#189 - November 2016

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NOVEMBER 2016 | ISSUE 189

Conquering GCC and the world

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Full details at: www.bankerme.com

Philippe Ghanem, CEO of ADS Securities

6 Middle East in the middle

30 Kuwait on stable ground

54 The need to teach old dogs new tricks

72 Business defence forum: the compliance front line

Dubai Technology and Media Free Zone Authority

“I am optimistic about global growth. We are better off than we think—businesses are much healthier, and regulators have done a very good job levelling the playing field.”

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CONTENTS

NOVEMBER 2016 | ISSUE 189

Editor’s Letter

W

News Analysis Middle East in the middle

8

News bites

THE MARKETS 12 Investors go alternative 16 Deutsche Bank disaster: the effect on emerging markets 20 Bonds are for capital gains, equities are for income COVER STORY 24 Conquering GCC and the world COUNTRY REPORT 30 Kuwait on stable ground ISLAMIC FINANCE 36 Turkey gains ground in global Sukuk market

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SEPTEMBER 2016

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NOVEMBER 2016

rante Magsakay /CPI Financial

PRIVATE BANKING 40 Adapting for future growth

| ISSUE 189

| ISSUE 187

Conquering GCC and the world CEO of ADS Securities

“I am optimistic about growth. We are better global we think—businesse off than s are much healthier, and regulato rs have done a very good job the playing field.” levelling

10 Keeping up with

constant change

n 38 Sophisticatio

in investments

Conquerin GC C and the wogrld

Philippe Ghane m, CEO 6 Middle East in the middle

Get the next issue Banker MiddleofEast before it is published.

Full details at: www.bankerme.com

of ADS Securities

30 Kuwait on stable ground

54 The need to teach old dogs new tricks

Zone Authority

and Media Free

50 Staying relevant

and Media Free

masses 42 Reaching the

Get the next issue ofEast Banker Middle before it is published.

Full details at: m www.bankerme.co

Dubai Technology

l Group , CEO, GFH Financia Hisham AlRayes

Dubai Technology

Onwards rds and upwa

Zone Authority

reflects “The MENA region , yet at a lot of challenges to see the same time, I like ies.” them as opportunit

Photo credit: Flo

Philippe Ghanem,

Group

BankerMENA

6

20

CEO, GFH Financial

Editor

24

Hisham AlRayes,

Nabilah Annuar

12

Onwards and upwards

hen the US presidential elections came to a close, one could not help but feel an overwhelming grey cloud looming.

The appointment of Donald Trump as the new leader of the free world brings more uncertainty for the coming year. With ongoing riots in the US, the fate of the nation appears to be hanging in the balance. While it is important to watch closely how things develop over the next few months, we are yet to see how the president-elect and his administration approaches issues of trade and foreign policies.

Clearly, going into 2017 is all about embracing change and adapting to new norms. These new realities include the Trump administration, lower oil prices, the likely end of negative and zero interest policies in Japan and Europe, and the unwinding of quantitative easing by the European Central Bank. In acclimating to these new fundamentals, one should start looking at things from a new perspective.

As terrifying as many things may have been over the past 18 months, it is not as bad as it seems. Markets did not crash over Trump’s victory—in fact stock prices saw an uptick the day after. Similarly, in spite of the Brexit vote, UK is still experiencing an upward trajectory in its domestic market. Global economic growth may be very sluggish, but it is growth nonetheless—it may not be as healthy as it was five years ago, but it is still growing.

And this is what matters.

Our November issue explores the road less travelled, taking a look at developing global trends that bode well for the region (pg. 6), as well as investment patterns and lessons for emerging markets (pgs. 12-20). Speaking to ADS Securities, the cover interview this month provides an insight into the Middle East’s largest brokerage firm (by volume) (pg.

24), and this is followed by an In Depth discussion on this market segment (pg. 54)—a relatively new component in the country’s financial landscape.

Touching various aspects of our current concerns in the market, as usual Banker Middle East provides you with a frank and thorough analysis of crucial issues that affect financial institutions and the wider economy.

72 Business defence the compliance forum: front line

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CPI Financial

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CONTENTS

NOVEMBER 2016 | ISSUE 189

IN DEPTH 46 Commitment to the people 50 Qatari vision leading into the future 54 The need to teach old dogs new tricks PRODUCT SPOTLIGHT 60 Creating better value for minority

46

EVENT 72 Business defence forum: the compliance

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

shareholders in unlisted securities

TECH FOCUS 64 It’s time to wake up and smell the coffee 68 Digital banking: the road ahead

www.bankerme.com

60

front line

PERSONALITY 78 Ziad Awad, Chief Executive Officer, Awad Capital

78

Chief Commercial Officer OMER HUSSAIN omer@cpifinancial.net Tel: +971 4 391 5419 EDITORIAL editorial@cpifinancial.net

ADVERTISING sales@cpifinancial.net

Editor Banker Middle East NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726

Sales Director Banker Africa JON DESPRES jon@cpifinancial.net Tel: +971 4 433 5321

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 London Bureau ISLA MACFARLANE isla@cpifinancial.net Tel: +44 7875 429476 Contract Publishing Editor SARAH SPENDIFF sarah.spendiff@cpifinancial.net Tel: +971 4 391 3729

72 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

ou

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Managing Editor GEORGINA ENZER georgina@cpifinancial.net Tel: +971 4 391 3728

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 4 433 5320 NAPOLEON ESTAMPADOR nap@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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Events Manager Finance Manager NATALIA KAILA SHAIS MEMON, ACCA, CMA natalia.kaila@cpifinancial.net Shais.memon@cpifinancial.net Tel: +971 4 365 4538 Tel: +971 4 391 3727 Administration & Subscriptions enquiries@cpifinancial.net Tel: +971 4 391 4682 Tel: +971 4 391 3709

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NEWS ANALYSIS

Middle East in the middle Demographic and social change, shift in global economic power, rapid urbanisation, climate change and resource scarcity, as well as technological breakthroughs to dictate and shape the future of the region

P

ivotal trends that are developing across the globe are all believed to be absorbed by the Middle East.

Oil rich nations across the region have experienced rapid developments in their respective economies. GCC countries in particular are witnessing a change in demographics, experiencing the gradual shift in global economic power, urbanisation, technological breakthroughs and natural resource issues—as are the rest of the world.

PwC in a recent report highlighted that these developments will continue to impact the Middle East over the coming decades. These profound changes that are disrupting and reshaping the region’s economies, society and industries, compounded by the urgency caused by the sharp

6 page 6-7 News Analysis.indd 6

drop in oil prices. The professional services firm, understanding these key structural megatrends is vital to gain a clear and collective understanding on how to successfully tackle the challenges the Middle East faces and to uncover opportunities that may have never been considered in the past.

“The Middle East today sits at the epicentre of megatrends that are reshaping our world; our ‘new normal’ era of low oil price and squeezed liquidity has therefore created the impetus for urgent action. While it is true that the urgency of the transformation currently underway is a reaction to the sharp drop in oil revenues, the direction of change— and its complexity—is an inevitable response to these multiple global forces,” commented Hani Ashkar, PwC Territory Senior Partner, Middle East.

Shift in global economic power has placed the Middle East firmly in the middle of the world’s fastestgrowing markets and allowed Dubai in particular, to turn itself into a global hub for aviation, tourism and logistics. Through Dubai International Airport, the city has also turned itself into a key link, connecting the economies of the East and the West and placing the UAE within a four-hour flight of 40 per cent of the world’s population.

Demographic and social change has driven both prosperity and instability in region, as explosive population growth has boosted economies, strained resources and raised the spectre of youth unemployment. The Middle East has led the emerging market population boom in the past decade, said PwC.

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14/11/2016 16:05

This means that the region is young, with 40 per cent of its population under 25; it is also a region with one of the highest youth unemployment rates in the world, standing at 28 per cent. The population in the Middle East is expected to rise by almost 50 per cent over the next 25 years—at a rate faster than that of India, however its age pyramid will shift by 2050, with far more elderly nationals in the GCC (20 per cent) than the expected world average (16 per cent). Therefore, leveraging on the youth’s brain power and capabilities has become vital for economic prosperity in these countries.

Although rapid urbanisation continuously transforms nations worldwide, the Middle East still remains one of the most highly urbanised in the world. With new cities under construction, this level continues to rise—making it a struggle to develop sufficient infrastructure to cope with this population explosion. However, the years of skyrocketing population expansion are now almost over, with focus shifts

The Middle East has one of the highest youth unemployment rates in the world at

28%

Projects planned or under construction in MENA are worth

$4 trillion

GCC relies on desalination for

70%

of its water and water consumption is forecasted to grow a third by 2020

The Middle East today sits at the epicentre of megatrends that are reshaping our world; our ‘new normal’ era of low oil price and squeezed liquidity has therefore created the impetus for urgent action.

— Hani Ashkar, PwC Territory Senior Partner, Middle East today making urban spaces function optimally, as evidenced by the public transport build-up in Dubai, or in the development of new cities such as King Abdullah Economic City in Saudi Arabia and plans for a new capital city East of Cairo. According to PwC, this reflects the $4 trillion opportunity of projects planned or under construction in the Middle East and North Africa.

Climate change and resource scarcity is now a pressing issue for the Middle East more than ever.

Changing the way humans use the planet’s resources will impact GCC countries more than most, given that GCC countries are among the world’s highest consumers of energy and water per capita. Water in particular, will become a significant challenge in the coming decade, with the GCC

already relying on desalination for 70 per cent of its water and water consumption being forecast to grow by one-third by 2020.

Nevertheless, technological breakthroughs could be part of the answer to these issues, but the disruption that digitalisation is bringing to today’s organisations also requires new skills that are in short supply in the Middle East. The Middle East has many of the right ingredients to benefit from new technologies, with young, tech-savvy populations in countries like Saudi Arabia ranking fourth globally in active Twitter usage, and the UAE reaching 78 per cent smartphone penetration. However, most companies and government entities are struggling to develop digital strategies and are lagging in terms of digital innovation, R&D and the development of new technologies. For instance, R&D expenditure in Saudi Arabia and the UAE is still below one per cent of GDP—well behind European averages and far behind the world’s biggest R&D spenders such as South Korea.

“Governments know they need to cut subsidies, expand their fiscal base and bring private investment and corporate practises into state entities. But they also know they need to keep building infrastructure and enable technology and innovation. From transportation to energy, healthcare to manufacturing, changes of this magnitude can unveil unforeseen threats and challenges,” said Stephen Anderson, Middle East Clients and Markets Leader at PwC. Evidently there are many factors that affect the development of countries in the Middle East. Social, economic, external and internal shifts as well as technological advancements are clearly the region’s main drivers that governments should watch very closely. These factors can both make and break these nations if not navigated carefully.

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7 14/11/2016 16:05

NEWS

BITES

UAE and KSA insurance sectors remain resilient despite economic headwinds

FGB-NBAD merger to conclude in Q1 of 2017

EY in a recent report has highlighted that the UAE and Saudi Arabia’s insurance markets have remained resilient despite ongoing economic uncertainty. The size of the insurance industry in the Gulf has more than tripled since 2006, and insurance premiums have increased with it. The insurance sector in the UAE is experiencing modest growth and lower risk with premiums projected to grow by 12 per cent CAGR to 2020. However, this growth has also spurred increased competition and reduced overall profitability of the sector. A new law requiring compulsory health insurance for all Dubai residents, which is being implemented over two and a half years, is also expected to be a key driver for the industry. In addition, new regulations aimed at strengthening governance, compliance and risk management are expected to spur a round of consolidation.

