where the average allocation to cash and deposits were up to 24 per cent from 17 per cent in 2015, with 62 per cent of HNWIs expecting to increase this allocation going forward. The GCC retains its appeal for HNWIs, with 76 per cent of HNWIs say that they prefer to keep their assets close to home demonstrating strong sentiments towards the UAE and Qatar.

GCC may need to seek alternative financing for infrastructure projects

ue to depressed oil prices, Gulf sovereigns and banks are seen to have limited resources at their disposal to support the region’s infrastructure rollout plan over the next few years, said S&P in a recent statement. S&P estimates that overall capital spending for GCC countries over the next four years will be $480 billion, of which about 60 to 70 per cent will go to infrastructure projects. Government spending across the Gulf on projects alone, including infrastructure contracts awarded over the period 2016-2019 is projected to be about $330 billion; and S&P suggested that $50 billion out of the $330 billion that may be spent on projects will be allocated specifically for infrastructure (including transport-related projects). Due to the large need for infrastructure funding, S&P is of the opinion that governments may choose to either borrow more directly or through the government-related entities, or turn to more financially innovative solutions such as public private partnerships.

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THE MARKETS

Qatarâ&#x20AC;&#x201D;maintaining its momentum A slump in the oil price will impact government revenues this year but will not deter Doha from its ambitious development and diversification plans, says Wadih AbouNasr, Country Senior Partner at PwC

However Qatar has large financial buffers built up from budget surpluses over the past decades, a sound reputation in international bond markets, and is committed to continued development spending that will help drive economic growth this year. That has not stopped a wave of redundancies in state-owned companies across different industries. The reduction in spending will continue to have a trickle-down effect through the economy as government entities seek to do more with less, and there is greater scrutiny on budgets and outcomes.

NON-OIL ECONOMY

fter several years of headlines proclaiming Qatarâ&#x20AC;&#x2122;s economic transformation into the richest country in the world per capita, having been awarded FIFA World Cup 2022 as well as being regarded as an international deal-maker and regional power broker, the slump in the oil price could be viewed as a challenge to those achievements. In truth, the country is better-placed than many of its neighbours to ride out this period of turbulence in the oil market, and will continue to boast of strong economic growth and offer attractive investment opportunities to the private sector. Obviously none of the oil exporting countries of the Gulf are immune from the effects of the 18-month price slump, and Qatar is no different. The Ministry of Finance is forecasting a 30 per cent drop in revenue this year. The budget for 2016 forecasts revenue of QAR 156 billion and spending at QAR 202.5 billion. That leaves the government with a projected QAR 46.5 billion riyal ($12.8 billion) deficit this year, its first in 15 years, despite a cut in total spending.

Wadih AbouNasr

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Qatar already made some headway in transitioning from being an economy that was driven by the hydrocarbon sector. Growth in the non-oil sector out-paced the oil sector since 2012. Construction and financial services have become the largest contributors to growth in the non-oil sector. There is still more that needs to be done in this area to reduce the reliance not only on oil revenue but also government spending. In the meantime, expenditure on key areas like health, education, and infrastructure related to the World Cup in 2022 will continue to drive growth and offer lots of opportunities for private sector investment. Qatarâ&#x20AC;&#x2122;s National Vision 2030 aims to transform the country into a knowledge-based economy, and the commitment to that goal remains firm even if there is some period of rationalisation during this period of lower oil prices. Overall investment this year could still be $22 billion, so even with an anticipated slowdown in spending there will still be significant investment opening for the private sector. Economic growth is still expected to be about five per cent over the next two years, and unlike many of its GCC neighbours growth may actually be faster this year than in 2015.

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The 2016 budget is based on an average oil price of about $48 a barrel, compared to $65 a barrel last year and among the lowest breakeven points in the region. This conservative stance puts the government in a good position as efforts to freeze oil output in a bid to support prices gather pace. Amid the drop in oil prices, Qatar is facing a looming global glut of liquefied natural gas (LNG) as new suppliers in US and Australia come on stream. Qatar aims to protect its position by becoming the most efficient producer. It is one of the lowest cost gas producers in the world, as it controls major supply routes, and owns its own fleet of ships which gives it the flexibility to ensure it is exploiting the best deals. By controlling production, liquefaction, transportation and import terminals around the world, Qatar aims to remain as the most profitable LNG producer even when competition intensifies. The government is taking some measures in response to the drop in revenue. The Emir, His Highness Sheikh Tamim Bin Hamad Al Thani, is making a series of necessary reforms not only to diversify revenue sources, but also on the spending side. In addition to using fiscal policy to stimulate growth, Doha earlier this year cut subsidies on fuel prices, resulting in a 30 per cent rise in petrol prices. Organisations like the IMF have long urged the region to remove costly and regressive subsidies that do nothing to curb excessive consumption, and redirect the savings into development spending. The move followed a speech by Sheikh Tamim late last year in which he said the government would focus on greater efficiency in its spending, ending corruption and wastefulness, and privatise some state-owned firms. He urged citizens to develop a more entrepreneurial culture and sought a greater push to diversify the economy away from oil.

In truth, the country is better-placed than many of its neighbours to ride out this period of turbulence in the oil market, and will continue to boast of strong economic growth and offer attractive investment opportunities to the private sector. - Wadih AbouNasr

BUSINESS LANDSCAPE

These are welcome measures for the longer-term health of the economy, and coupled with the wider reform agenda will make Qatar an attractive prospect for foreign businesses. The government will need to continue to improve the pace of reform it is to attract the private investment it wants. An increasing focus on public private partnerships (PPPs) to deliver government projects and services will help drive growth in the private sector, reduce government capital spending, and diversify the economy. Establishing a robust PPP framework and building a track-record of successful partnerships with the private sector will be essential. Increasing foreign direct investment (FDI) will be a key part of transforming Qatar’s infrastructure investments into long-term contributors to the economy and ensure that the government gets value for money from its investments. In this area Qatar has so far lagged behind the rest of the region. The relative value of FDI stock to the size of the economy is the second lowest in the region, ahead of only Kuwait, according to 2014 data from the United Nations Conference on Trade

and Development (UNCTAD). Bringing in more FDI will help transform the competitiveness of the economy and will be essential to achieving the Vision 2030 goals of creating a knowledge economy by bringing in foreign know-how and experience that local entrepreneurs and companies will be able to leverage. The introduction of value-added tax, planned for 2018 as part of a GCC wide initiative, will also help the state diversify its sources of revenue away from the cyclicality of the oil price. Qatar’s private and quasi-private sector already boasts the region’s largest bank Qatar National Bank, and regional champions like Qatar Airways and Qatar Electricity and Water Company (KAHRAMAA), which is taking its local expertise in developing power and water plans across the region. Qatar Petroleum, the world’s biggest producer of LNG, is also planning to expand overseas. Qatar Exchange is in active discussions to attract more listings to increase the depth and breadth of the stock market, which has been part of the MSCI Emerging Market index since 2014. This helps to attract large pools of international capital and should help revitalise the exchange, which has only seen one IPO since 2010.

OUTLOOK

The success Qatar has made of its heavy investments in LNG in the early 1990s demonstrate the state’s ability to create world-class industry leaders and execute on ambitions. As attention increasingly shifts to other areas of the economy, as articulated in the Vision 2030, that same focus and experience will be in evidence again. Qatar has strong fiscal buffers, a clearly defined development agenda, and global ambitions. The lower for longer oil environment will place more pressure on the Qatar economy but may well ultimately provide impetus to achieving its latest set of ambitions to move beyond the hydrocarbon sector.

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THE MARKETS

Shari’ah-compliant equity: challenges and opportunities

By Alan Chua, Global Equities Portfolio Manager, Franklin Templeton Investments

e all have different reasons to invest our hard-earned money. It might be for a shortterm goal like the purchase of a car or house, or a long-term one such as funding our children’s education or ensuring a more comfortable retirement. Investing can take on a religious significance, too. For a growing Muslim audience, investments must not only be able to achieve their goals, but also be compliant with the Islamic law. At Franklin Templeton Investments, asset managers with expertise in Shari’ah-compliant strategies are located in the key Islamic finance centres of Singapore, Hong Kong, the United Arab Emirates and Malaysia.

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Alan Chua, EVP and Portfolio Manager with Templeton Global Equity Group based in Singapore, talks about the unique aspects of managing a Shari’ahcompliant equity portfolio and why profits and principles don’t have to be mutually exclusive. The principles of Shari’ah investing dictate that to be considered acceptable, companies must pass a certain set of criteria. Among them, the balance sheet structure should contain neither too many liquid assets nor debt, and the company should not engage in Haram, (forbidden) industries such as alcohol, tobacco, gambling as well as specific foods considered non-Halal, or unpure. Advisers who are considered experts in Islamic law are integral to

the investment selection and review process. Our portfolios are independently reviewed and endorsed by the Amanie International Shari’ah Supervisory Board, highly regarded for its extensive Shari’ah and technical expertise. The Amanie Scholars provide initial approval on investment objectives and strategy, as well as ongoing supervisory and monitoring services to ensure continuous adherence to internationally accepted Shari’ah principles and standards. Implementation of these standards can be subjective at times, as it is subject to the interpretation by different Shari’ah Boards, which is a challenge to us as portfolio managers. That can lead to a lack of homogenisation of approach and can confuse potential investors.

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THE DETAILS

(Credit: enciktepstudio/Shutterstock.com)

The natural interest in Shari’ah investing is likely to be confined to Muslim nations

For example, generally, a company that holds too many liquid assets may have Shari’ah restriction on eligibility. So one would think to eliminate the company. However, this is not always straightforward. It can depend upon the Shari’ah screening methodology applied by the fund adviser in the review process in which one calculates the company’s financial ratio. If a company classifies a large portion of its liquid assets as long-term assets, certain Shari’ah benchmarks will not include it as part of their liquid asset calculations. In addition, some benchmarks will use market capitalisation as the denominator while others will use total assets—

both of which could provide different results. Using market capitalisation as the denominator is particularly difficult for value investors (like us) because as a stock gets cheaper and hence provides more long-term value, it could suddenly become ineligible as the market capitalisation falls relative to the liquid assets or debt. Stocks that were compliant at one time but then later deemed noncompliant must be disposed of, but once again it’s all about details. For example, the frequency at which the company pays its dividends (once a year, semi-annually or annually) could make a difference to eligibility. Depending on the Shari’ah screening methodology, a company that accumulates large amounts of cash throughout the year before paying it out in the form of dividends runs the risk of becoming non-compliant. Once it pays the dividend, it may become compliant and hence an eligible investment once again. The grace period given to dispose a stock (once it becomes non-compliant) is also different from one benchmark or adviser to another. In the dividend example, if the grace period to sell non-compliant stocks is short you may be forced to sell it before it pays the dividend but conversely if your grace period is long, the stock could remain compliant by paying the dividend and reducing cash on the balance sheet. Such are the challenges of Shari’ah investing! But despite the constraints, we are able to find plenty of potential opportunities. In managing our Shari’ah portfolios, we leverage the same investment team and research process in place in the Templeton Global Equity Group at large. So the Muslim investor is essentially getting a subset of our broader portfolio, but one which is compatible with specific Shari’ah principles. Our team overall is finding potential

opportunities in the healthcare, energy, and telecommunications sectors. European financials represent a sector our Shari’ah portfolios can’t invest in, but we’ve been finding a lot of value over the past year there in our other portfolios. By country, Malaysia represents one of the biggest markets right now for Shari’ah investing, and is growing because of its advanced national pension scheme. There is a mandatory monthly contribution into the national pension fund that grows with population and income levels. Other big centres include some of the Gulf cities in the Middle East like Dubai and Abu Dhabi. I think the natural interest in Shari’ah investing is likely to be confined to Muslim nations, but it would not be surprising to find other countries also interested in offering an Islamic investment vehicle as there is a large and growing Muslim diaspora globally. So our potential investment opportunities could likewise continue to expand, and we think it’s an exciting time to be an investor in this growing space.

Alan Chua

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THE MARKETS

Impact of IFRS 9 on banks across the Gulf Head of Risk Management Practice for Middle East and Africa at SAS, Sayantan Banerjee gives the lowdown on IFRS 9 and its effects in the region

he International Financial Reporting Standard 9 (IFRS 9) replaces International Accounting Standard 39 (IAS 39), and will impact banksâ&#x20AC;&#x2122; financial statements, with loss calculations the most affected. IFRS 9 will cover financial institutions across Europe, Middle East, Asia, Africa, and Oceania. The compliance deadline for all the banks will be January 2018.

What exactly is IFRS 9â&#x20AC;&#x2122;s mandate and how has it changed from the existing IAS 39?

IFRS 9 addresses three main aspects: 1) classification of assets; 2) measurement of the losses; and 3) hedge accounting. In the recent changes IFRS 9 will align classification and measurement of the losses with its business model, cash flows and future economic scenarios. For hedge accounting IFRS 9 mandates newer disclosure requirements to connect the accounting part with the banks risk management activities in greater detail. This article looks at how the first two aspects might impact the banks in the Middle East.

How will classification of assets impact banks in the region?

Classification will determine how financial assets and financial liabilities are accounted for in the financial statements and, in particular, how they are measured on an

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Sayantan Banerjee cont. on page 14

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THE MARKETS

cont. from page 12

ongoing basis. IFRS 9 introduces a logical approach for the classification of financial assets based on the cash flow characteristics and the business model in which an asset is held. This single, principle-based approach, will eventually replace the existing complex rule-based requirements that are difficult to apply. The new model also means that there will be a single impairment model which will be applied to all financial instruments. This will remove a source of complexity associated with previous accounting requirements.

In terms of measurement of losses how does the IFRS 9 come into play?