Saudi Arabia’s insurance market on the other hand is experiencing lower growth and lower risk, but is now one of the largest in the region, having grown to rival that of the UAE. The traditional prominence of corporate business in Saudi Arabia means that brokers and agents play a larger role in the Kingdom than in other more developed markets. While growth over the past half-decade has been vigorous, the penetration rate is just 1.1 per cent, meaning there is a high degree of untapped growth potential in the market. Premiums are projected to grow by nine per cent CAGR through to 2020.

Additionally, because of a lack of product differentiation, insurers tend to compete on price rather than on value-add services or unique product features.

Health insurance has been the primary generator of premiums. However, the potential of new legislation to require many public facilities like shopping malls, restaurants and schools to have insurance cover, could rapidly expand the size of the property and casualty market.

“The global macroeconomic outlook has not been kind to emerging markets in the past year, but over the longer term, powerful structural changes will continue to make emerging markets vital to the future growth of insurance carriers. In the Middle East region, despite day-to-day fluctuations in the oil and commodity prices, the demographic growth and urbanisation in the region continue to take hold, as does middle-class growth. The rise of internet and mobile technologies will also accelerate the adoption of new insurance products tailored to new customers and their needs,” said Sanjay, EY MENA Insurance Leader.

National Bank of Abu Dhabi (NBAD) has announced that it will continue to work with First Gulf Bank (FGB) towards the integration of the combined entity. Over the course of the third quarter, there have been a number of developments, with the two banks expecting to complete the merger in the first quarter of 2017 as planned.

A senior management team has been selected to lead the combined bank. The appointments were announced internally and will be made public ahead of the completion of the merger. The amalgamation is subject to a number of conditions, including the approval of the merger by at least 75 per cent by value of the shares represented at quorum general assembly meetings of NBAD and FGB. The merger is also subject to receipt of all required regulatory approvals.

EY Infographic - Risk Opportunity Matrix for insurance investment 0.8 High risk, low growth Argentina

Risk (0=lowest risk, 1=greatest risk)

0.7

Brazil

High risk, high growth Uganda Vietnam

0.6 Kenya

0.5 0.4

Nigeria

Thailand

India

Turkey

Colombia

0.2

Saudi Arabia

South Korea

0.1

Indonesia

South Africa

Mexico

0.3

Russia

China UAE Malaysia

Chile

Hong Kong

-20%

Singapore 0.0 Low risk, low growth 0% 20% 40% 60% US$ Value market growth, 2015-20 -0.1

Low risk, high growth

80%

100% Source: EY

8 page 8-10 News Bites.indd 8

Egypt’s currency devaluation no impact on banks, country still stable Egypt’s decision to devalue its currency and adopt a flexible exchange rate regime is not expected to have any immediate implications for sovereign and bank ratings, according to Capital Intelligence Ratings (CI). It expects the impact of exchange rate devaluation and higher interest rates to be manageable for rated banks. This is partly a reflection of prudent Central Bank of Egypt policy and regulations, along with improved risk management practises at the banks.

Separately following Egypt’s devaluation decision and fuel subsidy cut, the IMF has approved the three-year $12 billion Extended Fund Facility announced in August. The increase in inflation in the near term on the back of these decisions as well as interest rate hikes will weigh on domestic consumption and may raise social tensions, while fiscal and external deficits remain.

S&P has revised its outlook on Egypt from negative to stable, affirming its ‘B-/B’ long and short-term sovereign credit ratings on the country. The stable outlook balances Egypt’s external and fiscal vulnerabilities, against likely IMF support following the government’s upfront delivery on programme reforms.

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14/11/2016 16:07

NEWS BITES

Saudi construction sector poses risks for banks Rising challenges in the Saudi construction sector will lead to rising nonperforming loans (NPLs) and higher provisioning costs for the country’s banks, says Moody’s in recent a report published today. The research and ratings agency expect to see a reduced project pipeline and rising indebtedness across the sector to affecting the banking industry.

The Saudi construction sector has been negatively affected over the last two years by slowing economic activity and fiscal consolidation measures, stemming from a lower oil prices environment. Moody’s expect the pressures to continue as the Saudi government aims to reduce its large fiscal deficit. As a result, the building and construction sector will likely contribute materially to the increase in nonperforming loans (NPLs) at Saudi banks—NPLs are expected to rise to around 2.5 per cent of gross loans in 2017, from around 1.5 per cent estimated as of June 2016.

Saudi banks’ exposure to the building and construction sector increased by 19.7 per cent year-on-year as of June 2016. This is well above the 8.9 per cent increase in total bank credit over the same period and has contributed to a material increase in the sector’s indebtedness. The NPLs associated to the building and construction sector is already the highest when compared to other sectors, at 3.1 per cent of gross loans as of year-end 2015 (up from 2.8 per cent as of year-end 2015) versus a total reported NPL ratio of 1.2 per cent.

The building and construction sector in Saudi Arabia is already the main contributor to NPL formation at Saudi banks over the past five years and Moody’s expect this to remain the case in the coming quarters. This is indicated by the increasing proportion of NPLs in this segment, accounting for SAR 4.1 billion or 27 per cent of system NPLs as of year-end-2015, up from SAR 1.9 billion or eight per cent of system NPLs as of year-end 2010, and a number of leading indicators of asset-risk trends monitored by Moody’s point to rising pressures that will stem from the construction sector in next 18 months.

AUB’s issues perpetual Sukuk worth $200 million Ahli United Bank (AUB) has successfully issued its $200 million Perpetual Additional Tier 1 Sukuk. To be listed on the Irish Stock Exchange and NASDAQ Dubai, the Sukuk adds a new source of cost effective funding for AUB’s capital which will further diversify its capital and funding base. The paper was oversubscribed and will assist AUB in both sustaining its growth momentum and optimising its capital resources.

RATINGS REVIEW Entity

Abu Dhabi

LT IDR/LT Rtg (FC)

Bahrain Egypt

Lebanon

Kuwait Ras Al Khaimah Turkey

Saudi Arabia Qatar

AA

BB+

B

B-

ST IDR/ST Rtg (FC)

F1+

BB+

B

B-

B F1+

A BBB- AA

AA

B

AA

AA-

LT IDR/LT Rtg (LC)

Under Review

Country Ceiling

B

BBB+

B

B-

B

B

AA+

B

F1+

AA+

F1

A

F1

AA+

F3

BBB-

F3

F1+

AA

F1+

AA-

Positive Negative Evolving Stable

F1+ F1+ OUTLOOK

BBB

AA+ AA+

WATCH

M&A reaches $37.4 billion in the first nine months of 2016 Estimates from Thomson Reuters/Freeman Consulting suggested that the value of announced M&A transactions with any Middle Eastern involvement reached $37.4 billion during the first nine months of 2016. This is 19 per cent more than the value recorded during the first nine months of 2015 and the highest first nine month total in the region since 2010.

The $14.1 billion merger of National Bank of Abu Dhabi and First Gulf Bank was the largest deal to be announced in the region so far this year, it is the largest domestic Middle Eastern deal of all time. Boosted by this deal, domestic and inter-Middle Eastern M&A increased 149 per cent yearon-year to $20.5 billion. Outbound M&A activity fell 24 per cent from first nine months 2015 to reach $11.4 billion.

Overseas acquisitions from Qatar accounted for 41 per cent of Middle Eastern outbound M&A activity, while acquisitions by companies based in Saudi Arabia and UAE accounted for 34 per cent and 11 per cent, respectively.

Inbound M&A fell 53 per cent to $2.2 billion. Financials was the most active sector, accounting for 45 per cent of Middle Eastern involvement M&A, followed by technology and real estate. Credit Suisse, which advised the Abu Dhabi banking merger with UBS, topped the first nine months 2016 announced any Middle Eastern involvement M&A league table. UBS ranked second.

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page 8-10 News Bites.indd 9

F1+

AA

KEY

UR

ST IDR/ST Rtg (LC)

9 14/11/2016 16:07

NEWS

BITES

Outlook on Oman revised to negative by S&P S&P in a recent ratings action revised its outlook on the Sultanate of Oman from stable to negative. Its long- and short-term foreign and local currency sovereign credit ratings was affirmed at ‘BBB-/A-3’.

The revision reflects that Oman’s fiscal consolidation could take longer than expected. S&P assumes that government financing needs will largely be funded externally due to the Sultanate’s narrow domestic capital markets. As a result, the economy’s external debt could exceed its liquid external assets by more than anticipated, thereby limiting buffers to offset external pressures.

The widening of Oman’s current account deficit and deterioration in its external position has moved in tandem with the worsening of the government’s fiscal position. With government spending remaining relatively high in the context of the sharp decline in government oil revenues, import levels remain broadly supported at levels prior to the sharp decline in oil prices in mid-2014.

A stable outlook for the UAE banking system Moody’s in a recent report has maintained a stable outlook for the UAE banking system, reflecting the rating agency’s view that resilient capital and liquidity buffers will help to protect banks’ credit profiles despite the continued economic slowdown.

Moody’s expects real GDP growth of around 2.5 per cent and 1.9 per cent for 2016 and 2017, down from 3.2 per cent in 2015. This economic slowdown will lead to modest increases in new problem loan formation, particularly in SMEs and retail segments. Profitability will remain strong, with Moody’s expecting a broadly stable return on assets at around 1.7 per cent over the outlook horizon.

Although funding costs and provisioning costs will likely increase, the rating agency expects them to be offset by rising corporate yields combined with loan growth (subdued at three to five per cent) and modest efficiency gains. Capital buffers are likely to improve and Moody’s expects tangible common equity to increase modestly to around 15per cent of risk weighted assets by 2017, up from 14.3 per cent as of December 2015.

In addition, loan-loss reserves were a solid 94 per cent of problem loans as of June 2016, the rating agency expects this level of coverage to continue.

Softening in Dubai’s real-estate market will pose only moderate asset quality challenges as the market recovery was driven by end-use demand and lending practises have been tightened since 2009 crisis. Government support for UAE banks will likely remain high, reflecting the government’s continued willingness and its strong capacity to provide financial support if the need arises, despite fiscal pressure from falling oil revenues.

A Trump world The election of Donald Trump as the next president of the US will one way or another change the country’s relationship with the rest of the world. Among the issues that have been raised by the president-elect are—the effectiveness of NATO, political ties with Russia, withdrawal from free trade agreements, the Iranian nuclear accord, nuclear weapons in Asia, and the validity of climate change.

Commenting on the election results, Lindsay Newman, Principal Analyst, IHS Country Risk said, “The main take away is that Trump will look to initiate a series of rollbacks on President Obama’s policies… With the additional benefit of a Republican majority in both houses of Congress, Trump will also prioritise his flagship tax reform initiatives including reducing the number of tax brackets from seven to three and cutting corporate tax rates across the board from 35 per cent to 15 per cent.”

IHS further explains that Trump’s foreign policy is guided by an “America First” principle, emphasising strength at home rather than engagements abroad. Under the America First platform, Trump has pushed for strong trade protectionism and a retrenchment from the free trade agenda supported under Obama. Under his first 100-day action plan, Trump suggests he plans to renegotiate or give notification of a withdrawal from the North American Free Trade Agreement and the TransPacific Partnership, as well as label China a currency manipulator. This suggests that increased use of World Trade Organisation dispute settlement mechanisms, especially those pursuing Chinese industry, are likely in the next two years.

10 page 8-10 News Bites.indd 10

Lebanon sees a clear path to implement reforms Lebanon’s (B2 negative) parliament has recently voted to elect Michel Aoun as the country’s president, filling a post that had been vacant since May 2014. The election marked a compromise between the country’s two key political alliances—the ‘8 March coalition’ (which includes Aoun and his party) and the ‘14 March coalition’. Moody’s, in a statement, said that this reflects a higher level of consensus among political parties and could signal an end to the political paralysis that has undermined government effectiveness and led to persistent delays in reforms. Stalled reforms have stunted growth and worsened public finances.

The election would be credit positive for the sovereign if other cross-party agreements on economic and fiscal reforms follow. It is also likely to strengthen the confidence of non-resident depositors in Lebanon’s long-term economic prospects. Functioning government institutions will reinforce the country’s capacity to implement reforms and absorb external shocks.

Lebanon’s central bank, Banque du Liban, has passed quasi-fiscal packages of more than $1 billion a year since 2013 by directing credit at growth-enhancing sectors. However, the room for further support from commercial banks has tightened as their net foreign liabilities increased to $18 billion in August from $15 billion at the beginning of the year, the acceleration of a trend that began in 2011, when banks had a net foreign asset surplus.

The ratings agency expect improvements in policy effectiveness to only be gradual given that several challenges remain.

The forming of a new government could take several months, during which time sectarian political divisions could resurface.

Additionally, the country’s complex political system has prevented the formulation and implementation of policies even in the presence of a president. For example, not a single budget has been passed since 2005.

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14/11/2016 16:09

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28/08/2016 10:58

THE MARKETS

Investors go alternative

D

iversity and yield have been the main drivers of demand for alternatives, as institutional investors increasingly search outside of traditional bonds and equities both to improve the return elements of portfolios whilst minimising their risk profile. Going forward, volatile market conditions and uncertainty are only likely to increase this shift.

A research report by Willis Towers Watson has recently found that total assets managed by the top 100 alternative investment managers globally, reached $3.6 trillion up three per cent from the previous year. Covering ten asset classes and seven investor types, the Global Alternatives Survey, which shows that of the top 100 alternative investment managers, real estate managers have the largest share of assets (34 per cent and over $1.2 trillion), followed by hedge funds (21 per cent and $755 billion), private equity fund managers (18 per cent and $640 billion), private equity funds of funds (PEFoFs) (12 per cent and $420 billion), funds of hedge funds (FoHFs) (six per cent and $222 billion), infrastructure (five per cent) and illiquid credit (five per cent).

Data from the broader survey (all 602 entries) shows that total global alternative assets under management (AuM) is now $6.2 trillion. The research shows, for the first time, the level of assets in insurance-linked investments is around $30 billion,

12

Luba Nikulina

of which almost two-thirds is invested in Europe, by 13 asset managers.

Luba Nikulina, Global Head of Manager Research at Willis Towers Watson, said, “We have seen an evolutionary step in institutional investors’ understanding of the extent that alternatives can fulfil this dual purpose, with many adopting more sophisticated strategies in order to capture specific return factors rather than simply diversifying by asset class alone.

This is being reflected in the breadth and depth of product choices available to institutional investors, whether in the proliferation of alternative beta strategies, or in secure income strategies which satisfy their desire for both

diversity and yield. Illiquid credit is a further method for institutional investors to diversify return drivers and improve overall portfolio effectiveness, whilst also adhering to a low risk yet return seeking profile.”

The research—which includes data on a diverse range of institutional investor types—shows that pension fund assets represent a third (34 per cent) of the top 100 alternative managers’ assets, followed by wealth managers (19 per cent), insurance companies (10 per cent), sovereign wealth funds (six per cent), banks (two per cent), funds of funds (two per cent) and endowments & foundations (two per cent).

According to the paper, among the top 100 managers, North America continues to be the largest destination for investment in alternative assets (50 per cent), with illiquid credit and infrastructure being the only asset classes where more capital is invested in Europe. Overall, 37 per cent of alternative assets are invested in Europe and eight per cent in Asia Pacific, with five per cent being invested in the rest of the world.

Pension fund assets, managed by the top 100 asset managers by pension funds, increased again from the year before to reach almost $1.5 trillion.

Real estate managers continue to have the largest share of pension fund assets with 40 per cent, followed by PEFoFs (20 per cent), hedge funds (10 per cent), private equity (nine per cent),

Photo credit: g0d4ather/shutterstock.com

Luba Nikulina, Global Head of Manager Research at Willis Towers Watson, discusses the progress of the alternative asset management, which has reached $6.2 trillion

cont. on page 14

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12/07/2016 09:24

THE MARKETS

cont. from page 12

infrastructure (eight per cent), FoHFs (seven per cent) and illiquid credit (four per cent).

Nikulina pointed out that there is an increasing profusion of choice for institutional investors wishing to diversify their portfolios. A typical example of this is the increasing number of ‘alternative beta’ strategies— such as reinsurance, carry, value, momentum, merger arbitrage—outside of the traditional hedge fund structure available for significantly lower fees and with much better alignment. There is continued interest and more options available in real estate, infrastructure and other real assets, particularly in secure income strategies where investors are searching for both yield and diversity as an alternative to traditional hedging with government debt securities.

Illiquid credit, governance permitting, is another alternative way of diversifying sources of return and improving overall portfolio efficiency as part of both low risk and return-seeking portfolios.

The survey shows that at the end of 2015, the top 25 alternative asset

FoHF*

Direct Hedge Funds*

Private Equity FoF*

managers of wealth management assets managed $476 billion (up four per cent), followed by the top 25 managers of insurance company assets ($304 billion—up one per cent); the top 25 managers of sovereign wealth fund assets ($173 billion—up eight per cent); the top 25 managers of bank assets ($100 billion—down 10 per cent); the top 25 managers of fund of funds assets ($89 billion—down 10 per cent); and the top 25 managers of endowment and foundation assets ($87 billion—up eight per cent).

The shift away from equities and bonds into alternatives is believed to have gained momentum among most institutional investors around the world, as these strategies have helped to manage risk through diversity.

Persistent economic uncertainty coupled with highly volatile conditions is likely to reinforce this trend.

“Whilst performance has been encouraging and a primary reason for continued growth in alternative assets, a continued area for development is ensuring that managers can demonstrate Direct Private Equity Funds*

Direct Real Estate Funds

Direct Direct Commodities Infrastructure Funds Funds

to asset owners an alignment of interests when it comes to costs. Managers that are best able to provide evidence of this, alongside a track record of innovation and stable performance in a volatile macro climate, are likely to fare well,” added Nikulina.

According to the research, Macquarie Group is the largest infrastructure manager with over $95 billion and tops the overall rankings, while Blackstone is the largest private equity manager with over $94 billion and the largest real estate manager with also almost $94 billion. In the ranking Bridgewater Associates is the largest hedge fund manager with $88 billion and Blackstone is the largest FoHF manager with almost $68 billion. Goldman Sachs is the largest PEFoF manager with almost $45 billion and M&G Investments is the largest illiquid credit manager with over $33 billion. PIMCO is the largest commodities manager with $10 billion, the largest manager of real assets is TIAA with over $7 billion and LGT Capital Partners is the largest manager of insurance-linked investments.

Real Assets

Illiquid Credit

Insurance Linked Investments

Total

USD billion Top 100 total assets

222.2

754.6

419.7

640.2

1,241.9

–

167.1

–

169.1

–

3,614.4

3%

Top 100 Pension Fund assets

107.3

149.5

295.4

127.5

604.6

–

126.8

7.4

66.8

7.4

1,492.8

5%

Top 25 Insurance Company assets

13.0

–

26.8

10.3

174.4

–

16.0

–

64.0

–

304.4

1%

Top 25 Sovereign Wealth Fund assets

26.2

29.8

6.5

40.8

52.6

–

12.5

4.6

–

–

173.1

8%

Top 25 Endowment & Foundation assets

12-0

26.9

9.9

25.5

10.8

–

–

–

2.1

–

87.1

8%

Top 25 Fund of Funds assets

–

36.7

–

48.0

2.0

–

–

–

2.2

–

88.8

10%

Top 25 Wealth Manager assets

74.6

99.9

31.3

33.5

207.9

–

28.4

–

–

–

475.6

4%

Top 25 Bank assets

22.2

8.2

9.2

5.8

36.9

–

7.3

–

10.7

–

100.0

10%

* Figures for some of these managers were obtained from publicly available sources and using data derived from the Global Billion Dollar Club, published by HedgeFund Intelligence.

Source: Willis Towers Watson

14

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THE MARKETS

Deutsche Bank disaster: the effect on emerging markets The problems of international financial institutions could adversely affect emerging markets, writes Mihir Kapadia, CEO and Founder of Sun Global Investment

T

he financial world pans across two contrasting but mutually dependent landscapes—the developed economies built around tight-fitting dominoes, and the economies that are still developing, striving to assemble their market structures. Growth, especially over the past two decades, has been accelerating in the emerging economies including the Middle East, India and Asia Pacific; these economies are growing at a faster rate than the steadier pace of growth experienced by the developed western economies.

A shiver in the West would mean a shake in the East. While this analogy might draw an image of the West as a sagacious figure guiding the latter, this is not the case.

Mihir Kapadia

cont. on page 18

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THE MARKETS

cont. from page 16

The leading financial districts in the Western world including London, Frankfurt and New York mutually trade and depend on emerging markets’ commodities. Deutsche Bank, though a dominant bank in Germany, has struggled for decades to make meaningful returns in the domestic retail banking sector due to competition from savings and co-operative banks, and others who are under little pressure to maximise profitability. In response, Deutsche Bank built up its operations focusing on international investment banking and trading. Such a strategy implies going wherever global capital flows.

Given the strong growth in emerging markets compared with developed markets, a significant element of the capital flows have been from savers and investors in developed economies to issuers and borrowers in emerging markets. Like other banks, Deutsche Bank has been involved in intermediating these flows. It has been very strong in fixed income and in derivatives as has built up one of the largest portfolios of the latter of any bank.

Deutsche Bank has had a fundamental problem with cost and profitability for many years. As its global business volumes expanded manifold since 1998, the company struggled to make reasonable returns even when the markets were in good shape. It was only able to achieve decent number for return on equity by running dangerous levels of leverage.

Markets have not been in a good shape since 2007. Banks suffered heavily during the global financial crisis and have recovered strongly since 2009. This has been boosted by low interest and quantitative easing by the central banks. However, Deutsche Bank underperformed and its share prices had fallen to EUR 20; compared with a peak of EUR 104 in 2007.

18

The Deutsche Bank share price has halved further in 2016; investors are worried about the failure of fundamental restructuring in European banks, the impact of negative rates on bank profitability and most recently very large fines imposed by US regulators.

— Mihir Kapadia, CEO and Founder of Sun Global Investment

Deutsche Bank’s share prices has fallen to

EUR 38; compared with a peak of

EUR 104 in 2007

The Deutsche Bank share price has halved further in 2016; investors are worried about the failure of fundamental restructuring in European banks, the impact of negative rates on bank profitability and most recently very large fines imposed by US regulators. The stock is at the EUR 10-12 range and is trading at a 75 per cent discount to the last stated book value per share.

One key reason for this is the huge $14 billion fine threatened by the US Department of Justice, though this is widely expected to be reduced after negotiations. It would be very negative for Deutsche Bank if is not reduced. The low share price also reflects market fears that the bank faces significant write downs and that

the book value is overstated. This would lead to a need for bolstering capital and raises the spectre of a highly dilutive rights issue in order to boost its capital ratios.