Method of recognising impairments or booking losses as provisions has been under the scanner since the financial crisis. The delayed recognition of credit losses on loans (and other financial instruments) was identified as a weakness in existing accounting standards, especially when there were enough economic and predicative indicators to show that the future cash flows are not exactly how they seem. As part of IFRS 9 the IASB has introduced a new, Expected Credit Loss (ECL) impairment model that will require more timely recognition of losses. Specifically, the new Standard requires entities to account for ECL from when financial instruments are first recognised and it lowers the threshold for recognition of full lifetime expected losses. Every asset will now pass through three stages in their credit life cycle. Stage one, where they are normal accounts with satisfactory repayment performance, Stage two, where they show significant deterioration in their credit quality and Stage three, where they are recognised as non performing exposures. The new standard will require the banks to account for a

14 page 12-14 The Markets.indd 14

- Sayantan Banerjee, Head of Risk Management Practice for Middle East and Africa at SAS. 12 month ECL for Stage one and a lifetime ECL for Stage two. These estimates must be forward looking and probability weighted.

How will this transition impact the banks in the Middle East?

Given the IFRS 9 requirements in terms of classification, measurement, and impairment calculation and reporting, banks should expect to be required to make some changes to the way they do business, allocate capital, and manage the quality of loans and provisions at origination. Banks will face data modelling, reporting, and infrastructure challenges. This is in terms of enhancing coordination across their finance, risk, and business units, integration and reconciliation of risk and finance data, gathering and maintaining historic data modelling required for the expected losses, lack of reliable macroeconomic indicators in the Gulf that can be used for modelling, as well as the main aspect of modelling the losses at the facility level itself, mostly in terms of methodology and complexity. Most of the banks in the Middle East are complying with standardised Basel II requirements which does not require them to develop facility level expected loss models. As a result, unlike the banks in Europe, the banks in the Middle East that lack reference models will find it difficult to calibrate Basel II models for IFRS 9 impairments. They will need to consider developing new models that

cater to the IFRS 9 requirements. This will also mean that they need to take a closer look at their existing IT systems and modelling platforms where they can execute the models, connect them to the macroeconomic scenarios, do the ECL calculations, design the staging rules and finally report them.

What is your outlook?

In the Middle East, most of the banks are well provided for with the one per cent General Provision rule along with the Specific Provisions that are kept as an ongoing basis. It will be interesting to see the results of the quantitative impact study (QIS) that all the GCC banks are currently undergoing. By mid2016, the region will see an increasing level of interest in finding the right methodologies for the calculations and the most flexible IT systems to address all the challenges mentioned above. Addressing these challenges effectively will enable Boards and senior management to make betterinformed decisions, proactively manage provisions and effects on capital plans, make forward-looking strategic decisions for risk mitigation in the event of actual stressed conditions, and help in understanding the evolving nature of risk in the banking business. In the end, a thoughtful, repeatable, consistent capital planning and impairment analysis should lead to a more sound, lower-risk banking system with more efficient banks and better allocation of capital.

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21/02/2016 11:03 2/18/16 5:28 PM

THE MARKETS

Surviving oil prices and economic slowdown Charles Habak Principal Financial Services at Booz Allen Hamilton, provides his opinion on how GCC banks will defend their turf and capitalise on current economic conditions

he tightening economic climate in the GCC, on the back of lower oil prices, decreased government spend and reduced liquidity, is expected to continue to take its toll on the banking sector for the foreseeable future. Rising cost of funds, declining asset quality, and slower deposit growth that started to surface in mid2015 will continue to negatively impact banking profitability and capital adequacy. As a result, the coming year will require a rapid change in mind set and focused actions by banks to weather the current economic storm, capitalise on new opportunities and ultimately emerge stronger.

EFFICIENCY THROUGH COST REDUCTION

Years of double digit growth triggered by expanding economies and favourable macroeconomic conditions have led banks to rapidly yet suboptimally grow their human capital and physical asset base. As a result, efficiency ratios declined notably over the past decade; for instance, cost-to-

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Charles Habak

income rose to an average of 40 per cent across the region as compared to a pre-crisis level of circa 30 per cent. Amid the tightened economic and liquidity landscape, revenue outlooks are constrained and costs must be curtailed, in some cases aggressively. As a result, surgical programmes that systematically reduce costs while preserving service

quality are required. Banks will have to revisit their organisation structures, rationalise and simplify their product portfolios, reduce their projects to centre exclusively on regulatory and multifold return on investments, and adopt greater use of technology, automation, and outsourcing to achieve substantial efficiency improvements. Over-inflated retail and mid office business units can be expected to yield the largest savings, followed by select operational functions.

COMMITMENT TO DIFFERENTIATION

GCC banks have been converging towards commoditised offerings, driven by more stringent regulations and management ambitions of establishing universal offerings. In this new economic climate, the need for GCC banks to differentiate their retail and corporate offerings is critical. Successful banks will focus on establishing clear competitive edges in specific retail and corporate areas, through service excellence in a more narrow and focused range of segments. For instance, retail banks should seek to reinforce their competitive edges in focus areas such as cards and payments, budgeting and competitive savings accounts, high-performing and user-friendly digital platforms, or premier customer service. Similarly, corporate banks should seek to build expertise and recognition in specific products, such as origination of structured finance, supply chain finance or cash management and trade services. For differentiation to be materially achieved, management will need to establish and commit to priorities based on clear organisational capabilities and market opportunities. This new focus will then need to be effectively cascaded down the organisation, supported by robust management discipline to maintain priorities and discard nonfocus business opportunities.

DILIGENT USE OF DEBT CAPITAL MARKETS

After years of access to ample lowcost government deposits, GCC banks now face a growing liquidity squeeze, precipitated by government withdrawals to cover budget deficits. To counteract this trend, banks will have to rely more heavily on debt capital markets for growth; however, they will be competing with sovereign entities, which will continue to increase their debt issuances. This, coupled with investors demanding wider spreads, underscores the fact that banks will have to contend with higher funding costs. Banks that are dependent on regional debt, particularly Sukuk, which have a more limited market, should work closely with investors to structure issuances in accordance with market expectations, ensuring sufficient uptake of their securities. Institutions with strong balance sheets should seek to offset these challenges by carefully planning and timing debt issuances to international capital markets, where liquidity is more available and funding costs are generally lower. Finally, banks should be more diligent with balance sheet allocations, particularly with longertenor facilities, to avoid duration mismatches between their assets and liabilities, and minimise overall risk.

OPPORTUNISTIC GROWTH IN SME LENDING

Banks have already begun tightening their lending, and in many cases have started to curtail loans to small and medium-sized enterprises (SMEs) altogether. Tougher requirements, coupled with deteriorating economic conditions, have resulted in a surge of SME lending losses for banks, with UAE banks recording over $1.9 billion in SME impairments representing 10 per cent of outstanding SME loans in 2015.

Year-on-year return on equities declining from pre-crisis peaks

23-25 % 14-16 %

down to

Nonetheless, as write-offs and provisions increase, opportunities will emerge to generate high yields by providing new facilities as well as refinancing existing ones. Banks should seek to effectively capitalise on these opportunities by developing advanced due diligence, credit assessment and analytics capabilities in order to finance more resilient SMEs while minimising potential losses, particularly in less cyclical sectors. Greater coordination and better sharing of information should be required between retail and corporate divisions to ensure leads are shared and the overall portfolio is carefully managed. Finally, banks should seek to collaborate with public authorities to create and subscribe to government loan guarantee programmes that aim to ease the impeding impairments growth from SME loans and allocate a portion of their portfolio to SME loans, counterbalancing bank risk with government developmental goals for the private sector.

MARKET CONSOLIDATION

As small banks fall behind, particularly those that are less efficient and undercapitalised, mergers and

acquisitions (M&A) activity in the GCC banking sector will accelerate. GCC markets have long been highly fragmented, often due to prestige or sentimental backing by large shareholding families. However, the burden is increasing on shareholders, with year-on-year return on equities declining from pre-crisis peaks of 23-25 per cent down to 14-16 per cent, a trend that will continue to worsen under the weight of the new economic climate. Consolidation in the sector is expected to accelerate, particularly among regional banks, driven by cost synergy, branch network rationalisation and geographical expansion ambitions. Smaller banks should seek to strengthen their balance sheets to maintain greater control over their fate. Well capitalised banks should consider taking advantage of lower valuations to opportunistically acquire or merge with smaller banks. Nevertheless, regulatory hurdles and alignment on appropriate valuations will prove difficult in light of low regional precedence, and will require significant diligence in an evergrowing doubtful climate. GCC banks must brace themselves for a challenging period ahead. However, this period will also bring new opportunities for those able to significantly focus their strategies and maintain robust discipline to stay the course, adopt transformational efficiency enhancing programs, employ measures to effectively leverage debt capital markets, and capitalise on undervalued assets and M&A opportunities. Only banks that fully accept the new economic reality and move quickly to transform themselves meaningfully and strategically, will remain resilient to tightening market conditions and capitalise on these new opportunities. And those who do so, will emerge stronger for it.

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17 28/03/2016 14:47

COVER INTERVIEW

Dancing in the light In a conversation that included advice on choosing the right ‘dancing partner’ and the problem with bespoke burgers, Tirad Al Mahmoud, Chief Executive Officer of ADIB, explained the Islamic bank’s goals, ambitions and economic outlook

he Middle East’s oil producers face a testing time in 2016. The oil price has rallied from a low in January of just over $22/barrel to around $34-35/barrel. However, even with the rally, the price is at nowhere near economic levels for the region’s governments. Yet this, for the CEO of ADIB (Abu Dhabi Islamic Bank), is not a crisis, it is a cycle. “History is a sequence of events that tend to repeat themselves from time to time. Those who are lucky enough to see an event repeat itself can feel far more comfortable in dealing with the same challenges when they come again. “To be more specific I am referring to the sharp decline in the price of oil and the concurrent regional instability. For many people, this is a new event and they are unable to see a light at the end of the tunnel. I have seen this before in this region. In the mid-1980s Iran and Iraq were at war, Silkworm missiles were flying about, the Soviet Union was embroiled in Afghanistan and oil was at $5-6/ barrel. This was the GCC region’s first high stress test and it passed with flying colours! “Today’s oil price, taking account of inflation, is not much different to the price levels we saw back in the 1980s and we have stress in the south and stress in the north of the region. I believe this will pass and I think the oil price will see a very strong recovery. Investment in infrastructure, in schools, hospitals and businesses will bounce back. Some people say 2020. I am much more optimistic; 2017 is going to be a bright year. I am not a political analyst, I am not an economist but I predict a good 2017. In the meantime, 2016 is a year that will be similar to 2015. Bankers will need to remain focused on their absolute priorities in 2016. It is not the time for banks to expand into new ventures, rather keep focusing on core business, manage your liquidity, look after your customers,

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Tirad Al Mahmoud

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make sure your core customer base is being well served, look at your internal infrastructure and make sure that you continue to upgrade. “We will not be opening in new countries or buying banks in 2016. This is not the time for that. We will be focusing on our customers—and continuing to deliver the best banking experience to them, growing our [UAE/GCC] customer base, enhancing our products and services, developing our employees through training and investing in technology.”

What steps is ADIB taking to assist customers in managing the challenges of the current economic environment?

Islamic banks and conventional banks serve the same purpose. We are economic enablers. We are very similar in that respect. As long as we continue to play our role as an economic enabler and don’t start to disengage from the economy, we are being a net positive contributor and what we are going to do is continue to be engaged with our customers. We will continue to be responsive to their needs and we will continue to expand our products and services and in the local economy; that, in itself, is a net positive contributor to economic activity and to the infusion of optimism in the business community. There is room to do business in the UAE and to grow some of our business activities. I believe those opportunities that exist are bankable, sound opportunities. To give you some examples: we are involved in the development of affordable housing; we are involved in the Meraas and IMG theme parks in Dubai–these are part of the new service economy that is developing; there’s big demand in the healthcare sector and in education, and we are participating in both. ADIB will continue to contribute by playing its role effectively and proactively.

Tirad Al Mahmoud was appointed Chief Executive Officer of Abu Dhabi Islamic Bank in February 2008. He previously served with Citigroup and Samba Financial Group. Previous senior management positions include Chief Executive Officer and Managing Director of Citibank–Central Europe, General Manager & Head of Corporate and Investment banking–Samba, Chief Risk Officer of Citibank in Egypt and Northern Africa, Vice President for Corporate Real Estate Finance of Citibank in Canada as well as senior regional coverage posts for Citibank’s businesses in Qatar, UAE, Bahrain and Kuwait. Source: Abu Dhabi Islamic Bank

oil price has rallied from a low in January of just over

$22/barrel to around

$34-35/barrel Does the bank’s commitment to investment in IT and digital banking have any implications for the branch network?

We will have the best of both worlds. The digital banking strategy we have is growth-driven. There are market segments that we believe that we can serve better and by serving them better we will acquire more customers. Reducing the branch network is not part of the discussion for us. However, as far as the youth, the underbanked and the unbanked are concerned, do they care about a bank branch? This is the Facebook generation so we want to be a Facebook bank for them. This is about growth, not about cutting expenses. We will have both capabilities available. Customer behaviour will decide which will grow. I think the branch network will remain very strong and very much in demand by people like you and me but our children don’t care about branches. However, older customers with money behave differently. They want a relationship; they want to see a person. They want to have confidence and trust, they want stability, they don’t want surprises and that has to do with physical presence not digital presence.

ADIB has had a strong track record in Emiratisation. What more can you do to encourage Emiratis into the banking sector?