In any case, whatever happens, Deutsche Bank will have to reduce assets significantly. There is fear that the problems of Deutsche Bank and other international banks will lead to a reduction in the flow of loans to emerging markets and an increase in the cost of credit. However, flows through the markets (rather than baking channel) are likely to be significant.

Emerging markets are likely to continue to grow and capital will flow to them. However, it is likely that Deutsche Bank will have a much smaller role in intermediating those flows than it has in the past. The US banks are in a stronger position than Deutsche Bank and other European banks.

Stable developing markets including the Middle East, Brazil, Russia and India would be hoping for some market clarity and global markets wait to see if the scenario will trigger a repeat of the 2008 meltdown. The growth approach of the emerging markets has been to cut interest rates to restart growth, and countries such as Brazil have been making such moves to attract foreign investments backed by these banks.

Their whole economic stability and growth prospects would be at threat if Europe falters.

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Photo credit: g0d4ather/shutterstock.com

THE MARKETS

Bonds are for capital gains, equities are for income With bond yields near zero per cent, it’s time for older investors to think about a new strategy, writes Hans Goetti, Chief Strategist Middle East & Asia, Banque Internationale A Luxembourg 20

L

ooking at the long-term trend in asset prices there are many factors at play. During the last few years the most important one has been the role of central banks, which was characterised by continued meddling and interventions in the pricing of assets ranging from bonds, to equities, to real estate, to precious metals.

The other very important determinant of asset prices has to do with demographics, particularly the role of baby boomers as workers, savers and investors.

The first of the baby boomers (those born between 1946 and 1964) turn 70 this year. For the next decade there will be 1.5 million people turning 70 each year which will bring the share cont. on page 22

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THE MARKETS

cont. from page 20

of the population in the US above 70 years of age from 10 per cent today to 15 per cent.

The challenge is that this age group does not have sufficient savings which would enable them to retire. As a consequence they continue working, which is evidenced by the fact that employment growth in the age cohort over 65 is close to seven per cent year-on-year, faster than any other age group. Instead of riding into the sunset or going on cruises they will continue working, simply because they need the cash flow. Moreover, life expectancy has increased significantly.

This means that ageing baby boomers will continue to build their savings base in the next few years, rather than drawing down their assets. Given their age, capital preservation will become even more important. In the past, bonds were the instrument of choice to achieve this objective. The problem is that today bond yields globally are between tiny and non-existent.

In a world where about 30 per cent of sovereign bonds trade at yields below zero per cent, and nearly 80 per cent below one per cent, equities remain one of the few alternatives despite their sky-high valuations.

This is illustrated by the fact that for the first time the 30-year US Treasury bond yield is actually lower than the S&P 500 dividend yield.

In the past year, 75 per cent of the total return in bonds has come from capital gains, and just 25 per cent from the yield. On the other hand, in equities, over 50 per cent of the total return has come from re-invested dividends.

The baby boomers are in need of income at a time when central banks have made bonds a scarce commodity and have pushed prices

22

In a world where about 30 per cent of the world’s sovereign bonds trade at yields below zero per cent, and nearly 80 per cent below one per cent, equities remain one of the few alternatives despite their skyhigh valuations. — Hans Goetti, Chief Strategist Middle East & Asia, Banque Internationale A Luxembourg

In the past year,

75

%

of the total return in bonds has come from capital gains, and just

25

%

from the yield On the other hand, in equities, over

50

%

of the total return has come from re-invested dividends

into the stratosphere. This age cohort is, therefore, forced to turn to equities as an alternative to bonds.

Despite their powerful bull market, equities have lagged bonds for the past 16 years, and it can be argued

that despite their historically high valuations they still have a lot of catching up to do on a relative basis.

Ironically, investors are finding themselves in a situation these days where bonds are for capital gains and equities are for income. All thanks to years of central bank meddling and price manipulations.

Despite these distortions, the central banks’ experiments are far from over and it becomes evident that policy normalisation remains a huge challenge with the Federal Reserve coming closest, although even they are finding it difficult to achieve this goal. After their December 2015 rate hike created havoc in financial markets in the early part of this year, the Fed has refrained from further tightening. While the probability of another move this year has increased we can safely assume that further interest rate hikes will be gradual and very data dependent.

Given the structural headwinds in the global economy we foresee interest rates to remain lower for longer, perhaps much longer. This means savers will find it challenging to generate income and the chase for yield will continue. At the same time, savers around the world will have to rethink their age old income generating strategies and start to realise that in this new environment bonds are for capital gains and equities are for income.

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COVER INTERVIEW

ADS Securities is the largest brokerage by volume in the Middle East and one of the fastest growing forex and investment companies globally.

Conquering GCC and the world Philippe Ghanem, CEO of ADS Securities stresses the importance of preparedness and anticipation in manoeuvring through volatile and uncertain times

24

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H

ow has the financial industry changed since ADS launched?

The financial services industry has evolved significantly since we launched in 2010.

There are three things we have seen shaping the market: technology, regulation and capitalisation.

We saw, first hand, just how great of a role technology plays in our industry only a few weeks ago with the Sterling flash crash. What we saw that day is an indication that global markets may not yet be ready for such high levels of sophistication in technology. If technology is not well managed by professionals that understand the industry, it can cause significant damage. So today, financial services firms not only need technological sophistication, but must develop a robust understanding of the technology they are using and employ experienced professionals who know exactly how to manage it.

Another trend we have seen that has impacted the industry is regulation. In some markets globally, regulation has become politically motivated, which has made it restrictive and difficult for businesses to manage, affecting profit growth.

Tighter regulation—including demands for higher capital requirements—has driven many well-known, established companies out of business. The firms who have invested in managing regulation and expanding their compliance teams have stayed the course. Here in the region, Abu Dhabi is a relatively new financial market that does not have the legacy issues of other markets and accordingly, regulation has played a major role in developing and supporting the growth of the market. There is strong regulation that has been designed for today, for today’s investors—the regulators are taking the best practise approach. So in a sense, firms like ADS Securities have an advantage because they were born with regulation, with compliance.

The last development we’ve seen change the landscape is an increased demand for higher capital requirements. This is tied to regulation, as I referenced earlier. This demand for higher capital requirements has meant that many firms have become risk averse, more rigid and less secure. Given financial institutions deal with foreign exchange, equities, securities, and other products, without adequate capitalisation they will not be able to access liquidity providers and prime brokers, or invest in technology. Our shareholders recently increased their capital investment in ADS Securities, deploying an additional $185 million to increase our total capitalisation to $585 million. This is a strong signal of our shareholder’s belief in both the enormous potential of our business and a clear opportunity for further differentiation in the industry.

ADS is well-capitalised at

585 million $400 million

$

up from

when it was founded in 2010

What are ADS’ major businesses and what is the company’s future expansion plans?

When our Chairman Mahmood Ebraheem Al Mahmood and I launched this business in 2010, no one believed that we could achieve what we have. This has been possible because we have invested in people, technology and put service to our clients above all else.

We may have started out as a brokerage but we are now a fully-fledged financial institution providing wealth and asset management, debt capital markets and investment banking, as well as trading billions of dollars a day. I believe we have shown that a private Abu Dhabi company can compete with some of the world’s biggest financial brands.

Make no mistake: we are a ‘people’s business’. ADS Securities has an exceptionally talented team—it’s all about our people, their expertise and commitment to our unified vision of global business. This has been the company’s major driver.

Looking forward, ADS will continue to focus on our four core business lines—brokerage [online and offline], debt capital markets, investment banking and asset and wealth management.

Our brokerage business has always served as the ‘engine’ of our company, and we are continually identifying innovative ways to grow and develop. ADS’ ability to leverage our strong relationships, deep capitalisation and global influence to reach out to bankers, brokers and LPs to ensure our clients benefit from the deepest liquidity, fastest execution times and most competitive spreads, truly sets us apart. The launch of our Prime of Prime offering earlier this year is filling a market gap in which leading brokerages like cont. overleaf

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page 24-28 Cover Interview.indd 25

25 13/11/2016 15:36

COVER INTERVIEW

cont. from page 25

us have a role sitting between clients and their own prime brokers, providing access and sharing their credit lines.

We also foresee growth for our debt capital markets business.

With the low oil price and global tightening of liquidity, corporates will need to raise capital through debt structures.

The secondary markets are very strong and stable—I think the UAE in particular is one of the most stable in the world. We will continue to help structure issuances and sell them.

Finally, Abu Dhabi has emerged as the offshore wealth centre of choice and we see massive opportunity for our asset and wealth management business—it has already seen immense growth in both our client base and assets under management. We are able to offer our clients bespoke investment expertise, operational excellence that is transparent and discreet, as well as a real understanding of the risks and dynamics of the markets. Our asset and wealth management offering has not been developed for the mass market—we served targeted HNWIs and institutions, offering our clients a range of assets, products and services across international markets, as well as managing their personal wealth. We do not have the historical limitations of private banks or the product and service restrictions associated with international investment firms. So ultimately, our aim is not to compete with banks in the country or the region, but to add value and support to the market as a whole.

How do you view the UAE market in terms of investor sentiment?

I’ve always maintained that uncertainty in global financial centres has meant that emerging and developing markets have a greater role to play. The UAE has always been a business gateway for the GCC and this will continue to evolve as countries in the wider region look to expand their financial interests.

The role of the Central Bank and the regulators will be key to creating and maintaining an efficient, high quality financial sector which can service the region as a whole.

Attracting and retaining investment into the region will facilitate the creation of a greater range of products and services, ultimately expanding the financial services sector.

It’s very important to highlight the UAE and Abu Dhabi in particular, as a great business platform. Abu Dhabi’s geographic location between East and West, coupled with access to liquidity, provides investors access into the Middle East markets and provides for the investment of Middle East monies in overseas markets.

In the last year, the majority of analyst and media comments about the Middle East has been understandably focused on the drop in oil price, but this is one element in a rapidly changing and developing market. I see unexpected benefits from the low oil price as it is acting as a positive

26

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I am optimistic about global growth. We are better off than we think—businesses are much healthier, and regulators have done a very good job levelling the playing field.

— Philippe Ghanem, CEO of ADS Securities catalyst accelerating the diversification of the Abu Dhabi economy. Companies across the GCC are looking for new business structures and financing options, which represents great opportunity for players in the sector.

Overall, I am optimistic about global growth. We are better off than we think—businesses are much healthier, and regulators have done a very good job levelling the playing field.

In challenging times, what obstacles has ADS faced and how were these addressed?

2016 has been a challenging year for many organisations, regardless the industry, around the world. We have seen the largest, most well-known firms take unprecedented measures, at an unprecedented pace.

We have used this time to take a deeper, honest look at ourselves: the services our firm offers, how we are structured and the way in which we operate. Technology is a powerful tool that has made us more efficient and more connected.

This has allowed us to look more seriously at centralising and automating support functions like operations, administration and IT—and where we can save and/or reallocate investment to where our business needs it most. We’ve also focussed on high revenue potential products and services that can be delivered by leaner, more efficient teams.

To overcome challenge we must concentrate on the people we employ and retain, our clients and technology.

You have to remain focused on maintaining high quality across all aspects of the business, on improving corporate governance and controlling costs. Those that do not understand this concept can fail. You have to do what you know and appreciate the things you can control, and you need to employ people that understand your business.

There are no miracles—there is only hard work and commitment. In difficult times you may not necessarily need to be the best, but you have to be consistent and stable—be there, be operational and generate revenue.

I believe in ADS, its leadership and the team. We are equipped to weather all storms as we have strong capitalisation, cuttingedge technology and exceptional people who are committed to the success of the business and its clients. So whatever challenges that come, we’re prepared and ready. cont. on page 28

Where banking is more personal

bleed guide.indd 1

13/11/2016 16:20

COVER INTERVIEW

cont. from page 26

We’re seeing several consolidations in the market. What does this mean for the future of the industry?

Consolidation is important because in many small markets, there is duplication. Today, the UAE may not be as big as the UK or US market, but it has a geographical advantage sitting at the crossroads between the markets of the East and West.

Now, the physical location has now been overtaken by the financial opportunity which the UAE offers to both these regions. It is therefore important to have strong and solid institutions that are focused on the same service. Industry consolidation is positive because it keeps momentum focused, and gives the global marketplace large, efficient and successful GCC institutions to face.

There aren’t a huge number of financial services companies in the country, but we could potentially see one or two more mergers in the sector. I also expect to see growth of the debt capital market in the region. The bond market is now starting to develop, and as we saw in Saudi Arabia, corporates will be looking to issue. There is a healthy appetite for GCC paper and this sentiment will continue—particularly in Saudi Arabia and the UAE.

Where do you see most interest in terms of investment?

Healthcare, renewable energy and technology are where there are opportunities for growth, in large part due to the innovation these sectors heavily rely on. Innovation ultimately drives growth and economic development.

Looking at renewables, the cost of production has dramatically declined due to technological advances and in the foreseeable future, will be able to compete with fossil fuels. Consumer staples and food and beverage are defensive sectors that will remain resilient and offer good value for money in a well-diversified portfolio, and for those who are investing across different sectors, it is valuable to diversify the currencies of the assets that are being invested in.

With incredible market volatility witnessed over the past year, what will you be watching very closely as we go into 2017?

We cannot talk about next year without mentioning the US elections—this was definitely one of the hardest elections to predict. It will be interesting to see if the US maintains strong commercial ties with the international market, especially Asia. We will have to wait and see if Donald Trump will maintain existing alliances.

Ultimately I believe that growth will continue in the US. The dollar will stay strong, but its strength will also be dependent on the Federal Reserve’s policies. In the last year, we’ve seen commitments to rate hikes that failed to

28 page 24-28 Cover Interview.indd 28

ADS Securities provides sophisticated forex, bullion and commodities trading solutions to institutional and private investors.

materialise—which in the end was a good thing. A rate hike may come at a later date but when it does, it will be something that comes at a fast pace.

Turning to the European Union, it is certainly a difficult time. The EU is currently being challenged by the UK referendum results, which is unlike anything ever experienced previously. Ultimately, the final outcome of the Brexit referendum will be driven by upcoming political decisions and agreements between the UK and Europe. At the end of the day, markets will decide on the preferred financial centre—Frankfurt or London. The people of the UK have spoken and it is now up to the government to manoeuvre accordingly, with minimal adverse effects to the country and its economy. Not withstanding, we shouldn’t be too worried about Brexit as I believe that the UK has the history, capability and expertise to handle these challenges, and will continue serving the international marketplace in the best way possible.

The UK has made its decision; it and the EU will grow and develop accordingly. The US, however is in uncharted territory. These are two determining influences that will chart the momentum for next year.

What is your outlook for the future?

I’m optimistic given our long-term view of the market and despite the fact that there will always be factors that are simply beyond your control. This is why we focus so much on bringing in people who have been exposed to different markets and events—they help us put in place measures to mitigate risk. ADS Securities is agile, adaptable, and we will continue to focus on attracting and retaining highly sophisticated, hard working professionals who are passionate about our business.

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COUNTRY REPORT

Kuwait on stable ground In spite of continued volatility and depressed oil prices in the region, the country’s banking and financial landscape remain steady bolstered by strong Government support, well-capitalised entities and a healthy operating environment 30 page 30-34 Country Report.indd 30

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13/11/2016 15:37

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W

ith a population of approximately 2.9 million people, Kuwait is bordered by powerful neighbours—Saudi Arabia, Iraq and Iran. Its strategic location and massive oil reserves make it one of the world’s richest countries per capita— and most dependent country on oil in the GCC (as measured by exports and government revenues, according to Moody’s). Kuwait enjoys the lowest fiscal and external breakeven oil prices in the GCC and has exceptionally large Government financial assets. It has been slower than its peers in developing its non-oil and private sectors, and was the last to implement fuel subsidy reforms.

BANKING SYSTEM

Market reports have indicated that the Kuwaiti banking system is thus far stable. Industry observers expect continued Government spending to shore up growth in the oil-dependent economy, which will support credit conditions and banks’ profitability.

Moody’s in a recent report noted that enhanced loss absorption buffers, in the form of stronger capital levels and a significant and growing cushion of general provisions (at 3.8 per cent of gross loans as of year-end 2015),

will allow banks to manage new problem loan formation. Downside risks to asset quality will, however, remain elevated owing to high credit concentration and banks’ exposure to real estate and equity markets. Banks will also become more reliant on market funding, as loans will grow faster than deposits, although liquidity levels will remain robust, despite liquidity tightening in the region that has driven up the cost of funds.

Spending by the Kuwaiti Government, even as oil prices stay low, is projected to maintain growth momentum and support operating conditions for banks.

While the country’s economy remains highly dependent on oil, contributing over two-thirds of Government revenues and accounting directly for 45 per cent of GDP in 2015, policymakers are pushing ahead with non-oil related infrastructure projects. This is supported by ample accumulated resources, following several years of large fiscal surpluses, and low Government debt levels. The execution of the Government’s new five-year development plan will drive new business for banks, while domestic consumption will remain strong supporting market projections of a seven per cent credit growth. Nevertheless, reduced capital spending may curb growth expectations.

Kuwait is highly dependent on oil (Average 2006-2015) Hydrocarbon Experts, % of Total Merchandise Exports

100 90

Qatar (Aa2 neg)

80 70

Oman (Baa1 stab)

60

Bahrain (Ba2 neg)

Saudi Arabia (A1 stab)

Kuwait (Aa2 neg)

50 40

UAE (Aa2 neg)

30 60

65

70

75 80 85 Hydrocarbon Revenues, % of Total Government Revenues

Note: Fiscal data for Qatar for 2006-2014. Trade date for Bahrain for 2006-2014.

90

95

Source: National Authorities, Haver Analytics and Moody’s Investors Service calculations

cont. overleaf

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COUNTRY REPORT

cont. from page 31

Kuwait to post fiscal deficits in 2017 Oil Revenue - LHS

N0n-Oil Revenue - LHS

Expenditures - LHS

Fiscal Balance - RHS

40

45 40

30

35 25

10

20 15

0

% of GDP

30

20 KWD billion

10 -10

5 0

-20

-5 -10 2017F

2016F

2014

2015E

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

-30 2000

Moody’s have forecasted nonperforming loans (NPLs) of around three to four per cent of gross loans for 2016-17 (from 3.3 per cent for rated banks at year-end 2015). Kuwait’s banking system is expected to maintain its substantial loss absorption capacity.

This is underpinned both by robust capitalisation levels (with a Basel III Tier 1 ratio of 15.3 per cent at year-end 2015) and by improving total reserves (equivalent to around 156 per cent of NPLs for rated banks at end-2015). This has been attributed to a conservative implementation of Basel III capital requirements by the Central Bank of Kuwait (CBK), which will have to be fully implemented by year end 2016.

Net profitability is expected to remain relatively unchanged, with the system’s net income to average assets at just over 1.1 per cent during our outlook period. Kuwaiti banks are better placed to weather this period of tightening liquidity than regional peers and although market funding reliance will increase, Kuwaiti banks will remain primarily deposit funded and liquidity buffers will remain comfortable.

According to the research and ratings agency, Kuwaiti banks’ deposit ratings incorporate an average of four notches of uplift, reflecting its assumptions of a very high likelihood of government support.

Authorities are expected to remain committed and able to provide support to banks if required. The Government has stepped in to provide capital in the past and can call on financial assets managed by the country’s sovereign wealth fund—estimated at $600 billion at end-June 2016, a sum more than five times the size of the country’s GDP.

Source: Ministry of Finance, Moody’s Investors Service

Kuwait’s non-oil GDP growth has lagged other GCC countries but is expected to accelerate 2014

2015

2016F

2017F

12% 10% 8% 6% 4% 2% 0% Bahrain

Kuwait

Oman

Qatar

Saudi Arabia

UAE

Source: International Monetary Fund, Moody’s Investors Service

Kuwaiti banks are exposed to volatile regional and european equity markets Kuwait Stock Exchange

MSCI Gulf Cooperation Council Countries (GCC)

Euro STOXX

DEBT CAPITAL MARKET

The Kuwaiti Government in July revealed plans to raise up to $10 billion US dollar-denominated conventional and Islamic bonds. Nevertheless industry reports in October indicated

32 page 30-34 Country Report.indd 32

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Note: Index value as of 1-Jul-2015 used as base (=100)

Source: FactSet, Moody’s Investors Service

cont. on page 34

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COUNTRY REPORT

cont. from page 32

that the sovereign issue could possibly be delayed until next year as there is no rush to raise funds overseas. The Government reportedly still has not sent banks a request for proposals to arrange the issue.

Kuwait may have delayed its issue having wanted to gauge market sentiment of Saudi Arabia’s paper.

Industry players have said that if the country issued before Saudi, the demand for Kuwaiti paper could have been limited by investors that wanted to buy into Saudi’s bond. It is believed that Kuwait may tap global debt capital markets at a better time when it is more cost efficient as they are fairly liquid in terms of their finances.

The country however, witnessed largest ever debt issuance which was also the first and only guaranteed quasi-sovereign paper from the country. EQUATE Petrochemical, a wholly owned subsidiary of EQUATE Petrochemicals Co. successfully tapped the international debt capital markets with a $2.25 billion dual-series bonds.

The debenture consisted of $1 billion in long five-year bonds maturing in March 2022 as well as $1.25 billion in 10-year bonds maturing in November 2026.

The issuance was well received globally by a diversity of investors including fund managers, government institutions/pension funds, financial intuitions and insurance companies, with an over-subscription rate of two times and a global order book exceeding $4.5 billion. The issuance proceeds will be used for general corporate purposes, including to refinance existing debt.

The paper not only represents the largest debt issuance to be marketed locally in the history of Kuwait, but is also the first and only Kuwaitiguaranteed quasi-sovereign debt capital markets issuance to be marketed in Kuwait and globally under the Reg S / 144A issuance format. It represents a landmark transaction that will serve as

34 page 30-34 Country Report.indd 34

The execution of the Government’s new five-year development plan will drive new business for banks, while domestic consumption will remain strong supporting market projections of a seven per cent credit growth.

Nevertheless, reduced capital spending may curb growth expectations. — Moody’s a vital benchmark which will notably pave the way for the country’s muchanticipated first sovereign issuance.

The dual-tranche bonds were priced competitively with the five-year tranche priced at 98.4 per cent with a three per cent coupon at a spread of 195bps over mid-swaps (3.4 per cent yield). Meanwhile, the 10-year tranche was priced at 98.781 per cent with a 4.3 per cent coupon at 270bps over mid-swaps (4.4 per cent yield).