“We are the first bank in this country to have introduced a policy of hiring young graduates, whether they be from high school, college or university, for starter job from teller to clerk to junior officer. Three years ago we established our own internal academy. We hire young Emiratis and nonEmiratis, we train them and we give them their first jobs. We are very big on Emiratisation but also on hiring youth and giving them their first job ever, training them and equipping them to be successful in the bank.” cont. overleaf

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COVER INTERVIEW

cont. from page 19

Would it make sense to have a national Shari’ah authority?

Today each bank has its own Shari’ah board and the board has two functions. First, it supervises the bank to make sure the bank complies with the policies and regulations. Second is the creation of legislation. Say you want to do something which has not been done before, you go and you seek legislation to allow you to do this. Shari’ah in Arabic means law. So what we are talking about here is ‘lawful’ banking. We are not saying others are awful! However, we are saying that under Shari’ah law there are certain rulings you have to be bound by. We have studied these laws every which way possible. Around 80 per cent of them are ethical standards so I would say we are an ethical bank really and ethics are universal. Everybody in the world wants ethical banking. They want to trust their bank. They want a bank that’s ethical. The remaining 20 per cent is basically the difference between a conventional bank product and an Islamic bank product. That 20 per cent is very important because it makes all the difference to whether the product is acceptable from a Shari’ah point of view.

This is the Facebook generation so we want to be a Facebook bank for them. - Tirad Al Mahmoud

Take the charging of interest versus the charging of a profit as an example. Islamic banks charge a profit, conventional banks charge interest. The difference comes when you as a client cannot afford to pay any more. When you lose your job a conventional bank will continue to charge you interest, may even increase the interest and impose penalty charges on top because you have become a high risk. With an Islamic bank, when you lose your job, the bank cannot continue charging you profit. The clock stops. So you get an immediate relief and as part of our laws you don’t have to ask for it. You have to tell us but you don’t have to beg. Second, the bank cannot raise its price on you. Even if you have agreed to accept a higher rate, we are not entitled to it and if our supervisory board finds out that we have raised the price on you they would reverse the charge and give you back the money! Asking you to approve a rate increase midstream in a transaction is not an armslength commercial negotiation; it is forcing you to agree to something to which you can’t say no. We cannot do that; we cannot take advantage of your weakness. That’s where the difference shows up, when you are going financially through a lot of stress. This is the real difference between charging profit and charging interest. Charging a profit is saying we share in

Affordable housing, healthcare, education and service industries of the future are sectors that ADIB is investing in.

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Islamic banks are not temples, they are not mosques, they are businesses but they are bound by certain rules. - Tirad Al Mahmoud

the dividends, we share in the production that you have but if you are not producing anything, what are we sharing? Nothing! This is where the difference between Islamic banks and conventional banks comes into focus. It’s like an insurance policy. A good insurance company is one that pays out when you have a problem. You will only find out the quality of your insurance company when you have a disaster. That is when you know if the company is good or not. The difference between Islamic banks and conventional banks only shows up when you have a disaster as a client. As a consumer that is when you get the true value. These are some of the fundamental value differences between a conventional bank and an Islamic bank and that is what we try to educate our employees [because they also need to be educated on this continuously] and our customers as well. Islamic banks are not temples, they are not mosques, they are businesses but they are bound by certain rules. Eighty per cent of those rules are very high ethical standards and the other 20 per cent are formulaic

regulations that basically prevent the presence of usury and usury is not just a number, it is also circumstances. If you have a national authority that sets the rules the advantage we would get is in the standards that we apply to our policies and regulations. The legislation is not going to change. Some people think that when you have a national Shari’ah board you will have one law which is what we all need–one law, one approval on whether something is right or wrong. Actually that is not what we would get. What we would have is a standardised approach to applying legislation. Take the example of the International Swaps and Derivatives Association’s [ISDA] interest rate swap agreement. Before this was introduced, conventional banks did interest rates swaps but the market was a mess. Lawyers were drafting agreements differently. However, when the master agreement was launched you then had one standard agreement everywhere so the law firms’ lives became easier, the courts’ lives got easier and the counterparties, the banks and the customers, their lives got easier. This is what we would get from a national supervisory board: the application of legislation gets standardised, standard documentation, standard terms of reference, standard language and standard dispute resolution. The legislation itself would not change but all these other things are absolutely necessary for an efficient market. cont. overleaf

ADIB is big on Emiratisation, hiring youth and giving them their first ever job.

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COVER INTERVIEW

cont. from page 21

It would bring standardisation to the industry which would improve efficiency and bring scalability and portability. Take McDonalds, the firm makes burgers in one size. You can produce a million burgers around the world and scale up but if every burger is bespoke and done differently, can you produce a million fast enough at a reasonable cost? It’s impossible! Everything we do today is bespoke, tailored to your needs and to the particular thoughts and ideas that a scholar in the supervisory board has but once you have one national supervisory board, you would have standardised issues, standardised documents, language and terms of reference. This would enable us to ‘industrialise’ Islamic banking. Our products are priced competitively with conventional banking products but our processes are currently more expensive– we spend more money to produce similar products.

What product areas is ADIB focusing on for 2016?

Affordable housing, healthcare, education and on the service industries of the future; these are the sectors we are investing in. Our SME business is also growing. We hear about the challenges in the sector but we are not intimidated by them. The credit challenges are no surprise. Al Etihad Credit Bureau will prevent some of the mistakes of the past being repeated in the future. Think about it like this: you are dancing in a darkened room so you don’t know who you are dancing with. Then the lights come on and you see your partner clearly for the first time. It can be a shock! I think now the lights are on in the market. Now you can see everybody and they can see you. The bankable market has shrunk somewhat and the rotten elements are now clear and obvious. That is what the credit bureau has revealed. We expected it a year and a half ago and we built provisions for it. We didn’t know which part of the portfolio would bite us but we built a cushion for it and we were ready so we are happy to continue to do SME and commercial banking. We are committed to those segments.

You have been CEO of ADIB since 2008, what ambitions do you still have for the bank?

What I want to do is ensure that the bank is the best regional bank in the Middle East and North Africa; able to deliver value for MENA companies present in several MENA markets. We need to be a relevant bank for regional players. Today those players rely on banks like HSBC, like Citibank. We are moving into that space. We aim to deliver a very competitive service to the multinational segment of the MENA region. That is why are building our presence in key markets, where such companies are also active players.

22 page 18-22 Cover Interview.indd 22

Second, we intend to be the best correspondent banking services provider to Islamic banks globally. Today they are not being served by anybody. A lot of these banks are small, and in many emerging countries nobody looks at them. The likes of JP Morgan, Citi, HSBC are not interested but we want to target the segment and give them a service. We are not ready for this today but it is a 2020 ambition, and we believe we can do it the right way. We also want to be a bank that is known in the Gulf as the best real estate finance institution in the region. I don’t just mean mortgage finance but also real estate advisory, how to manage it, how to structure it, how to buy and sell, how to re-profile your real estate portfolio and how to finance your portfolio. We have a real estate management company and we are building a value proposition in the bank. Last but not least we have already begun our digital banking business. It’s a growth-driven strategy. I think we will be among the best digital banks in the region that has been able to create a very attractive value proposition for the youth and the underbanked. We are looking to a future where today’s underbanked will be using not smart phones but feature phones to access banking services more efficiently, more safely and more cheaply.

ADIB is a leading bank in the UAE with more than AED 110 billion in assets. Its 870,000 customers benefit from the third largest distribution network in the UAE with 88 branches and more than 770 ATMs. ADIB has 2,500 employees and provides retail, corporate, business, private banking and wealth management solutions. The bank was established in 1997 and its shares are traded on the Abu Dhabi Securities Exchange (ADX). ADIB is a leading global advocate of Ethical Finance and in 2012, in partnership with Thomson Reuters, the bank launched the Ethical Finance Innovation and Challenge Awards (EFICA). In 2015, the awards received over 200 applications from all over the world. ADIB has presence in six strategic markets: Egypt, where it has 70 branches, the Kingdom of Saudi Arabia, the United Kingdom, Sudan, Iraq and Qatar. Source: Abu Dhabi Islamic Bank

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28/03/2016 10:25

COUNTRY FOCUS Oman

Oman turns to new economic horizons Amidst several setbacks last year, Oman remains resilient to the unfavourable economic backdrop

he economic climate has been relatively challenging for the coastal state in the Arabian Peninsula. The rough global macroeconomic landscape, coupled with continuous depressed oil prices, have started to take a toll on this hydrocarbonreliant economy–and it is not expected to ease off anytime soon. As oil prices are only expected to recover in the medium-term, Oman’s economic growth prospects are expected to slow down. With lower

24 page 24-28 Country Report.indd 24

financial reserves compared to its regional counterparts, Oman, along with Saudi Arabia and Bahrain (all of which share the same concerns), are the most vulnerable in the GCC market. Finding ways to close the budget gap, market observers expect the country to come to the market to issue debt, amidst rumours of it requiring external funding. The IMF expects the country to chart a fiscal shortfall of 18 and 20 per cent of gross domestic product (GDP) for 2015 and 2016, respectively. On

the external front, Oman’s current account deficit is anticipated to widen to 17 per cent in 2015 and 24 per cent in 2016. Assuming that the twin deficits are funded by foreign exchange and fiscal reserves, collectively estimated at about 70 per cent of GDP as at end-2014, the nation’s reserves are expected to dwindle rapidly. The government debt level was still low at about five per cent of GDP as at end-2014, which will allow the government some latitude to weather the low oil price environment.

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The IMF expects the country to chart a fiscal shortfall of

18 and 20%

(Photo Credit: A Jellema/Shutterstock.com)

of gross domestic product (GDP) for 2015 and 2016, respectively.

Oman detached from its reliance on hydrocarbon to tourism and logistics.

THE BANE OF CRUDE OIL

Moody’s Investors Service at the end of last year revised its outlook on Oman’s banking system from stable to negative, reflecting the softening operating environment for banks in the context of low oil prices. The negative outlook also reflects Oman government’s weakening capacity to support the banks in case of need. “Slower economic growth will translate into weaker credit growth for the banks and moderate pressure on their funding, asset quality and

profitability, albeit from a strong base. We expect a moderate impact on asset quality. Non-performing loans are expected to increase to around three per cent of gross loans in 2016, up from 2.3 per cent in 2014,” said Mik Kabeya, Analyst at Moody’s. Sharing similar sentiments, Khalid Howladar, Senior Credit Officer at Moody’s, expects Omani banks to increasingly rely on more costly and confidence sensitive market funding to support credit growth, despite remaining primarily deposit funded.

The Moody’s expects credit growth to slow down to a rate of seven to nine per cent in 2016, from 11 per cent in 2014. Moody’s anticipates that the Government will adopt an increasingly selective and measured approach to public spending as oil revenues diminish, thereby contributing to a mild economic slowdown. The country’s real GDP growth is expected to slow to an average of two to three per cent per year until 2019, from an average of 4.9 per cent between 2005 and 2014. The country’s relatively high borrower and real-estate sector concentrations, are also expected to pose a downside risk to the asset risk performance. Concurrently, at the end of last year S&P downgraded the country’s long-term foreign and local currency sovereign credit ratings from A- to BBB+. Bearing similar justifications, the ratings agency conveyed that the negative outlook reflects its view of the further deterioration of the Government’s fiscal and external positions beyond its initial expectations over the next two years. This was followed by RAM Ratings’ revision of its outlook on Oman. RAM in January lowered its outlook from stable to negative on Oman’s respective global, Asean and national-scale ratings of gA1(pi)/ gP1(pi), seaAAA(pi)/seaP1(pi) and AAA(pi)/P1(pi), while reaffirming the said ratings. The Malaysian ratings agency was of the opinion that Oman is likely to incur persistently large fiscal deficits due to weak revenue generation from prolonged low global energy prices and elevated fiscal expenditure that was deemed structurally sticky. The negative outlook also incorporates its expectation that the country will record a double-digit current account deficit in the absence of a significant breakthrough in its export structure. cont. overleaf

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COUNTRY FOCUS

cont. from page 25

Moody’s expects credit growth to slow down to a rate of

7to 9

in 2016

“In view of the limited prospects for structural reforms in the near term, persistent fiscal and current account deficits are expected to lead to rapid debt accumulation and/or an accelerated erosion of reserves. As oil prices are likely to remain low at least in the near term, Oman’s fiscal and external balances will continue to come under pressure,” said Esther Lai, Head of RAM’s Sovereign Ratings. As large fiscal deficits are expected to persist, RAM anticipates a rapid buildup of public debt to the tune of nine per cent of GDP in 2015 and significantly higher going forward. While Oman’s dependence on the hydrocarbon sector has gradually reduced, it still accounts for approximately 44 per cent of the economy. Prolonged low oil prices have necessitated an acceleration of diversification efforts, demonstrated by ongoing investments in major infrastructure projects to promote the country’s tourism and logistics sectors as well as greater private sector participation through easier financing for SMEs. While RAM acknowledges these initiatives, their effectiveness remains to be seen, given the government’s nationalistic stance and potentially insufficient investments due to pressured government finances.

TOURISM TO HELP GDP GROWTH

The implementation of Oman’s National Strategy for Tourism 2040 which was announced in February targets a six per cent rise in the contribution of the

26 page 24-28 Country Report.indd 26

In view of the limited prospects for structural reforms in the near term, persistent fiscal and current account deficits are expected to lead to rapid debt accumulation and/or an accelerated erosion of reserves.