DISSOLUTION OF PARLIAMENT

Sheikh Sabah Al Ahmed Al Sabah, Kuwait’s ruler dissolved the National Assembly on the 16 October 2016. The assembly which was supposed to run through July 2017 sets the stage for elections that will take place on the 26 November 2016. Legislators have voiced strong opposition to the Government’s unilateral move to hike the price of petrol, which ultimately led to the surprise dissolution. These developments highlight the institutional challenges that Kuwait faces in reducing its economic and fiscal dependence on oil.

Slower progress than the rest of the GCC in economic diversification and implementing fiscal reforms in response to the oil price shock is in part because unlike other GCC countries, Kuwait’s political environment is more liberal,

allowing for unions and for parliament to criticise government policies, said Moody’s in a statement on the dissolution. These democratic elements of the system, however, can be particularly disruptive to government effectiveness, which has been repeatedly demonstrated by the government’s inability to implement reforms. While Kuwait’s institutional set-up allows for more political noise, political risk is still considered to be low and would not lead to economic or credit distress.

Kuwait’s Government effectiveness score in the Worldwide Governance Indicators (WGI), has deteriorated due to long and burdensome executive and legislative processes, illustrating how institutional blockages can hamper policy implementation. The slight improvement in 2015 was driven by an improvement in the quality of its primary education and infrastructure, according to the World Economic Forum’s Global Competitiveness Survey, a sub-survey used to compile the overall WGI score. However, in terms of bureaucratic quality and its effect on government effectiveness, there have been no material changes since 2014.

Moody’s earlier this year, changed Kuwait’s sovereign rating outlook to negative. Its decision was driven by material uncertainties over the Government’s ability to effectively implement its fiscal and economic reform programme. Kuwait’s economic and fiscal institutions were not severely tested during the period of high oil prices. Slow or only very limited implementation of fiscal and economic reforms may over time erode Kuwait’s medium-term economic and fiscal prospects and lead to a deterioration of the country’s credit profile. Early elections may not result in a more cooperative National Assembly, but the Government’s ability to implement further reforms and avoid a rollback of the current subsidy reforms will be indicative of its institutional effectiveness.

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ISLAMIC FINANCE

Turkey gains ground in global Sukuk market International law firm White & Case, sheds light on the potential of Islamic finance in the Turkish market

A

s a fast growing emerging market and a major economy with its unique geostrategic position as the bridge between Europe, the Middle East and Asia, Turkey has a mature Islamic finance industry that aims to win a bigger slice of the global Sukuk market. As Turkey seeks to overcome a year fanned by a series of political events, its Government is determined to triple the share of participation banks— banks that operate in accordance with Islamic law—in the country by 2025.

The vision, if successful, will make Istanbul a financial hub for Islamic finance, regionally and globally.

While steps to establish participation banking were undertaken as early as 1985—through the incorporation of Kuveyt Türk and Albaraka Türk—the success of interest-free banking model was limited due to the lack of a regulatory framework. However, as Sukuk gained popularity both within and outside of the Islamic world, the 2010-2015 period saw Islamic finance in Turkey growing significantly, underscored by new regulations in participation banking. The first Turkish Sukuk was issued in 2010 in the form of asset-based instruments known as certificates.

A further critical catalyst to the success of Islamic finance in the country was the introduction of public finance law and

36 page 36-38 Islamic Finance.indd 36

Debashis Dey, Partner, White & Case, Dubai

Encouraged by the broadened stamp tax, VAT and duty exemptions encompassing all types of Sukuk transactions, market players would likely be more willing to diversify their issuance structures, paving the way for a deeper Turkish Sukuk market.

— Debashis Dey

amendments to tax legislation in the years that followed. As a result, it issued eight sovereign Sukuk with an approximate total value of $7.7 billion, and numerous private issuances with an approximate total value of $4 billion—all between 2011 and September 2015.

The most common Sukuk structure in Turkey is Ijarah. Under the practice, the entity seeking to raise funds establishes a special-purpose vehicle (SPV) for the sole purpose of issuing lease certificates, and then transfers the underlying assets to the SPV. The SPV then leases these assets back to the entity and issues lease certificates based on the proceeds of the lease.

In addition to the Ijarah structure, the Capital Markets Board (CMB) in 2013 introduced new permitted Sukuk structures, including Mudharaba, Murabahah, Musharakah and Istisnah.

Commenting on the development if Islamic finance in Turkey, Derin Altan, our Partner at White & Case’s Istanbul office said, “Turkey has gone from strength to strength in the past few years and has become a model for the world in interest-free banking.

This is supported by the Government’s strategy of increasing the market share of participant banking from around five per cent to 15 per cent by 2025, which would make Turkey an important player in global Sukuk market.” cont. on page 38

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ISLAMIC FINANCE

cont. from page 36

Turkey issued 8 sovereign Sukuk at a total value of

$7.7 billion Private issuances worth

$4 billion all between 2011 and September 2015 Derin Altan, Partner, White & Case, Turkey office

Despite the viability and prominence of the Turkish Sukuk market, there have been only a handful of domestic corporate Sukuk issuances other than participation bank issuances. However, certain participation banks appear to be laying the groundwork for such issuances by incorporating a separate asset leasing company (ALC) for third-party issuers.

— Derin Altan On a larger scale, Turkish corporations and the Government are likely to step up its use of Islamic finance structure to fund public and public-private partnership (PPP) infrastructure projects, mainly airports, ports, bridges, highways, energy facilities and other transportation-related infrastructures. As of December 2015, Turkish corporations required additional financing of $350 billion in order to complete a backlog of projects planned through to 2023— some or all of which could be provided

by Islamic financing.

38 page 36-38 Islamic Finance.indd 38

Altan added, “Despite the viability and prominence of the Turkish Sukuk market, there have been only a handful of domestic corporate Sukuk issuances other than participation bank issuances.

As of June 2016, no international corporate Sukuk have originated from Turkish issuers other than banks.

However, certain participation banks appear to be laying the groundwork for such issuances by incorporating a separate asset leasing company (ALC) for third-party issuers.”

Globally, corporate Sukuk issuances constituted 36 per cent of the total volume of international Sukuk issuances in 2014, and 39 per cent of the volume in 2015. Participation by new players— especially the governments of the UK and Luxembourg, both rated AAA by Standard & Poor’s—has been warmly welcomed by other market participants as sovereign participation in Sukuk issuances pave the way for corporates to follow through.

Looking ahead, the first Turkish corporate to successfully issue an international Sukuk will inevitably need to overcome certain hurdles. However accommodating regulators may be, these speed bumps create uncertainty that must be reflected in transaction timetables and cost estimates—a challenge in current

global capital markets where favourable issuance windows appear and then disappear in the blink of an eye.

Encouraged by the broadened stamp tax, VAT and duty exemptions encompassing all types of Sukuk transactions, market players would likely be more willing to diversify their issuance structures, paving the way for a deeper Turkish Sukuk market.

The CMB, Borsa İstanbul and other governmental authorities in the Turkish financial markets appear to be extremely willing to encourage growth in the Sukuk and Islamic finance markets in Turkey. To achieve this, regulators should welcome and accommodate any commercially and legally reasonable Sukuk structures, even if doing so requires further legislative amendments.

As the relevant regulators have made clear, any amendment to regulations to accommodate a specific type of Sukuk would first require a proposed transaction that can be presented to regulators for their review and consideration. Feedback and participation from all market players—including but not limited to banks, corporates, arrangers, law firms, other advisors and investors—will be key to shaping the future of the Sukuk market in Turkey.

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PRIVATE BANKING

Adapting for future growth Michel Longhini, CEO Private Banking, at Union Bancaire Privée highlights the tighter regulatory environment in cross-border transactions and private banks should manoeuvre in tough conditions

R

ecent half-year results announcements by Swiss private banks have shown a number of similarities: cashrelated business has grown significantly, transaction and fee income is under pressure, and net new money (NNM) is seeing fairly weak growth. This is a clear reflection of the fundamental trends in our industry.

Firstly, the figures show that clients are highly risk-averse, even accepting negative interest rates on short-term investments. Clients are also seeking refuge in stable but low-yielding bond investments, aiming to preserve their capital and obtain a limited but guaranteed income until maturity. The

40 page 40-42 Private Banking.indd 40

situation has enabled private banks to sharply increase their interestrelated revenues, taking advantage of opportunities to invest excess portfolio cash, as well as growing their loan books as a result of very low borrowing rates.

It is an unusual situation for these banks, whose main remit is to provide advice and manage portfolios in return for a fee, and which are generally very cautious in their asset/liability management.

We are also seeing a decline in trading activity, which is affecting brokerage revenue. This trend is not being caused solely by client risk aversion, but also by increasing regulatory constraints.

Current regulations in Switzerland and

across all financial markets are aimed at making bank fees more transparent, providing necessary controls over products sold in each country, defining cross-border rules and ensuring that products are always aligned with clients’ risk profiles. These regulations are now applied by all banks, and the new environment they have created is making banks less responsive and restricting the scope of their activity, inevitably pushing down volumes and therefore reducing brokerage revenue. On top of that, there is a big shift among the most active ‘selfdirected’ clients towards more suitable and less costly solutions, such as online brokers. cont. on page 42

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PRIVATE BANKING

cont. from page 40

Banks’ results for the first half of 2016 highlight ongoing low levels of net new money, a situation that KPMG describes as ‘no new money’ in its report entitled “Clarity on Performance of Swiss Private Banks”. Even though everyone agrees about the long-term growth potential of the client segments targeted by private banks, it is a zerosum game: in a low-growth world, genuine wealth creation is limited, and any increase in assets under management is being driven by the performance of listed assets. Variations in the amount of NNM being attracted by the various banks are mainly to do with differences in recruitment and acquisition strategies. In simple terms, business lost by one bank is gained by another, but meanwhile margins are being eroded across the board.

At the same time, banks are now missing out on a large proportion of wealth creation as clients shift towards direct investments. Overall, adding in the business impact of tax compliance programmes, private banks’ performance in terms of NNM was disappointing in the first half of 2016 and has been for several years now.

In this gloomy environment, we can acknowledge two facts: firstly, in order to maintain their growth strategies, private banks are taking the risk that their profitability and balance-sheet strength will deteriorate over the long term. Secondly, they are having to deal with losing market share to direct investments, which are attracting a rising proportion of global wealth. Of course, real estate is an asset class that has always been overrepresented in global client wealth.

However, at a time when returns on risk-free assets are so low, clients are increasingly focusing on direct investments, including real estate, infrastructure, new technologies, aircraft and gold.

42 page 40-42 Private Banking.indd 42

Michel Longhini, CEO Private Banking, at Union Bancaire Privée

It is still the case that the main rivals to private banks are other private banks. More than ever, however, they are also seeing competition from direct investments that bypass private banks, generating little revenue for them, except possibly the interest on mortgages used to buy real estate.

Direct investments are attracting an increasing proportion of investment flows, but are still marginal in terms of private banks’ overall revenues.

Private banks’ growth issues are not solely related to reduced wealth creation and stiffer competition: they are also being caused by insufficient returns from traditional assets and the increasing appeal of direct investments. The trend is confirmed

by the amount of funds that can now be raised for technology, venture capital and infrastructure projects. Overall, a significant portion of new savings flows are bypassing the established activities of private banks and are therefore not making any contribution to their growth.

As a result, banks need to make changes in two areas. Firstly, they need to adjust their costs in line with their growth potential and ability to generate revenue. Secondly, they need to reinvent their offering, so that they can continue to capture and manage the bulk of their clients’ financial assets and increase NNM, without necessarily engaging in aggressive and costly recruitment policies.

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ADVERTORIAL

Jersey: providing stability and certainty for

As clients in the GCC turn to financial centres outside the region for wealth preservation and succession planning, Jersey is providing services that directly meet their needs.

GCC clients According to the most recent Capgemini World Wealth Report, wealth among high-net-worth individuals (HNWIs) in the Middle East reached an impressive 2.3$ trillion in 2015. There are now more than 600,000 HNWIs in the GCC, who are looking to keep their assets secure, with the right succession planning in place to preserve their wealth through the generations. It is notable, however, that increasing numbers of those HNWIs are looking outside of the region to achieve these aims.

One reason behind this shift is that, as families have grown in size, their wealth management has evolved to reflect their increasingly complex and international interests. That said, it’s impossible to ignore the impact of the region’s relatively unstable geopolitical and economic picture. Earlier this year, for example, oil prices sank so low that ratings agency Moody’s reported the states of the GCC faced twin fiscal and current account deficits for the first time in a decade.

It’s no surprise then that the GCC’s wealthiest families would seek to hand the planning and management of their affairs to a first-class, stable international finance centre (IFC).

International investment carries risks as well as the rewards of safety and security, and the right wealth structuring service will be able to identify the most appropriate investment options within the context of fluctuating market and regulatory landscapes. Wealth structuring can also navigate tax and regulatory requirements and provide a secure and flexible service to protect and grow those assets.

This is where Jersey holds a strong hand. It’s a secure jurisdiction that offers a flexible approach to private wealth management, built on more than 50 years’ international expertise, delivering trusts as well as estate and succession planning. More recently Jersey’s innovative foundations and private trust companies have proven very popular, especially among those seeking greater control over their investment assets.

44

The suitability of these products is one reason why Jersey has long been a preferred jurisdiction for private wealth management clients from the GCC. Additionally, the number of family offices in the GCC region is expected to double in the next eight years, a service which Jersey has been providing to GCC families for many years. The Island also has a longstanding relationship with many intermediaries and HNWIs in the region, offering appropriate regulation and a tight-knit network of professional firms. Furthermore, Jersey offers excellent market access into both London and the EU – it’s estimated that the Island’s finance industry facilitates around 670£billion of foreign investment flows into those markets.

Of course the Western world has its share of geopolitical uncertainty at the moment too – not least the fall-out from the UK’s vote in June this year to leave the EU. Because of its location between the UK and EU, Jersey finds itself with a front-row view of the ‘Brexit’ developments. The good news for investors is that while the UK’s referendum has generated a huge amount of uncertainty for the UK itself, Jersey’s position is unlikely to be affected. As a Crown Dependency it’s neither part of the UK nor the EU. The referendum vote doesn’t affect Jersey’s long-standing constitutional relationship with the UK, nor its rights to offer its services to EU markets, which are the result of independent bilateral negotiations.

This leaves Jersey in a prime position to provide wealth management services to HNWI clients from the GCC. The Island offers stability, independence and tax-neutrality, and robust, specialised regulation that acts as a quality filter, ensuring that funds comply with international standards and regulations.

Jersey has long been commended by organisations including the World Bank and the OECD for its standards of transparency, and was recently commended by MONEYVAL, the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, for its anti-money laundering measures. MONEYVAL found Jersey to have a ‘mature and sophisticated regime for tackling money

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KUWAIT

BAHRAIN QATAR

KINGDOM OF SAUDI

laundering and the financing of terrorism’, giving the jurisdiction the highest rating of any state it assessed.

Jersey’s expertise also extends to Islamic finance. The Island’s legal system hasn’t had to change in any way in order to accommodate Shari'ah-compliant products, and is flexible enough to accommodate the various nuances of different schools of Islam.

Any partnership with a wealth structuring provider has to focus on the long-term, keeping assets safe and allowing them to grow. Provisions should be tailored to the investor’s needs and goals, and the practitioners have to keep up-to-speed with changes to regulatory and tax environments, enabling the wealth structuring services to evolve alongside them.

Jersey’s offering balances product innovation with high standards of regulation, world class legislation and vast expertise from a range of seasoned professionals. As such, the Island is perfectly placed to support the complex estate planning and investment ambitions of GCC investors, as they seek not only to minimise the threats that lie in the rapidly changing global financial picture, but to capitalise on the opportunities that are, without doubt, there too.

For further information on Jersey’s world-leading private wealth management services, contact Richard Nunn, Jersey Finance Business Development Director for the GCC. E: richard.nunn@jerseyfinance.je T: +971 (0) 4 319 9923

UNITED ARAB EMIRATES

OMAN

Jersey: 10 key strengths 50 years’ experience in private wealth management Deep ties to the GCC, with expertise in Islamic finance Early adopter to the latest transparency standards Glowing recommendations from the OECD, World Bank, IMF and MONEYVAL A substantial network of top-level financial services professionals An enviable community of support services, from legal to accounting Innovative products – from trusts to Foundations, Private Trust Companies and family offices Stable location Close ties to London The perfect blend of the transparent and the confidential

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45 16/11/2016 09:44

IN-DEPTH

Commitment to the people Banker Middle East’s Retail Banker of the Year, Hamed Fayez, Senior Executive Vice President, Head of Retail Banking Group at National Commercial Bank discusses consumer finance trends and future strategies for the bank

H

ow does Saudi Arabia’s retail banking landscape compare to the GCC?

The retail banking sector in Saudi Arabia is highly competitive, mature and heavily regulated. This has caused intense competition between the banks to acquire a finite number of customers, but it also forced these same institutions to try to differentiate themselves through innovation, customer service and digitisation. In contrast to the wider GCC region, I believe we operate in the largest market in the bloc, which by itself is a positive differentiating factor. Having said that, customers’ expectations of their banking relationship had grown quite significantly, which is keeping the whole industry on its toes and forcing us to focus on delivering like we’ve never done before.

What are the current challenges faced by this market segment?

The sector today, on the back of lower oil prices and the measures which were announced recently to tackle the high governmental wage bill, is facing a challenging period. Our core target market will have little capacity to borrow,

46

given the combination of increase in cost of living and the lower income at the same time. Having said that, we will continue to focus on providing our customers with the highest levels of service, invest in our digital platform, lead in product innovation and create a culture of excellence and employee centricity within the organisation.

Through delivering on these priorities, I am confident that NCB will be wellpositioned to make the best out of whatever macro environment we operate in.

Amidst a tough economic backdrop, how does NCB maintain market share and ensure an upward trajectory?

It starts with setting the right strategy.

From there, appointing the right people who are able to deliver on such and equipping them with the tools and support they need goes a long way in ensuring the sustainability of our performance. To be more detailed, we are fortunate at NCB to have the full retail banking proposition within our arsenal. We operate the largest private bank in Saudi, a leading credit card operation, a massive affluent segment, the second largest auto lease,

consumer finance, branch banking and remittance businesses. Through managing such a diverse offering, focusing on customers and employees alike, and being nimble and agile in our ability to respond to changing market dynamics, I believe that our market share will continue to grow going forward across all products.

As the retail banking market gears towards the theme of customer centricity and personalisation, how is NCB approaching this development?

We launched the customer satisfaction journey in 2013 when the CEO announced the bank’s newly adopted five strategic priorities, one of which being the best in customer service.

The journey started within retail by creating the ‘Excellence in Customer Service’ programme, the first out of three programmes that the whole customer experience is designed around. From there we launched the ‘Customer Delight’ and ‘Champion of Service’ programmes, in parallel with investing in our people and the culture they work within, and transforming the core banking systems across the bank in general, with a focus on retail, cont. on page 48

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I truly believe in a hybrid model, where bricks and mortars meets technology.

Smart branches, in terms of size, functionality, technology and location is what we believe the future of our operating model will look like. — Hamed Fayez

Hamed Fayez

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IN-DEPTH

cont. from page 46

in order to better service our customers through straight through processing and a ‘one and done’ delivery model.

By working on both the hard and soft elements of what we believe is important to our customers, introducing the right KPIs and adopting the NPS system, we were able to quickly establish ourselves as best in class when it comes to customer centricity, evident in our top quartile customer service ranking in an exercise conducted by a SAMA appointed benchmarking specialised consultant earlier this year.

And as I mentioned earlier, it is indeed a journey and we are only scratching the surface of what can be achieved in this space.

How important is the high-net-worth sector to NCB?

Today, we operate the largest private bank in Saudi Arabia, supported by the leading investment bank in the country, NCB Capital. It is critical for us to build on the success we achieved in this space by continuing to focus on this specific, highly sophisticated segment and provide our client base with best in class wealth management, commercial banking and treasury solutions, in addition to addressing our clients’ business needs through our colleagues at the corporate bank, the largest in the country.

However, all of the above is secondary to our ability to demonstrate to our customers a commitment to excellence in service through highly trained relationship managers. I cannot emphasise enough how important this segment is to us, especially having managed the private bank myself before assuming my current role. The appreciation I have for the loyalty demonstrated by our high-net-worth clients throughout various economic cycles makes me that much more committed to providing them with the level of service they surely deserve.

48

NCB’s remittance business [branded as Quick Pay], operates

28 centres at the end of 2012, and through an aggressive expansion strategy will end this year with close to

150 centres

year in 2014 in terms of branches delivered and we plan to surpass that number in 2016.

As for our remittance business [branded as Quick Pay], we were only operating 28 centres at the end of 2012, and through an aggressive expansion strategy I’m happy to say that we will end this year with close to 150 centres altogether.

In terms of our international footprint, we own a majority share in Turkiye Finans, the largest participation bank in Turkey. We also maintain a presence in both the Far East and the GCC through rep offices and branches, depending on the location.

Having said that, we continuously review our international footprint and along with the board decide on how best to grow globally.

How do you envision the future of retail banking for both the bank and as a market segment per se?

In terms of innovation and product offerings, what is in the pipeline for the bank’s consumer banking s e g m e n t i n t h e n ex t c o u p l e of years?

Operating in a highly regulated environment, we always strive to produce innovative and creative products and solutions notwithstanding the constraints we face in this market.

We have a few ideas in the personal finance and residential finance departments which will be launched by early 2017, complimented with a solid digitisation agenda.

Looking ahead, what are NCB’s expansion plans in both its local and international markets?

In terms of expansion we believe the country is under-branched and we are committed to expand our presence where we are most needed.

It is worth noting that we had a record

While we are finally, and unfortunately at the same time, witnessing global trends materialising in our local market, whether it’s a stringent regulatory environment or ever diminishing returns on the business, I still believe that the future is bright for retail banking in the country. A path of financial inclusion is happening as we speak, and with such a large segment still unbanked, the opportunity to grow is still there.

In terms of model, much has been said about digitisation and automation. I truly believe in a hybrid model, where bricks and mortars meets technology. Smart branches, in terms of size, functionality, technology and location is what we believe the future of our operating model will look like. We are very thankful to be in a market where the potential is still big, the customer base is loyal, the regulator is solid and the Government is supportive.

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IN-DEPTH

Qatari vision leading into the future Catching up with Fahad Al Khalifa, Group CEO of Al Khalij Commercial Bank (al khaliji), Banker Middle East discusses Qatar’s banking landscape and the bank’s future endeavours

Fahad Al Khalifa, Group CEO of Al Khalij Commercial Bank (al khaliji)

T

he GCC banking and finance sector is believed to be far more stable and resilient than its global counterparts, with most financial institutions in the region reporting year-on-year improvements in growth, profits and revenues. This is attributed to a number of important factors and differentiations including petrodollar liquidity, strong corporate fundamentals, and a somewhat domestic focus of regional and international companies that makes them less prone to the potential side effects of global financial cycles.