- Esther Lai, Head of RAM’s Sovereign Ratings

tourism sector to the GDP. Ahmed bin Nasser Al Meherzi, Minister of Tourism, reportedly announced that the strategy aims to increase the contribution of the private sector in tourism projects to 88 per cent, and government investments by 12 per cent, which includes infrastructure projects. The strategy also targets of five million visitors by 2040, almost double today’s level of 2.6 million visitors. Al Meherzi envisions the Sultanate as one of the most important tourist destinations, visited by tourists to spend holidays and explore the country by 2040. According to the Tourism Report 2015, issued by the National Centre for Statistics and Information, more than 2.6 million visitors arrived in the Sultanate last year. GCC nationals made 1.06 million, Indians at 299,661, British nationals at 150,902, and Germans at 106,269.

Cruise ship visitors to the Sultanate in 2015 reached 148,000, consisting of visitors from Germany, Italy, the UK, the Czech Republic, and British Virgin Islands. Guests in Oman’s three to five star hotels numbered at 1.2 million last year, with revenues totaling OMR 192.1 million. According to Oxford Business Group, a series of high-end hotels have started opening for business, including international brands such as Westin, St. Regis, W Hotels, the Ritz-Carlton, Kempinski and Louis Vuitton. Luxury resorts are also being rolled out, ranging from Soneva Group’s new resort in the Musandam exclave, due to break ground in 2017, to a range of facilities in new integrated tourism complexes. These complexes are specially designated areas within which non-Omani nationals may buy properties. cont. on page 28

Strengths:

 Energy (oil and gas) resources.  Substantial foreign asset base contributes to a net creditor position and largely mitigates transfer risk.  Economic data are usually strong, although can turn negative during times of low oil prices.  Low external debt levels and repayment commitments.  Strong import cover.  Despite some demonstrations early in the Arab Spring, the political leadership remains generally popular.  Good international and regional relations. Source: Euler Hermes Economic Research

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COUNTRY FOCUS

cont. from page 26

LOGISTICS PAVING BETTER REFORMS

Oman’s logistics sector is one of the main non-oil economic sectors. It contributed 4.9 per cent to the country’s GDP in 2015 and the Government is keen on promoting the country as a leading logistics centre in the region, said Frost & Sullivan in its Sultanate of Oman Logistics Industry 2016 Outlook. Oman’s strategic centralised location in the Arabian Gulf makes it ideal for conversion into a major trans-shipment hub for East-West trade route. The logistics industry in the Sultanate is said to be going through a transformation to overcome infrastructure bottleneck, lack of investment in port handling capacity, and poor land transport connectivity with other GCC countries. This comes on the bank of the Government’s strong support on key infrastructure projects to ease congestion and enhance capacity. These projects include development of national railway network and modernisation of airports with focus on increasing freight handling capacity. According to the report, the logistics industry in Oman is likely to grow at a compound annual growth rate of 6.9 per cent between 2015 and 2020. The key drivers for economic growth are the infrastructure investments associated with national logistics development plans, economic diversification efforts, and trade with the GCC, Asia and Sub Saharan African countries. The transportation and logistics segment accounted for around $8.81 billion in Oman’s GDP in 2015. The services sector is expected to be the growth engine for Oman’s economy, driven by Government focus on logistics, transportation, and tourism industries. Amongst all freight activities in Oman, sea transport is the predominant mode, accounting for more than 80 per cent of freight in Oman handled by Sohar and Salalah Ports, the report

28 page 24-28 Country Report.indd 28

We expect a moderate impact on asset quality. Non-performing loans are expected to increase to around three per cent of gross loans in 2016, up from 2.3 per cent in 2014. - Mik Kabeya, Analyst at Moody’s

revealed. As part of the Government’s plan, Port Sohar has been promoted to handle sea cargo as an alternative to Muscat since 2015. Sea freight is further expected to grow by 4.8 per cent in 2016, driven by the increasing intra-region GCC trade and due to trans-shipment demand from Asia, Europe, and Africa. The road freight in Oman is driven by domestic economic activities to meet local demand and land-based trade with other GCC countries. Furthermore, the construction of a new 680-km road linking Oman and Saudi Arabia will provide a more direct route between the two countries as well as reduce the number of border crossings, while increasing road transport efficiencies.

NO CURRENCY DEVALUATION

Rumours of a currency devaluation that has been circulating in the market for the past few months was quashed

when Hamoud bin Sangour Al Zadjali, executive president of the Central Bank of Oman clarified the bank’s stance in an interview with Al Markazi magazine. “False and unverified stories have been spreading around lately about the fluctuating value of the Omani currency, especially on social media, prompting the Central Bank of Oman to publish clarifications to the public,” he said. Oman’s central bank affirmed that the country is still committed to peg the rial to the US dollar and the value of the currency in the futures market did not change. He clarified that interest rates in the Oman’s banking sector are determined by supply and demand forces, in line with the principles on which the Omani economy is based, including market freedom. The central bank further expects the Omani banking sector to continue its performance in 2016 under its tight surveillance, enjoying comfortable levels of liquidity and financial solvency.

Weaknesses:

 Sultan Qaboos does not have an heir and the succession process is opaque.  Social and political reforms have been limited and pressures for change could mount.  Dependence on oil and gas (over 70 per cent of export earnings).  Proven oil reserves have a limited time horizon at current rates of extraction (15 years).  Strategic importance (overlooking the Straits of Hormuz) entails risks of potential involvement in regional conflict (closeness to Iran).  Expenditure on the military is one of the highest in the world. Source: Euler Hermes Economic Research

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(Credit: Bloomua/Shutterstock.com)

BRAND MANAGEMENT

When it comes to branding, an institution is urged not to fear change.

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Brand management at its best ADNIC and Industry share their views on sustainable brand management strategies

randing is inevitably a crucial aspect of any business in this day and age. Brand management is not seen as one of the key tactics in customer retention and acquisition. Well-executed brand marketing programmes have the potential to drive up both revenue and sales. “For banks in particular, which are typically focused on driving operational efficiency, investing in brand can go against the grain. The instinct is to keep marketing costs to a minimum and focus on increasing wallet share of existing customers. But this neglects what the competition are doing, what the next generation of customers are thinking and what else existing customers might be tempted to do,” said Sholto Lindsay-Smith, Partner at Industry, a global consultancy firm.

BUILDING BRAND ADVANTAGE

For many branding is about the logo and the colours. ‘Own a shape, own a colour’ as traditional designers used to say. Indeed these are important but they are only part of the bigger picture. Commenting on the evolution of branding demographics, Abdulla Al Nuaimi, Chief Officer, Shared Services

at Abu Dhabi National Insurance Company (ADNIC) explained that the UAE market is currently witnessing the development of a new landscape for the financial services sector, driven by innovative technological advancements, solid digital infrastructure and a substantial concentration of young, tech-savvy consumers. Lindsay-Smith said: “Brand today has moved into the realm of social psychology. It’s about mindshare– what your customers think about you. If you are contemplating a rebrand, the first big question you have to ask yourself is, do I see brand as an asset or a cost? If it’s the latter, you probably won’t succeed. Building a brand advantage is a strategic discipline that requires focus, discipline and time. But it’s worth it.” Drawing an example, he mentioned that a pair of well-made plastic sunglasses with the added Gucci logo, immediately adds hundreds of dollars to the price tag. Clearly it is not only the logo that adds value to the sunglasses, but the association of the Gucci brand with glamour, style and luxury. The same principle is said to be applicable to corporate brands. Brands such as IBM and Accenture are undoubtedly today’s household names cont. overleaf

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31 23/03/2016 13:06

BRAND MANAGEMENT

cont. from page 31

due to their selective investment in building their brand profile through advertising, sponsorship and thought leadership, giving them actual advantage in their market. The most successful brands have behind them a clear organising thought that defines what they communicate— the promise—and make sure that the experience matches this promise. For example, a car brand—BMW. The first thing that pops to mind is utility vehicle, robust, dependable. The second would be German engineering and performance. These associations that jump into mind are what brand is really about, said Lindsay-Smith. “The important point to note is that we probably only hold two or three associations in our mind about any brand. But how did those brands get us to make these associations? It is the sum experience you have had of those brands that formed your opinion, from seeing their ads to having a ride in the car,” explained Lindsay-Smith. Well-executed brand marketing programmes have the potential to drive up both revenue and sales. “At ADNIC, our brand strategy is less about projecting ourselves and more about listening to what our consumers and industry influencers are saying about us. As such, we place a lot of emphasis on identifying channels where our consumers are active—be it online or offline. We also invest a lot of time and capital in communicating with our consumers through B2C and B2B media and complement it with participation in a range of industry events as well as community and CSR activities across the UAE,” added Al Nuaimi. It is the sum experience that people have of a bank that forms the brand, according to Lindsay-Smith. This goes across every aspect, from branch design, to website search, to credit card transaction, to the experience of applying for a new account or a loan.

Whether the brand is about quality, speed, ease or exclusivity, the experience should be true at every interaction.

SUSTAINING THE BRAND

Abdulla Al Nuaimi, Chief Officer, Shared Services, Abu Dhabi National Insurance Company

Going forward, I think we are likely to see greater harmonisation between online and offline brand behaviour among financial services firms in the UAE and more emphasis on technology as a brand driver. - Abdulla Al Nuaimi

Should companies evolve their brands or be more radical? The natural tendency, according to Lindsay-Smith, is to be cautious and protect any brand equity by maintaining some continuity with the past, be it the name, colour, symbol or tag line. A more revolutionary approach can help to signal change. In banking, where the industry experiences greater customer inertia than other markets, by not changing radically enough banks risk failure to attract new customers. When it comes to branding, an institution is urged not to fear change. “Customers won’t leave you because you rebrand, but new customers will not choose you because you look out of touch. In other words, when it comes to a rebrand, fortune favours the brave,” said Lindsay-Smith. In order to sustain a brand, financial institutions must endeavour to avoid potential pitfalls. This requires companies to: evaluate the cost of execution, find a definitive strategic objective to the brand, keep the brand simple, and build belief in the mission. The cost of a rebrand is not just the fee paid to the branding agency but also includes the cost of execution. Depending on the solution, LindsaySmith explains that this can mean redesigning branches, rebuilding one’s website, human capital training as well as investments in sponsorship, public relations and advertising. The cost of rebranding, in actual fact, can reach millions of dollars. It was pointed out that many rebranding exercises fail due to negligence in factoring the implementation costs compromising the execution stage. Lindsay-Smith also suggested that another way to frame the budget is cont. on page 34

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BRAND MANAGEMENT

cont. from page 32

to look at all these components over time. Therefore it is better to execute it in a coordinated manner as opposed to a piecemeal way. As for objectives, branding is said to be about defining the very essence of what the institution stands for (its core purpose and values), and what the company seeks to be famous for (the things that make the bank different and better than its competitive peers). Lindsay-Smith said that it is a highly strategic process that forces institutions to make decisions about what they will invest in doing well. During the branding process, it is pertinent to make decisions about the market segment the bank chooses to focus on, the suitable product features for such a market, the proper price point, the appropriate service standard and the right brand image. He also said that banks should identify their competitors in the most brutal sense such as which banks they’d like to win customers from—inquiries that are best informed through a thorough assessment of the institution’s strengths as well as through market research. “Many branding initiatives fall foul of overcomplicating the brand definition and investing in a set of indistinguishable brand values. Another test. Can you recite your own brand values today? If not, what’s the point of them? Better to do away with them all and replace them with a clear ethos, like ‘Just do it’,” highlighted Lindsay-Smith. He suggested that less is definitely more. Above all, it is important to keep in mind that branding is about basic psychology. It’s about how the institution connects with its customers. Many branding initiatives fail because they are too complicated, too ‘woolly’ and unintuitive. The best answers are simple–easy to communicate, easy to remember and easy to act on.

Sholto Lindsay-Smith, Partner, Industry

Branding today has moved into the realm of social psychology. It’s about mindshare—what your customers think about you.

- Sholto Lindsay-Smith

Brand building is as much about internal alignment as external communication. Lindsay-Smith explained: “Before unveiling your new brand to the outside world it’s important to ensure you are ready to deliver. You need to engage and energise your people in delivering on the brand promise. And to do this, they need to believe in the mission.” In other words, the institution has to ensure that its staff at all levels are aware, committed and enthusiastic of the bank’s objectives. It has been said that a big challenge for banks is finding an engaging way to frame the mission to its staff. As for ADNIC’s approach, Al Nuaimi explained that innovation, reliability, integrity and customer centricity are at the heart of its branding strategy. This strategy is in turn built into the firm’s corporate values so as to empower its people to be ambassadors of their brand. Whether it be through the creation of new digital platforms to better serve their customers or supporting various community initiatives in the UAE, the ADNIC brand is about placing their partners and clients before themselves. “Going forward, I think we are likely to see greater harmonisation between online and offline brand behaviour among financial services firms in the UAE and more emphasis on technology as a brand driver,” he said.

Building a strong brand can enable you to:  Capture a new market segment.  Attract the next generation of customers.  Charge a premium for your services and products.  Defend against your competitors.  Attract the brightest and best staff.

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2016 OUTLOOK

2016: a matter of check and balance Volatility and sluggish growth remains as the two central themes for 2016, but sentiments remain positive

Brooks Ritchey, senior managing director of K2 Advisors

36 page 36-40 2016 Outlook.indd 36

lobal market volatility and decreasing growth rates across the world has substantially affected investor sentiment on many levels. The drop in oil prices, the slowdown in China, Europe and the US have cast a doubt as to the future. Nevertheless there still are market constituents who choose to look at the situation from a more positive angle. Investors, be it individual or corporate have started to find ways to leverage on such uncertain times. “Many investors fear the type of market volatility we have seen in recent months, but it’s not necessarily a bad thing— particularly for investors in some types of alternative investment strategies,” said Brooks Ritchey, Senior Managing Director of K2 Advisors, a hedge fund investing company, under the umbrella of Franklin Templeton Solutions. “Every investment manager has his or her own collection of favourite adages. One of mine is ‘each fresh crisis is an opportunity in disguise.’ I’ve been given a chance to test this maxim thus far in 2016. While it has been a rocky start for markets globally, the subsequent volatility has brought with it opportunity in the form of market inefficiency. When the market is inefficient, it means investors are generally allowing fears—rather than fundamentals—to overwhelm their decisions, and prices of securities may not reflect their underlying value,” he explained. Sharing similar sentiments, Tawfik Hammoud, Senior Partner and Managing Director at The Boston Consulting Group (BCG) carries a neutral view on the global economy. He believes that there are pockets of strength and areas that are fairly challenged, preferring to view the market on a country to country or region to region basis rather than as a whole. “We have had completely unprecedented monetary easing and basically central banks have been running this since Lehman. And that has never been the case in the history of capitalism. Central banks have done a

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pretty good job at creating a bit of a recovery. However at the same time they have created an addiction to very cheap capital, and you see it now with these crazy negative interest rates in many countries around the world. You also see it in the abundance of capital that is chasing yields around the world and across asset classes. You see it in private equity to where the multiples and leverage are pretty much back to where they were before Lehman,” said Hammoud.

THE FLIPSIDE OF VOLATILITY

It is believed that the majority of hedge strategies in general, seek to capture gains from market inefficiencies by taking advantage of pricing differences and relative discrepancies between securities, technical market movements, deep fundamental valuation analysis, and other quantifiable trends and/or inconsistencies. Ritchey explained, “As investors in hedge strategies through our liquid alternatives portfolios, we expect

The world economy would grow at

3.4

in 2016 and

% 3.6 in 2017

that inefficiency may provide us with better opportunities to generate excess returns, or positive alpha. In other words, volatility typically gives investors in hedge strategies a better chance at separating the winners from the losers. [That’s not to say that hedge-strategy investors always try to avoid ‘losers’]” According to K2 Advisors’ current economic outlook, as financial markets comes to terms with, among other issues, China’s slowing growth rate and uncertainty about global interest rates, the firm anticipates volatility to linger for quite some time–it also expects a possibility of escalation. “Of the four common hedging strategies typically employed within our liquid alternatives portfolios— long-short equity, relative value, event driven and global macro—we believe global macro and long-short equity are best positioned in the near term to benefit from this anticipated increase in market volatility,” he said.

VOLATILITY AND EQUITY PRICE SPREADS

Tawfik Hammoud, Senior Partner and Managing Director at BCG

Ritchey further explains that as volatility increases, the spreads between the share prices of companies that are considered healthy and those that are cont. overleaf

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2016 OUTLOOK

cont. from page 37

facing challenges typically widen. Longshort hedge strategies seek to take advantage of this widening by buying the good companies (going ‘long’) and shorting the weaker ones. According to him, hedge strategy managers are not soley focused solely on finding ‘winners’ but are able to fine-tune their hedges to identify the companies that may be negatively impacted by, for example, a collapse in oil prices, and capitalise on that negativity. “We also believe long-short equity strategies are poised to benefit from a continued rise in interest rates in the US, and the rate moves do not have to be dramatic to have an impact. Even gradual increases may bring opportunities for long-short hedge strategy managers. In a low interestrate environment, many mediocre companies can survive on cheap credit. When rates move higher, those mediocre companies tend to see their growth path limited because rising interest expense is a drag on their earnings,” he explained. Another factor that is seen to affect valuations has been the strong US dollar run over the last year. K2 Advisors expect this trend to continue throughout 2016, as US monetary policy has diverged from that of many other major countries and regions, and higher US interest rates will likely keep the dollar on its upward trajectory relative to other major currencies.

MIDDLE EAST FAIRLY RESILIENT

Determining investment strategies in uncertain and volatile market conditions undoubtedly depends on an investor’s portfolio interests. Although the first to be cautioned after, the GCC region appears to be viewed as a relatively stable market. “I think the Middle East has certainly been through cycles before. So it is not the first time that oil

38 page 36-40 2016 Outlook.indd 38

Many investors fear the type of market volatility we have seen in recent months, but it’s not necessarily a bad thing—particularly for investors in some types of alternative investment strategies. - Brooks Ritchey, Senior Managing Director of K2 Advisors

is at a very low level; I think there are some institutional memory in the region on the cycle. They have built phenomenal reserves and rainy day funds for such situations which allows them to buy time. The question is not what happens immediately in the short term, it is what happens in the medium term once some of these funds have been either drawn down or exhausted in some countries. I think that it will take a few years to play out,” said Hammoud. Such global economic backdrop is believed to provide the region a platform to consider more structural reforms in their economies and invest in human capital and competitive companies that have the potential of becoming regional or global champions. He further elaborated, “Low oil prices should be a huge benefit to the global economy, obviously not to the producers, but to the rest of the world as an importer of energy and the effect of that has not been as obvious as people expected. You would have expected Europe to do much better because the oil price has historically had a very significant impact on GDP and you are seeing a tiny bit of it, but not what you would expect. Oil prices remain acritical component of any economic conversation, but to a lesser degree than before I think.”

CHINA BECOMING MORE REALISTIC

For the third time in less than a year, the International Monetary Fund (IMF) in January cut its global

growth forecasts. It forecasted that the world economy would grow at 3.4 per cent in 2016 and 3.6 per cent in 2017, cutting 0.2 percentage points from its previous estimates in October 2015. Supporting its numbers, the IMF cited a sharp slowdown in China trade and weak commodity prices affecting Brazil and other emerging markets. Due to the wealth currency swings in the last couple of months, it is believed that there is less confidence in the global investor community, and the Chinese government’s ability to control the narrative as well as the economic outcome of the country. “I think that the negative narrative on China is not accurate, there is certainly challenges with China’s economy but we have to remember that five or six per cent growth is still phenomenal for an economy that represents now probably one-fifths of the world’s GDP with the US being a quarter. If you have one-fifths of the global economy growing at five or six per cent that is not too shabby. I think we just got used to numbers that are unrealistic. No one can grow over 10 per cent for a long time. China is in better shape than people give it credit for. There are real challenges, the state owned enterprises are a real concern. They also have competitive issues and a lot of companies that will require a lot of restructuring. I don’t see China as being a huge negative, but will now be a story that has ups and downs like any other country,” said Hammoud. cont. on page 40

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2016 OUTLOOK

cont. from page 38

US–A CONSUMER DRIVEN MARKET

According to market estimations, the US was expected to grow two to three per cent, shying away from the four or five per cent rate. Companies in the US are generally seen to hold strong balance sheets due to the capitalist nature of the system. However confidence in its own domestic market is diminishing. Furthermore, political uncertainties due to the upcoming election cycle is believed to put more pressure on the government functionality. “What worries me a little bit in the US is that the companies have by and large refused to reinvest in growth and in their businesses. They have preferred to return money to their shareholders and that is a sign that they don’t have a strong set of beliefs about the future. Seeing the amounts of share buy backs in the US, it is the highest it has ever been and there has been a reinvestment cycle that has not be reignited at the corporate level in the US. I think the US consumer was the main driver of growth for many, many years, I think the US consumer has learned some lessons in the last crisis and while they are coming back and starting to spend money again, I don’t think they will spend as liberally as they have before. But on a relative basis, the US is one of the strongest places and will continue to be one of the strongest places in the next few years,” said Hammoud, providing his insight on the US.

EUROPE CATCHING UP

Having a rather negative track record over the past several years, Europe appears to be slow to improve. Limiting the prospects further is the rumoured exit of Britain from the European Union (EU). Nevertheless with relatively resilient economies such as Germany, the region is expected to fare well in the short term.

40 page 36-40 2016 Outlook.indd 40

I do think in an era like this one where there is a lot of volatility and significant potential headwinds, I think any investor has to double down on caution and quality assets, being fairly conservative in estimating the cash flows that they should expect from those assets over the next five or 10 years. - Tawfik Hammoud, Senior Partner and Managing Director at BCG Hammoud elucidated, “Europe in many ways remains the sickest of the group of major economies, with limited positive prospects. The potential exit of Britain would be a total disaster for Europe and I think would send shivers down the global economies. However, I think generally people believe that at the end of the day Britain will do the rational economic things and stay in the EU. If Britain were to leave I think that is very negative on global economic growth. I think the countries that are able to reform will continue to muddle through, France, Italy to a lesser degree—and these are fairly large economies. Germany has been very resilient but has slowed down as well, but the whole German economic model based on exports obviously suffers a little bit if global economic growth is lower and China is sputtering. Europe will be mediocre at best over the next few years.”

MOVING FORWARD

Irrespective of how ugly industry observers have painted the current market canvas, many market players have iterated that there will always be pockets of growth. Good investment opportunities are will always be present across the world. Some opine that global macro-economic conditions are almost irrelevant to whether there are good investment opportunities. “I do think in an era like this one where there is a lot of volatility

and significant potential headwinds, I think any investor has to double down on caution and quality assets, being fairly conservative in estimating the cash flows that they should expect from those assets over the next five or 10 years. Extra caution is the message I give to all of our investor clients. At the same time you have interest rates that are so low that there is plenty of good deals to be had when interest rates are this low. Most deals are creative when interest rates are zero,” said Hammoud. “Global macro strategies focus on top-down macroeconomic opportunities across numerous markets and numerous investments, including currencies and commodities. These strategies take into account many factors, which may include a country’s or region’s economic indicators, as well as central bank trends and divergences. Other developments that we believe could potentially enhance the opportunity set for long-short equities include so-called ‘disruptive’ technologies. Looking forward, we may see a similar shakeup in some areas as new technologies come to market and disrupt the status quo. Disruption—and volatility—are often thought of negatively, but as we’ve seen, both phenomena may provide positive investment opportunities for hedge strategies that seek to take advantage of the market inefficiencies they typically bring,” concluded Ritchey.

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BME Product Awards 2016 - KSA WINNERS Best Credit Card Best Local Markets Brokerage

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CASE STUDY

Rising demand for professionalism Matthew Cowan, Regional Director–Middle East, Chartered Institute of Securities & Investments, highlights the importance of professionalism in conducting business

ISSUE: LACK OF PROFESSIONALISM

nethical behaviour by even a few individuals can result in undesirable consequences, both financial and reputational, for the firm they work for and for the industry they work in. It is therefore imperative to demonstrate that your firm can be trusted by fostering a culture of integrity and professionalism. Financial services firms within the Middle East should therefore demonstrate that their employees are not just qualified, but that they keep their skills and knowledge up to date and value the importance of professionalism in all that they do. While most banks and other financial services institutions were keen to adopt global standards of professionalism–the effective combination of knowledge, skills and behaviour–they were perhaps not aware of the opportunities available to them to ensure their staff had access to the latest qualifications and to continuing professional development (CPD) workshops or similar upskilling opportunities.

SOLUTION: ADOPTION OF THE CISI PROGRAMME

Matthew Cowan, Regional Director–Middle East, CISI

44 page 44-46 CISI.indd 44

When the Chartered Institute for Securities & Investment (CISI) started work in the UAE in 2007, only 534 qualifications were taken between 31 March 2007 and 1 April 2008. Recognised the needs of these firms, CISI introduced the corporate supporter programme, in order to provide supporters with benefits that help them increase their levels of professionalism at a corporate and individual level. Any organisation within the financial services industry has the opportunity to become a corporate supporter of the CISI. This is a public endorsement by the corporate supporter of adherence cont. on page 44

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CASE STUDY

cont. from page 42

to the aims and objectives of the CISI including support of the Institute’s Code of Conduct, which is also known as the Lord George Principles and is shared with the Worshipful Company of International Bankers. Adhering to these principles sets corporate supporters apart from other financial institutions, and demonstrates their commitment to upholding and raising high standards of professionalism and ethics within the financial services industry. By endorsing CISI as a corporate supporter, the firms agree to promote CISI’s values of integrity and trust in the sector. They also gain access to CISI’s suite of globally recognised qualifications and CPD scheme, designed to ensure that employees continually maintain standards of compliance and competence.

RESULTS: OPTIMUM EFFICIENCY AND GOOD CONDUCT

Since we began our operations in the region, we have seen a huge increase in the number of individuals and firms becoming professionally qualified in the UAE with over 2800 exams taken between 31 March 2014 and 1 April 2015–a far cry from our initial year in the Middle East. “Since becoming a CISI corporate supporter, we have seen improved status and recognition in the financial services industry. This has in turn enabled us to attract and retain qualified talent as well as earned us recognition from our clients for our dedication to the highest professional standards,” said Daniel James McGowan, Group Chief Executive Officer at Centaur Holdings, about his partnership with CISI. Similarly, James Dodds, Managing Director at Chartercross Capital Management said, “Integrity really does matter. After nearly 15 years working in the offshore financial advice sector I have, each year, seen the market place’s

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desire for ‘simple impartial advice’ increase exponentially. Unfortunately the vast majority of companies in my industry only pay lip service to this, which is why our decision to become corporate supporters of the CISI, whose morals and ethics match ours perfectly, was an easy and obvious decision.” The events of the past few years provide a reminder of the importance of firms acting and demonstrating their honesty, openness, transparency and fairness in all their business activities. The Middle East has continued to demonstrate growth in the number of qualifications taken, driven by partnerships with regulatory authorities in the UAE, Oman, Qatar,

Bahrain, Palestine and Lebanon. We are pleased that we now have six corporate supporters in the UAE–Emirates NBD, Mashreq Bank, National Bank of Abu Dhabi, Commercial Bank of Dubai, Chartercross Capital Management and Centaur Asset Management–showing an increased awareness of the importance of integrity and ethics in the sector that we operate in. Professionals within the securities and investment industry owe important duties to their clients, the market, the industry and society at large. Where these duties are set out in law, or in regulation, the professional must always comply with the requirements in an open and transparent manner.

Lord George Principles:

1. To act honestly and fairly at all times when dealing with clients, customers and counterparties and to be a good steward of their interests, taking into account the nature of the business relationship with each of them, the nature of the service to be provided to them and the individual mandates given by them. 2. To act with integrity in fulfilling the responsibilities of your appointment and to seek to avoid any acts, omissions or business practices which damage the reputation of your organisation or the financial services industry. 3. To observe applicable law, regulations and professional conduct standards when carrying out financial service activities, and to interpret and apply them to the best of your ability according to principles rooted in trust, honesty and integrity. 4. To observe the standards of market integrity, good practice and conduct required or expected of participants in markets when engaging in any form of market dealings. 5. To be alert to and manage fairly and effectively and to the best of your ability any relevant conflict of interest. 6. To attain and actively manage a level of professional competence appropriate to your responsibilities, to commit to continuing learning to ensure the currency of your knowledge, skills and expertise and to promote the development of others. 7. To decline to act in any matter about which you are not competent unless you have access to such advice and assistance as will enable you to carry out the work in a professional manner. 8. To strive to uphold the highest personal and professional standards at all times. Source: CISI

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IN-DEPTH

Metabanking: from Wall Street to all street Reza Dari, CEO of Global Investment Bank, provides his views on adapting to the shifting investment landscape centred on sustainable social impact ventures

xpanding social awareness and technology disruptions are fast changing the traditional culture of Wall Street. Faced with multitrillion dollar write-offs and multi-billion dollar fines over the past decade, the banking industry is going through a challenging period of transformation. But evolution is never devoid of crisis and growth is seldom devoid of growing pains. Investment banking is entering a new phase of maturity in its evolution towards higher transparency, sustainability, social responsibility and humancentricity. The industry is slowly waking up to the new reality of an increasingly complex economic and regulatory environment wherein short-term bottom-line performance, risky financial products, and vague fee structures are no longer tolerated. Now, more than ever before, investment banks are in need of reconsidering conventional performance indicators and old operating models to minimise and utilise the hard impact of an incoming wave of a new generation of key actors and investors ever conscious of sustainability and purpose. In the coming age of investment banking those market participants who are most adaptive to change will be most likely to succeed. With over $40 trillion of wealth passing down to the new generation over the coming decades, we are about to witness the biggest intergenerational transfer of wealth in human history. Let us pause here for a minute and contemplate the relevance of this phenomenon to the industry. Coming to age during a period of globalisation, rapid technological change and economic crisis, the new generation is now entering their peak spending and investing years having cultural values and expectations vastly different from their previous generations. They are giving rise to a new wave of consumption centred on having and giving access instead of acquiring and accumulating assets. They are giving rise to a new wave of investment centred on active social impact instead of passive capital performance. They are consciously shifting away

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from exploiting scarce natural resources to harnessing the power of sustainable natural abundance. The deep impact of millennial shared values have already reshaped the culture of global commerce, telecommunication, entertainment and media in a fundamental way. And the investment banking industry will not be an exception. The traditional investment banking business model is becoming increasingly incompatible with the emerging financial and economic environment. But if we set aside pessimism for a moment and embrace impact as a measure of performance and innovation as a driver for growth, then suddenly a new paradigm appears to hold the promise of a new world of possibilities. The only way to break the perpetual cycle of financial and

$40 trillion of wealth passing down to the new generation over the coming decades

Investment banking is in dire need of a new strategic vision, which can genuinely align interests between clients, investors, shareholders, and social stakeholders to simultaneously pursue sustained organisational growth and social prosperity. The application of any such business strategy in the field of investment banking is what I refer to as “Metabanking”—transforming

Metabanking is the art of intuitive leadership in harnessing the power of shared values by directing human and capital resources to innovate and create next generation investment models and opportunities capable of generating sizable financial returns centred on positive social impact. - Reza Dari

economic crisis is to expand individual and organisational spheres of identity to include social stakeholders and the greater human society. We cannot escape the fact that individual and organisational success are inextricably linked to sustainable economic growth, which is inextricably linked to social prosperity. Regional financial centres and investment bankers today have a unique opportunity to cease the moment and position themselves as key agents of change by redirecting the flow of capital in the global markets towards impact-oriented financial solutions compatible with the growing need of a new generation of investors actively looking for guidance to restore their confidence in the financial sector.

economic anxiety to economic growth and social prosperity by transcending the conventional dimensions of risk and return to embrace the higher dimension of purpose. Metabanking is the art of intuitive leadership in directing human and capital resources to innovate and create impact-oriented investment opportunities and financial solutions. It centres on creating social shared values in addressing extreme poverty and social challenges by creating and utilising next generation business and operating models capable of generating sizable financial returns combined with measurable social impact. Impact is the new measure of organisational success and performance.

Organisational success will depend less on quantitative measures and more on qualitative measures, the most potent of which is purpose. The transcendent quality of purpose permeates from the organisation to its social stakeholders, ultimately rewarding its shareholders with enhanced social and organisational value. Those bankers that can recognise the power of purpose to inspire and energise all their stakeholders will be more likely to succeed in reinstating their role in society as trusted agents of local and global economy. Metabankers see cooperation–and not competition–as a key driver for organisational growth and long-term profitability. They see shared values as an opportunity for society to capitalise on their vast financial resources and technical capabilities to fuel progress and socio-economic integrity. The investment banking industry is on the brink of an evolutionary breakthrough in harnessing the power of purpose and creativity to usher in a new era of economic growth and human prosperity. In this new chapter of capitalism, Adam Smith’s invisible hand is firmly guided by the invisible heart of a new generation of key actors and investors seeking profitability infused with purpose and social impact. The new age of investment banking holds the promise of a new world of possibilities but we should be ever mindful that our eyes could only see the possibilities of a new world if they gracefully lose sight of the old.

Global Investment Bank Limited (GIB) is a company limited by shares incorporated in the Dubai International Financial Centre and regulated by the Dubai Financial Services Authority (DFSA). GIB provides services only to Professional Clients and Market Counter- Parties as defined by the DFSA. Source: Global Investment Bank

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IN-DEPTH

Bank-fintech partnerships key to success Danny N. Dagher, Chief Information Officer at Bank Audi, discusses the upside of the relationship between financial institutions and financial technology companies

here is a gap between the oil price change and it being passed onto consumers. Industry observers such as the CEO of Barclays and Jamie Diamond, the CEO of JP Morgan, said that fintechs are attacking the two areas with the biggest revenue pool that is under threat for banks: payments as well as retail and current accounts. “I understand that most banks in the Middle East choose to cooperate with fintechs. We spoke to numerous startups and fintechs and realised that they will reach a plateau at a point of time. This is because banks have something to leverage (a large customer base), a proposition that fintechs can never offer to clients. Therefore, cooperation between the two becomes a vital necessity,” explained Danny N. Dagher, Chief Information Officer at Bank Audi. It is impossible for a fintech to get 700,000 clients. Several companies around the globe are trying to work with multiple fintechs, creating an ecosystem of fintech companies to see how this shapes the future. It is uncertain how an environment such as this would look like and this is what makes it interesting and challenging. Bank Audi has embarked on the journey, employing resources to work on these ventures.

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Danny N. Dagher

“It has taken a while for us to get people to see this differently. There has always been a dichotomy between business and IT, and this is something [that] we are trying to remove because we believe now that tech is at the centre of any business, not only banking, but specifically banking,” explained Dagher. This can also be viewed through investment in capital venture funds or through investment committees. The

engagement for fintech could have many venues–one can partner with venture capitalists, make minority investments in certain fintechs, one can also partner up with these fintech companies providing them the ability to incubate their ideas at the bank. There is no need to limit the way a bank should cooperate with fintechs. There is no rule–the world is changing therefor financial institutions might as well be adaptive. cont. on page 52

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IN-DEPTH

cont. from page 50

Relationships with regulators and clients is seen as a matter of trust. Bankers are wired in such a way that they believe in the fiduciary duty they have towards their depositors and with that belief they protect the money in a different way. Fintechs on the other hand, adopt a different view. Taking a look at all the fintech companies, none of them actually became a real bank. None of them have accepted deposits from people, because when they accept deposits, they use the money differently. They have a fiduciary responsibility to depositors that makes them naturally less aggressive, but not necessarily less innovative. They always want to make sure that it is done properly and in the best benefit to their depositors. Banks also have credibility with regulators. They are regulated and they have a long history as well as many clients–which fintechs do not have. “For us the balance or the pendulum is how we keep that trust with the regulators and trust with the clients without jeopardising our ability to innovate. How do we avoid using this as an excuse not to innovate? A lot of bankers I talk to and see use regulations and compliance as an excuse not to innovate, not to try new things, not to push the agendas. This is one of the challenges that we have on a daily basis,” said Dagher. Some have questions if fintechs could develop into a banking system of their own. Dagher believes that there is no answer. “There are different theories, papers and articles. And I when speak to different executives there is no clear answer. Shadow banking is something with a negative connotation, but people talk about their ability–the ability of fintechs and start-ups to seriously disrupt [the system]. I believe there are certain areas where disruption will be traumatic to banks, especially around payments,” he opined. Will fintechs become banks? Definitely, some fintech companies, or

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some of the banks that are in the startup phase. There are a couple of banks in Asia and the UK that are not really banks, but more like the existing fintech companies in the US. Commenting on this proposition, Dagher highlighted, “Fintechs could become serious banks. There is no answer but we are exploring all types of possible scenarios and possible outcomes.” If there are any systemic constraints in the country, customers are usually aware if them. According to Dagher, banks usually strive to provide customers with the best services available for them in their local market. For instance, if the internet connection in a particular country is not that reliable, one shouldn’t expect a quick mobile app or online banking experience. He said that this is a challenge that all international banks have. The only way to resolve issues such as these is to adapt. “If you do it right, in certain countries you can have a full digital bank and in some countries you can start implementing innovative ideas in the existing subsidiaries. When we do that we make sure that we always apply a local architecture that allows us to plug in any app, any service you want to introduce,

Fintechs could become serious banks. A lot of the traditional banks will become utilities, while many of the existing large banks will become utility companies. There is no answer but we are exploring all types of possible scenarios and possible outcomes. - Danny N. Dagher, Chief Information Officer at Bank Audi

quite easily. That is the point–you want to be ready,” said Dagher. He further elaborated, “I believe that Bank Audi over the last two to three years, and especially now in the last few months after meeting with other executives and bank CEOs, is in relatively good shape in terms of understanding how things should be and executing that vision. There are a few things that help, and my role as a Chief Information Officer has been a bit different in the sense that I do not have a tech background. Never in my life have I worked in technology, but rather the investing in technology side. It was challenging initially, but not the way I see how technology can help the bank. We will always need banking, but we won’t always need banks. I do believe that everyone should having access to basic banking services.” Private banking is an area of growth for Bank Audi. There is always growth in banking and certain services, not necessarily in certain segments. The bank has managed downturns before, but have not witnessed oil prices in such lows since the 1990s. Dagher said, “Everyone is talking about how we are heading into tough years. We need to have more young people joining the ranks of innovation and flatter organisations with less hierarchy–more emphasis on partnerships with local or international companies.” Bank Audi had a couple of successful partnerships, the most recent example was with VMWare, and it is believed that the industry needs more partnerships such as these in the region. Dagher pointed out that it was relatively difficult to get companies like VMWare to work with a Lebanese bank. He said, “When we started to drive the cloud it was one of the first globally and was hard to get someone like VMWare to come in and do a project in Beirut. We still have companies that don’t want to come to Beirut. They are missing out on the fun.”

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IN-DEPTH

Investment banking strategies in hazy conditions Persisting macroeconomic conditions remain to be the main challenge for the financial services sector this year, says Shaheen H. Al-Ghanem, Deputy CEO Investment & Treasury at Warba Bank

ow would you describe the investment banking landscape in Kuwait and what are the current trends in the market?

Kuwait is an oil producing country, hence the investment environment is directly tied to Kuwait’s growth prospects, which is linked to the price of oil. Despite the marked drop in oil prices, I believe the country’s prudent management of its oil wealth has left it with enough of a fiscal buffer to withstand a protracted period of low oil prices. This will contribute to the sustainability of government driven projects and drive investments in the energy, infrastructure and housing sectors. The greater portion of investments in the upcoming years will be directed to the oil and gas sector through the government’s efforts in galvanising large capital flows to mega projects in clean fuel, heavy oil developments and new refineries. We also observe a strong trend towards promoting infrastructure developments in Kuwait such as the Ministry of Electricity and Water’s plan to invest in the country’s water and power production capacity. Collectively,

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Among the successful transactions arranged in 2015, was National Industries Group’s

KWD 105 million dual currency syndicated financing facility

all these projects will trickle down to the private sectors through the active participation of local banks in financing the projects and through the involvement of specialised service-based firms.

What are your suggestions to further improve the investment banking landscape in Kuwait?

The key to improving the country’s investment landscape is to encourage institutions, both local and foreign, to become more active in directing investments to Kuwaiti companies and projects. To that end, I believe the government will have to play a key role in transforming the legal and regulatory environment specifically as it relates to the capital markets. By setting up strategic policies and instruments which specifically address the role of investment in the development of the economy, the government will be able to increase the overall economic activity through increased investments across local industries. This will also diversify the sources of investment in Kuwait and place its economy in a reinforced position that will be able to withstand potential economic shocks like the one which we are currently facing

in the oil and commodity markets. Moreover, this strategy will allow the government to widen its investment flows into the local economy through new forms of capital investments which, in turn, serves to lift the longstanding burden and responsibility of financing the local economy to prompt economic growth and diversification. Additionally, it is exceedingly important to revive the initiative of attracting foreign investments and free flow of capital into Kuwait. Apart from proving its resilience during economic crises due to the efficiencies it proliferates across the capital markets, attracting foreign investment to Kuwait contributes to the transfer of global knowledge and the spread of expertise and best practices into the local markets.

What is your most interesting deal in the past year?

2015 was a year rife with achievements and milestones for the bank as it relates to our investment banking activities. We were able to grow our investment portfolio with quality assets, and investments continue to maintain resilience against sluggish market conditions. Through participation in Wafra Residential Value Invest I, managed by Wafra Investment Advisory Group, Inc, we were able to gain exposure to prime US real estate like the ‘The Nathaniel’ building, which is a Class A+ nine story building in an upmarket area of East Village Manhattan, New York. We also explored opportunities in the US and UK markets in order to deploy funds in those regions and expand our global real estate exposure in line with our formulated asset allocation strategy. On the debt capital market front, Warba was able to successfully land numerous mandated lead arranger and book runner roles in high profile transactions. Among the successful transactions arranged in 2015, was National Industries Group’s KWD 105 million dual currency syndicated financing facility, where Warba Bank led a consortium of local and regional banks as the sole mandated lead arranger and book runner. The investment department preformed the vital role of structuring and placing the transaction in the local and international syndicated financing markets. cont. overleaf

We feel that the US real estate sector and the lowobsolescence heavy equipment leasing sector will continue being a primary focus of ours when it comes to growing our investment portfolio. - Shaheen H. Al-Ghanem

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IN-DEPTH

cont. from page 55

Additionally, Warba Bank was mandated by Garuda Indonesia, the leading Indonesian flagship carrier as joint lead manager and joint book runner for its inaugural international $500 million benchmark Sukuk issuance. The issuance was considered a landmark transaction in that it was the first ever Indonesian corporate Sukuk issuance, and participation in this offering far exceeded all expectations with a coverage of 350 per cent, amounting to about $1.8 billion due to Warba Bankâ&#x20AC;&#x2122;s strong track record in corporate financing and its distinguished business relationship with Garuda Indonesia. Furthermore, pursuant to our faith in the power of financial innovation, which we believe to be an important factor for economic activity, especially as it relates to emerging banks like Warba Bank, we were the first Islamic bank to execute the first receivables securitisation financing for a Kuwaiti corporate, Al Mulla Group. The transaction involved the acquisition of a consumer auto financing portfolio for the amount of KWD 30 million. The transaction demonstrates our unyielding commitment to working closely with our clients and putting forth the effort to not only endeavour to understand their needs, but also formulate solutions which adds value to their business. To put it simply, the transaction was ground-breaking on so many levels as it accurately projected the true aspirations of the bankâ&#x20AC;&#x201C;to be the touchstone embodiment of innovative financial services.

What challenges can be expected this year and how will you suggest to stay ahead in investment banking? The main challenge banks and financial services companies will face this year is the persisting macroeconomic conditions rolling

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There exists ample room for growth and opportunities with attractive yields in certain real estate asset classes in the US and continental Europe. - Shaheen H. Al-Ghanem

over from last year. This is the fall in oil prices and concerns about weaker growth in China, which have given rise to a reassessment of global economic growth prospects and a rise in risk aversion and tightening of liquidity in the financial markets. In fact, volatility in the financial markets has recently manifested itself across a broad decline in global equity prices and an upswing in high-yield corporate bond and Sukuk spreads. Since our investments are allocated across many geographic jurisdictions globally, we always analyse economic conditions using a top-down approach. I do not predict that the current macro-credit environment will affect all sectors and industries globally; rather the economic problems that could potentially be prompted will be limited to certain sectors of the global economy, while the rest of the global economy will experience only a modest slowdown in economic activity. However, notwithstanding the

continued market volatility, I do believe that developed economies will remain relatively strong and a safe haven destination for institutional investors like Warba Bank. There exists ample room for growth and opportunities with attractive yields in certain real estate asset classes in the US and continental Europe, especially in the largest 50 metropolitan cities. Generally speaking, to stay ahead of the investment banking scene, I believe there will be scattered pockets of opportunities across different asset classes and geographic jurisdictions, which we can capitalise on through our top-down approach to capital allocation; but in particular, we feel that the US real estate sector and the low-obsolescence heavy equipment leasing sector will continue being a primary focus of ours when it comes to growing our investment portfolio.

What is your outlook on the market this year and over the short term?

I expect exposure to low oil prices, to impact real GDP growth on average in Kuwait and the GCC countries in 2016 and drag down further the lethargic global growth outlook. When looking at emerging markets, lower commodity prices coupled with persistent capital outflows and the side effects from a slowing Chinese economy, I expect economic growth projections being revised downwards. In contrast, for developed economies like the US, where Warba Bank sees ample investment opportunities, the outlook is more positive as a result of the same driversâ&#x20AC;&#x201D;lower commodity prices mitigating the fall in prices in the equity markets, keeping the US real estate sector growing at a healthy rate primarily due to the meagre returns forecasted in the high grade fixed income markets.

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ADVERTORIAL

TVM Capital Healthcare Partners eyes returns and societal impact Dr. Helmut M. Schuehsler

TVM

Capital Healthcare Partners has invested in five companies. How have those investments progressed?

Our approach to investing is to research our target markets in selected geographies extensively, in order to identify gaps in healthcare provision, before deploying capital. We have concentrated on building scale, quality and efficiency at these companies, using a very hands-on approach, with our TVM Operations Group supporting companies in several areas, including finance, IT, legal, and human resources. The divestment of ProVita to London-listed NMC Health in mid-2015 was a measure of our success in developing a mature, high-quality company that was an attractive acquisition for a major healthcare company.

You recently announced the registration of a new fund. How will this be different from your existing fund, and where are you planning to invest? The fund, TVM Healthcare III, intends to raise up to $300 million and invest in up to 12 healthcare companies in opportunities in the MENA region, India and Southeast Asia. We have already identified a number of highly attractive investment opportunities

58 page 58 Advertorial.indd 58

Dr. Helmut M. Schuehsler, CEO of Dubai-based TVM Capital Healthcare Partners tells Banker Middle East about the specialist private equity firm’s investments in the Middle East, North Africa and India, and plans to extend the company’s reach to Southeast Asia in all three regions. In our minds, demand for high quality healthcare in particular will rise. We have already partnered with a small group of highly experienced healthcare professionals in Singapore to advise our Dubai-based investment team on investment opportunities in the region.

Where do you see the gaps in healthcare provision in emerging markets? What are the drivers for growth in the healthcare industry in the markets where you are investing?

Urbanisation and socio-economic development in emerging markets are resulting in rapidly increasing demand for high quality healthcare. There is a real opportunity for private companies to complement the public sector, by stepping up to supply specialist services. Although recent emerging market volatility may make fundraising challenging, it also creates attractive investment opportunities from a relative lack of competition. Combine this with investing in a defensive sector such as healthcare which benefits from a solid long-term positive mega-trend and you should be looking at an excellent investment opportunity for a private equity player.

What is the appetite for healthcare i nv e s t m e n t among global institutional investors?

There is a lot of interest in healthcare at the moment, partly because it is a defensive sector, but also because in emerging markets, it is a high-growth sector, which benefits from rising incomes, and higher expectations on quality of service. We believe that our investors are also increasingly looking to have a positive impact on societies at large through their capital allocations, as well as looking at the usual return metrics. However, we firmly believe that to invest in healthcare successfully in emerging markets, you have to develop a strong in-house team, or be a specialist. For example, our investment, and especially our operating teams, include physicians and experienced healthcare administrators, as well as financial, human resources and legal professionals who bring to our portfolio companies” firsthand knowledge of value creation and operational quality in the healthcare sphere. As a company, we also bring global sector relationships to bear on the growth of our companies and the quality of the care they provide. www.tvmcapital.ae

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23/03/2016 13:11

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TECH FOCUS

Virtual banking business is UAE’s next step Mohammed Areff, Vice President, Middle East, Africa & Turkey at Avaya explains the importance of digital transformation

vaya showcased various technological advancements for available businesses in the region at the Avaya Technology Forum in Dubai held in March 2016. The company introduced the smart digital transformation service as well as an app store for business communications catering to emerging markets. “In the banking industry today, I see a huge potential for Avaya, specifically in this economic cycle. This is because if you look at banks, they are continuously trying to optimise their products. Banks are also looking to retain their customers as well as acquire new customers. Acquiring new customers does not necessarily mean acquiring a new individual but certain aspects of the individual. For example, I could have an account with Bank X but I could take a loan with Bank Y,” said Mohammed Areff, Avaya’s Vice President for Middle East, Africa & Turkey. The multinational technology company introduced Avaya Breeze, an enterprise development platform (EDP) designed to simplify the development of mobile, customer-facing and cloudmigration applications for organisations to achieve their digital transformation objectives. Alongside this launch it also introduced Avaya Snapp Store, the firstever ecommerce app store for business

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Mohammed Areff cont. on page 62

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communications. Avaya’s concept of ‘Digital Transformation-as-a-Service– SmartDXaaS–to emerging markets’, provides a range of cloud-based solutions and professional services, designed to help businesses achieve their digital transformation objectives more easily and cost-effectively. “Banks want to do digital transformation not for the sake of digitisation but rather for how they can help them acquire new customers and continue to retain the existing customers, improve their customer satisfaction, improve their time to market, introduce new products, improve the profitability, and also reducing the cost of delivery of their product and services,” explained Areff. With Avaya Breeze, organisations are able to deliver enhanced business value and execute their digital strategies by integrating communications and collaboration into workflows, business processes and existing applications. The open framework allows corporations to automate manual processes to improve digital experiences, while workflowbased applications can be created

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of siloed digital transformation initiatives will fail

of existing IT vendors will not survive in their current forms

within a matter of hours or days, rather than months. The Avaya Snapp Store provides a delivery mechanism, allowing a single integrated experience via browsers and native smart apps for entirely new customer experiences. The International Data Corporation projected that by 2018, 70 per cent of siloed digital transformation initiatives will fail due to insufficient collaboration, integration, sourcing or project management, while by 2020 more than 30 per cent of existing IT vendors will not survive in their current forms, requiring customers to realign their preferred vendor relationships. As enterprises today look to evolve digitally and deliver differentiated experiences to their digitally-savvy customers and workforce, IT departments are struggling to keep up. And by the end

of 2017, market demand for mobile app development services is expected to grow five times faster than internal IT organisations can deliver them, according to Gartner Inc. “Banks today actually live in the pockets of individuals. So our contact centre solutions play a major role in that talk, they play a major role in customer satisfaction. It also plays a role is helping the bank to sell products and services via this channel and this channel is just not about voice but it’s also about texting and video. For instance, if you look at our VTM (virtual teller machine) solutions, they are basically based on the contact centre. Therefore selling more services can be carried out in a more cost effective manner. The major cost in every organisation is human resources not because they have too many or too little people; but it’s about how it can use this resource optimally,” said Areff. There a number of other solutions Avaya has helped banks with in terms of minimising their investment and resources using the EDP solutions, for example. Avaya also uses a speech analytics solution in banks to help them improve customer satisfaction. The contact centre acts as the main interface platform for the banks in communicating with their customers. Areff explained that thus far, positive customer reaction was received for the VTMs that have been deployed in bank branches and malls. He also revealed that the first UAE bank will go live with the VTM in the next three to six months, where after he expects the market to eventually follow.

Avaya showcases its smart business platform in Dubai.

more than

private banking

Committed, to you. Because you have built up your wealth in your own way, you expect a private banker to offer you a customised approach based upon excellence and trust. Being involved and motivated by the concerns of the clients we serve, for 160 years, our expertise has grown along with our customers. Banque Internationale à Luxembourg helps you to structure your assets for growth and preservation of wealth, and offers you the high level services you desire. Contact our private banking team by calling +971 4278 2900, or write us an email at contact-dubai@bil.com

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TECH FOCUS

Mashreq enhances Snapp ergonomics Aref Al Ramli, Head of Electronic Business & Innovation at Mashreq, discusses its mobile application fingerprint identification and banking functionalities

ashreq in March 2016 announced the addition of new user friendly features to its mobile banking application, ‘Snapp’. The app can now be accessed using the secure fingerprint login option for iPhone, and can also now sync with the Apple Watch. Cosmetic upgrades, as well as the introduction of new mobile banking functionalities, were also included in the upgrade. The new layout makes it more user friendly and convenient for customers to use, manage and make transactions. Aref Al Ramli, Head of Electronic Business & Innovation at Mashreq, explained that the latest version is the bank’s fourth major upgrade particularly on the back-end data application. All processing systems, business systems and the enterprise layers of the application and restyling for the application were included in the upgrade.

Tell us more about the new version of the app.

We took a bold step in animating a lot of the features in the application. We hired an external party for the first time [not a banking specialist per say] that was based out of Milan, Italy who worked more on the design experience. The main core features that were also upgraded were the touch ID, and exclusive functionalities such as our ‘M2M’ [mobile to mobile] transfer. It has ‘Peer to Peer’ capability which enables you transfer money to any account in the UAE using only the mobile number from your address book. So any user logging into Snapp can transfer money to anyone on their contact list to any bank within the UAE. Once a person sends money from a Mashreq account to a non-Mashreq account, the receiver will automatically be notified to input their IBAN account number. The account number will then be tied to the phone number for future deposits. We are the first ones in the region to have this feature.

Aref Al Ramli

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The second thing we introduced is the ‘Flash Transfer’. We wanted to test it in the Indian market first. This is a capability where you can send money to India and the recipient can either get the money credited to his account in India instantly, or he can go to an ATM and withdraw the money at any Axis Bank ATM. The uniqueness of this feature is, not only is the money transferred instantaneously into the account, but if the recipient does not have a bank account in India he can go and withdraw money from any Axis Bank ATM in the country. We have also introduced international bill payments where you can pay your bills in 117 countries through our mobile banking application. This is a new feature for the bank. Apart from that, we also have the ‘cardless cash withdrawal’, where you can withdraw cash from an ATM without using a debit card. You can login to Snapp and decide the desired amount, which generates a code. With the code you can go to the ATM and withdraw the money. The beauty of the feature is, if for example your family or friends are in a mall and need cash you can send the code and the amount to them to withdraw at the ATM.

What were the reasons that drove the launch of these new features and what has it achieved?

Customer convenience drove us to change, as we wanted a more modern design and an easier interface to use as well as better experience and more convenience–moving the app from merely financial enquiries to making transactions. Three parties were involved: Mashreq’s IT department, the Italian designers, and the third party mobile banking vendor. The feedback was positive, especially on the features and the design, customers have commented that the login is faster and they have access to more information with less effort.

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smart phone penetration in UAE at

87 91%

What is your outlook on the future of technological advancement in the banking sector?

Very promising in the GCC, particularly in the UAE, as we are amongst the highest smart phone penetration in UAE at 74 per cent. Infrastructure in terms of connectivity is quite robust, thus it is an ideal place for any digital platform. We are expecting a shift in mobile banking, from it being an enquiry platform to a transaction platform. We will perhaps one day see a movement to transactional banking. The launch of mobile wallets will take over, and plastics will not exist anymore. It is in everybody’s interest to move from cash to electronic banking. Although this trajectory will never

transactions are already % ofcarried out through electronic channels

of enquiries made on digital platforms and only nine per cent through the call centres

plateau, the progress might not be at the same pace. Statistics have shown that 87 per cent of transactions are already carried out through electronic channels, with 91 per cent of enquiries made on digital platforms and only nine per cent through the call centres. In terms of operations, our focus this year is on our mobile banking application and digitising our bank, providing better customer experience on the front line as well as making things faster on the back-end. We look to upgrade the application and processes of the bank. Over the next five to 10 years I see the bank move towards ‘no plastics’, with our operations digitised including the move to digital customer interactive platforms with virtual relationship managers.

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TECH FOCUS

Digital payments–don’t get left behind The era of payments management in core banking systems is over, says Mick Fennell, Vice President, Middle East & Africa, Volante Technologies

here are not many banks in the Middle East that have a separate, distinct, centralised payment engine running outside the core banking system. As of today, it’s probably only one or two banks in each country. However, that number is changing. Key banks in the region are sourcing new enterprise payment hubs and the numbers contemplating similar upheavals to the core of their bank, is growing. Why are banks willing to change? After all, core payment processing facilities are arguably the single most important transaction service provided to customers. Why create a separate system that requires integration, monitoring, separate environments, etc.? It’s actually just part of a bigger trend. Banks in the Middle East have seen a gradual eroding of the functional ownership of the core banking system. Up to 10 years ago, the number of separate, standalone treasury systems in the region were few and far between. Trade finance may also have been supported within the core system. Loan origination and loan processing were also seen as a core system process, likewise risk and reporting were commonly embedded

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Mick Fennell

in the core system. Today we are more likely to see separate systems for each of these functions. Banks have selected best-of-breed specialised systems to compete with new market entrants and to support more sophisticated and demanding clients.

In payments processing, cheques and cards have always had, and generally still do have, their own processing engines within the bank’s IT infrastructure. However, domestic and international remittances, as well as debit orders, have generally continued to be processed by the central core banking system. Whether they bought their core system from a vendor, or built the system in-house, a bank in the Middle East will still likely use the integrated payments module of that core system. Inherently, that payments module is integrated with services offered by the core system, be it accounting, customer information, static data, limits, fees and charges and reporting. Nevertheless, in spite of the benefits of this integrated all-in-one approach, banks that continue to rely on internal core banking system modules to process their payments are under ever-increasing pressure to change. This need for change is generated by a range of challenges, some more pressing than others depending on the specific financial institution. Bank customers also continue to demand greater transparency, faster execution, and more diverse ways to cont. on page 70

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integrate and communicate, whilst bank’s business heads continually push for new services, better analytics, and greater processing efficiencies. Core banking system payment modules were never built to cope with these types of demands. The digital payments era now requires a much greater level of agility, openness, and transparency. Banks need to orchestrate changes quickly, they need to continually take-on and rollout new payment types, new channels, and new clearing mechanisms. They need the capability to configure different orchestration flows, such as embedding a new service within an existing transaction lifecycle. Such enhancements cannot be applied efficiently or cost effectively when payment functions are embedded within a core banking system. Many have tried to ignore the inevitable by choosing to take an evolutionary approach. They seek to insulate their core system’s payments module from external change, through incremental add-ons, new modules and system upgrades. Whilst this may not be seen as the ideal approach, as the fundamental limitations of the core modules remain, it can still plug gaps and addresses specific projects and challenges. New channels can be added, new payment methods configured and new clearing mechanisms can be on-boarded. But over time, this incremental, evolutionary approach becomes ever more complicated, leading to longer rollout times for new services as well as increasingly risk laden and costly upgrades to the core system itself. Eventually, the organisation realises that competitor banks that have moved to a new centralised payment hub can service customers and market demands faster and consequently have a distinct competitive advantage. They have the agility to rapidly orchestrate changes to their process flows, integrate seamlessly with new services, and thus cope with the demands of the digital payments age.

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For banks that currently rely on the internal payments module of their core banking system be aware that the clock is ticking. The revolution is coming and soon you will be planning a major payments system transformation programme within your bank.

- Mick Fennell, Vice President, Middle East & Africa, Volante Technologies

Once this fundamental differentiator is understood, there should be no other choice but to take the revolutionary approach and move the central payment management and processing out of the core banking system and into its own dedicated payments hub focused on supporting four key capabilities to ensure competitiveness in the digital payments age: speed, flexibility, compliance and empowerment. Some of the biggest and most successful banks in the world have been running dedicated payment processing engines for many years, and as stated earlier, a number of

banks in the Middle East have already implemented such hubs to ensure support for the capabilities highlighted above. Over the coming years that number will expand as the reality of the limitations and costs of the incremental evolutionary approach will start to impact the competitiveness of the bank. Consequently, for banks that currently rely on the internal payments module of their core banking system be aware that the clock is ticking. The revolution is coming and soon you will be planning a major payments system transformation programme within your bank.

Challenges currently faced by banks: Increasing transaction volumes–payment volumes in emerging markets are increasing by 18.3 per cent per annum (World Payments report, 2014) putting a strain on system resources and impacting core system licence costs. Channel proliferation–increasing diversity in channels and payment instruments must be managed. From e-commerce initiatives to mobile wallets, the orchestration and management of these new transactions must be supported efficiently. Real time clearing–the global trend is towards faster, immediate payments and Middle East markets are starting to feel the pressure to support such dynamics. Changes in message standards–clearing mechanisms are moving to global ISO XML standards, demanding support in core systems for new and expanded data sets that help to populate and validate more dynamic message formats. Regulations–banks continue to drown under a sea of changing and expanding sets of regulations putting pressure on the system to amend core processes to embed a new function and/or provide active payment related data on demand. Source: Volante Technologies

The region’s most transparent awards

The BME100, a list of the region’s top-performing banks, is not only a benchmark in bank performance, but the judging process is unequivocally transparent. Each bank is ranked according to its financial performance relative to other regional banks, there are no grey areas. Every bank’s financial data is carefully scrutinised by our in-house analytics team and each bank is ranked in our BME100 list according to that financial data. Our analysts use the Data Envelopment Analysis (DEA) method for analysing the efficiency of the banks in the BME 100. The analytical framework of our BME100 reports is based on secondary data drawn from the annual reports of the major financial institutions and Islamic windows around the MENA region. In our analysis we measure the performance of the whole banking sector of the countries against each other and compare the best banks of each country against each other. Where annual reports are not publically available on the institution’s website for the year in question, the institution is not included in the analysis.

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Results are collated in the currency in which they are originally published and are then converted into US dollars and normalised before the institutional rankings are calculated. The currency conversions are carried out using the prevailing exchange rate at the end of each year and as published by the relevant Central Bank. The institutions are ranked according to both the absolute size of and the dollar value increase in size of the following: Assets Liabilities Income Net profit The rankings obtained within these areas are then combined to create an overall ranking.

CHECK OUT OUR LATEST BME100 HERE:

http://www.cpifinancial.net/flipbooks/SUPPLEMENTS/ 2015/BME1002015/

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PERSONALITY

Zoe Cousens Independent Investment Consultant and Member of the UAE National Advisory Board for the Chartered Institute for Securities & Investments

I have been working in the financial services sector for thirty years, mostly as an investment manager for high net worth clients, but I have also worked in treasury, funds and insurance during that long period of time, so I have a broad knowledge of the whole industry. I come from Guernsey in the Channel Islands which is a well-established, leading international offshore finance centre. Upon completing my business studies course at a London College, it was a natural progression for me to join that industry. My first experience of financial services was actually in Hong Kong where I had a contract with a private bank, before moving back to London for eight years where I was one of the first women to work in the London Stock Exchange in 1986, in the days before electronic trading was introduced. I would say my greatest achievement is moving from Guernsey to Dubai last year and establishing my own investment consultancy company from which I provide an independent investment oversight role to trustees, high net worth investors, regulators and family offices. This includes a monitoring service to ensure that clients’ objectives are being met by their investment managers, and their portfolios are being suitably invested and managed efficiently, for example. On re-locating here, I was also appointed as the first Middle East Representative for Guernsey Finance. I am fortunate to work for myself in a very varied role so there is no routine to my day at all. A typical day may vary from having meetings in the DIFC, to working from home, or attending a conference which may be taking place anywhere in the Middle East. The flexibility of managing my own business makes it hugely enjoyable. I do recognise the importance of

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having a disciplined approach when working usually from home, but fortunately time management has always been one of my strengths which is vital when meeting clients’ deadlines and expectations. I have just finished a bestseller by a Saudi Princess about the struggle for women’s rights in the Kingdom, and I am now reading a fascinating book on the role of Saudi Arabia in the modern world. I love reading all types of books, from historical novels and autobiographies, to the occasional business book, one of my favourites of which was written by Lord Digby Jones–whom I believe to be one of the most interesting men I’ve had the pleasure to meet. I love to play golf and tennis but I’m not a naturally gifted player so it’s always a struggle. I have re-started golf since moving to Dubai and I’m thoroughly enjoying playing in the sunshine on the pristine courses with breath taking views of the city’s skyline. With GCC oil dependency steadily decreasing and regional economies gearing more towards services and human/knowledge development, I believe the markets here are better positioned than ever to weather any storm. Government support for the financial sector has increased with an emphasis on the quality and sophistication of financial services ensuring that the industry is keeping up-to-date with global standards. Whilst acknowledging that we live in dangerous times, cycles of conflict have been seen before and are a regrettable feature of long-term historical charts. There is no doubt that we are enduring a period of uncertainty and volatility in global markets, but I believe it is important to have a long-term view of investing. Indeed, today’s risk premium could well be seen as an opportunity rather than a liability.

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LAST WORD

Mark Hirst

Founder & CEO, Blue Beetle On the importance of digitisation for UAE banks What is Blue Beetle and what does it do? Blue Beetle is a boutique full-service digital agency specialising in bespoke online solutions (i.e. websites and applications) that transform brands and grow businesses. We provide companies with services such as website and application design/development, content and email marketing, social media support, analytics, SEO (search engine optimisation) solutions, consultancy and strategy development. We work with clients across all major industry sectors, including brands in hospitality, retail, F&B, technology, property development and real estate.

What is your opinion on the digital aspects of the banking and finance industry in the UAE? It has come a long way. Sure there is still work to be done but it’s evident that it is, in fact, being done. Some of the online banking facilities here are superb including highly secure online banking portals and mobile apps on the offer. Most if not all the banks send you an SMS when a transaction happens and there is little reason to visit a branch these days. Having said that, some of the systems are quite dated and need revamping but the good news is that it’s happening.

What do you think is the biggest weakness of the banking industry in the UAE? I think one of biggest weaknesses is that the banks are islands with little collaboration and integration with each other. The charges for doing online banking transactions are also very high and if they weren’t, I think a lot fewer cheques would be in circulation. The fact that chequebooks are still used heavily here shows how behind the times we are.

Why should banks go digital? Very simply, if you don’t do it, you’ll be left behind. A bank that has embraced the digital revolution will [besides modernising and streamlining their business] look much more attractive to the new generation of customers than ones who have not. It’s all about speed and convenience. No one wants to have to go to a branch [and get stuck in traffic on the way]. We want to be able to do everything from anywhere and at any time. Better still, if it can be automated it should be.

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What are the must-have features on banks’ websites? People should be able to do as much as possible with their phone as the lowest common denominator and then move up from there. Make life super straightforward and easy for your customers. It’s about convenience and saving time. So an easy to use and intuitive online banking system is a must. Make pertinent information easy to find. It’s amazing how difficult it is to find out what a bank’s CBID code or sort code is sometimes–this type of information should be super easy to find. It’s also amazing how many bank websites and online portals do not support all the common browsers. Don’t make your users have to use a particular browser or browser version. Your website should be at least accessible in all latest versions of standard browsers.

What are your tips and advice in SEO for banking and financial industries? Know your customers inside out, see what they want and produce content that resonates with them. Create quality content that they are looking for and want to consume and share. SEO will follow suit automatically because search engines want to help their users find what they are looking for and if you are producing it, they will like your content.

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