50

THE QATARI PLAYING FIELD

“In the post-crisis banking and finance landscape, the GCC region is experiencing a paradigm shift that will redirect investments towards sustainable cities and economies. Coupled with many massive projects that are connecting the economies of GCC member countries, this shift will reap great benefits and diffuse the risk on the regional banking sector.

However, banking and finance institutions in the region need to adapt to current changes in macroeconomics and new industry regulations to take full advantage of the growth opportunities present,”

said Fahad Al Khalifa, Group CEO of Al Khalij Commercial Bank (al khaliji).

According to Al Khalifa, the main attribute differentiating Qatar from other GCC countries is the Government’s substantial investment undertakings in infrastructure, ahead of hosting the FIFA World Cup 2022 and other major sporting events. This increased Qatar’s growth figures in the banking and finance sector recording stronger numbers than most of its neighbouring countries in the region. However, to take full advantage of the possibilities and continue its growth, the sector is urged to adopt alternative approaches such as international expansions. In spite of this, financial institutions in Qatar are aware of the new realties and are increasingly tapping into large-scale infrastructural projects outside of Qatar, hedging against heavy dependence on the local market and economy.

PRESENT CHALLENGES POSE OPPORTUNITIES

Although fluctuating oil prices will not deeply impact infrastructural revamps and development projects over the next decade (as part of the long term Qatar National Vision 2030), the current challenges and conditions are an excellent opportunity for banks to consider economic diversification.

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13/11/2016 15:41

al khaliji recently won Best Premium Bank and Fastest Growing Bank in the region at the BME Industry Awards 2016.

Commenting on this, Al Khalifa said, “Always striving to be one step ahead, in 2017 and beyond, al khaliji will continue to build on a strong customer franchise with further expansion into the mid-cap segment. We’re also looking at capturing project financing landmark transactions from the early stages to completion; a focus that, we firmly believe, will largely play into the diversification of our corporate portfolio as well as premium vertical.

Furthermore, we are focusing on the SME segment through our financing and commercial banking services and looking at adopting a bolder stance on our product and service development for startups.”

CORE STRATEGIES

Earlier this year al khaliji raised QAR 1 billion in a perpetual Tier 1 issuance (Additional Tier 1 (AT1)).

The transaction was raised to manage balance sheet growth and improve capital adequacy ratio which is now

Always striving to be one step ahead, in 2017 and beyond, al khaliji will continue to build on a strong customer franchise with further expansion into the mid-cap segment.

— Fahad Al Khalifa at a comfortable level of 15.6 per cent.

While the programme size for AT1 is QAR 2 billion, al khaliji opted for QAR 1 billion to efficiently utilise the capital. al khaliji does have an option to tap into the remaining QAR 1 billion of AT1 next year or during 2018 subject to asset growth and capital adequacy ratio requirement.

In addition to this, al khaliji has been raising liquidity via private placement under its EMTN programme since Q2 this year. The bank witnessed an increased demand from Asian investors for the al khaliji name has been able to raise over $500 million through a one to five-year maturity bucket mainly from Asian investors. It also has approvals

in place to pursue a public deal either later this year or sometime next year for asset growth requirements but subject to market conditions.

“The main factors influencing al khaliji’s fund raising strategy for 2017s are depressed energy prices and its inflow of revenue derived from sale of oil and gas. We did witness some cash outflow in the beginning of the year when energy prices were at their lowest this year. However, since then, these prices have stabilised at improved levels, restoring investor confidence.

As a result, cash has started to flow back into the region gradually. al khaliji is following a diversification strategy for its funding needs. Part of this is cont. overleaf

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IN-DEPTH

cont. from page 51

achieved through EMTN and CD/ECP programmes. We are also marketing the al khaliji name in other geographies (eg. Asia and Europe) so that investors understand the risks involved as we are 47 per cent owned by State of Qatar, a AA-rated Sovereign,” explained Al Khalifa.

Low or negative interest rates, prevailing in parts of Asia and Europe, have also proven to have a positive impact for the region as investors chase yield and continue to bring in liquidity either in the form of capital market products and/or in corporate deposit form. al khaliji is also building relationships with selected investors from these markets to bolster ties with asset management companies and large corporates to attract funding from these investors in the form of direct deposits in al khaliji.

In terms of lending strategies, as a Qatari bank, al khaliji’s lending strategy is focused on Qatar. The bank adopts a partnership approach with its Qatari clients, working with them to assist them in achieving their business goals, as well as supporting the State of Qatar’s 2030 National Vision. al khaliji’s corporate banking franchise provides financing solutions that cover trade and supply chain finance, working capital, term finance and the means to access the international loan and bond markets. The bank also plays a key role in financing directly and indirectly key Government infrastructure projects in Qatar, for example, al khaliji’s mandate as a Joint Lead Manager on the State of Qatar’s recent $9 billion bond issue.

As part of the Government’s 2030 National Vision is to support and develop the private sector within Qatar particularly SME sector, al khaliji has partnered with Qatar Development Bank under the ‘Al Dhameen’ funding programme, to provide financing for SMEs, opening up access to finance for this market segment.

52

As a local bank in Qatar with strong Government ownership, we remain fully focused on our clients and business in Qatar. Despite the reduction in hydrocarbon prices, we believe that our home market of Qatar offers good long term sustainable, opportunities to grow our franchise.

— Fahad Al Khalifa, Group CEO of Al Khalij Commercial Bank (al khaliji)

GLOBAL FOOTPRINT

“As Qatar has grown, our clients’ requirements and investment needs have also grown. Our subsidiary, Al Khaliji France, with offices in Paris and the UAE, is an important part of the Group and our strategy. It provides a physical presence in Europe and the GCC that allows us to serve all our Qatari clients, whether in corporate or private banking, outside the domestic market. The ability to fully understand and provide excellent and seamless service to our clients irrespective of location allows us to differentiate ourselves from our competitors,” said Al Khalifa.

Not only do the subsidiaries continue to make a solid contribution to the Group’s income base, the branch in France also enjoys good interaction with the French Corporate sector as well as members of the Cercle des Banques Etrangères en France, providing a great opportunity to strengthen the bank’s relationship with colleagues, clients and VIP representatives of the French private sector.

“As part of our acquisition of BLC Bank (France), we were able to gain strong foothold in the UAE and launch our entire range of products and services to the UAE market, through the bank’s branches in Abu Dhabi, Dubai, Ras Al Khaimah and Sharjah,” he added. “Our operations in Qatar, the UAE and France stem from our vision to bolster our identity not only as a Qatari and regional bank, but as a crossborder financial institution that meets the needs of our premium customer base whenever and wherever they are.”

LOOKING AHEAD

By aligning the bank’s core values and strategies with the Qatar National Vision 2030, al khaliji has achieved consistent success through the growth of its business while maximising shareholder returns and actively contributing to the country’s economic growth and the development of the community.

“When it comes to our offerings, our role is to exceed our customers’ expectations with an unrivalled level of service, making us the bank of choice for our premium and corporate clients. This means continuing to grant differentiated corporate and individual products and services tailored to client needs, coupled with multiple exclusive privileges. Going forward, we also see great potential in converging our corporate, premium and private banking segments, building on a strong base of affluent and HNW individuals who are, equally, large business owners heavily involved in trade and cross-border activity,” said Al Khalifa.

“As a local bank in Qatar with strong Government ownership, we remain fully focused on our clients and business in Qatar. Despite the reduction in hydrocarbon prices, we believe that our home market of Qatar offers good long-term sustainable, opportunities to grow our franchise. We take a long term partnership approach with our clients and the success of our clients will ultimately lead to success for al khaliji and for Qatar.”

www.bankerme.com

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IN-DEPTH

The need to teach old dogs new tricks Marco Baggioli, Executive Managing Director—Global Head of Brokerage at ADS Securities highlights the prospects in the region and urges the global brokerage industry to adapt to technological advancements, focus on value

T

he brokerage business is a relatively new market in the UAE’s financial system. It stemmed from the fact that the country is strategically positioned between the trading hubs of South East Asia and Europe to play an important role in global financial markets. ADS Securities spotted this opportunity and decided to step in to service this market segment.

Photo credit: Florante Magsakay/CPI Financial

THE EVOLUTION

Marco Baggioli

“The global brokerage industry has gone through tough but interesting times, with multiple major changes.

A few years ago, one such change was the emergence of electronics where the market moved from voice to e-trading, which was arguably the first major shift for the industry. Cost of trading dramatically decreased which also made the average size of the trades much smaller. It was previously not un-common for trades to be worth the equivalent of hundreds of millions of US dollars. However, now the average trade on an e-platform is only around one million,” said Marco Baggioli, Executive Managing Director—Global Head of Brokerage. cont. on page 56

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IN-DEPTH

As a result, the profitability of each trade has narrowed significantly.

Trading foreign exchange today is fast, easy and is extremely cheap. However because each trade is small, it is not generating as much revenue as it previously did. These changes were nevertheless still acceptable as the sector is growing and there is market share for everybody to compete.

Another more recent challenge Baggioli highlighted was Swiss National Bank’s de-pegging of the Swiss franc in January last year, which came as another major shock for the industry.

This highlighted the lack of prudent risk management capabilities by some parties.

“Quite a few players in the industry [the least-capitalised ones] went out of business and the banks that were servicing these people through the prime brokerage services realised that some of their clients were not healthy or solid and did not have enough capital to cover the risk they were taking. Thus, most of them decided that they would only be prime brokers to larger institutions. So a lot of people lost access to the market and access to credit lines which, as a consequence, caused a struggle in the market segment,” explained Baggioli.

One of the reasons that the banks curtailed their prime brokerage offering and credit offering to foreign exchange players was the cost of capital. These past two years have been challenging for the banks as Basel III kicked in and their capital requirements were increased dramatically. Money that historically would have been invested—potentially through prime brokerage credit lines— now has to be held as cash, increasing the cost of capital, which is an expense that has to be passed on to the banks’ clients. This left the forex brokerage industry in a position where many banks simply withdrew their support—but this is a highly innovative industry and it

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Photo credit: Florante Magsakay/CPI Financial

cont. from page 51

Baggioli urges the brokerage industry to keep up with time and technology.

The foreign exchange industry is huge and the problem is that many players are still set in their ways, carrying out the business in an outdated manner and refusing to keep pace with the changes that technology bring.

— Marco Baggioli, Executive Managing Director—Global Head of Brokerage, ADS Securities paved the way for forward-thinking businesses like ADS Securities to step in and fill the gap. A new service known as prime of prime emerged, providing credit intermediation to clients who either no longer had access to a prime broker, or needed additional credit lines to access either their own or external liquidity, to execute anywhere in the market.

MAJOR CONCERNS

“We have always had shocks to the financial industry. There are times when everything is fine and times where everybody is panicking and worried. Lehman, for example, was a clear shock where we saw one of the

giants of the industry collapse, which people thought was ‘too big to fail’.

This concept has disappeared and people now recognise that nobody is too big to fail. Swiss National Bank is another example of a black swan event as people were extremely surprised and were not expecting such a bomb to drop,” explained Baggioli.

He continued, “This was a severe shock to the system and a lot of people, and institutions, lost tremendous amounts of money. This incident is like living in an earthquake-free zone and suddenly an earthquake happens. All these incidents tell us that the market clearly needs to change. The SNB event tells us that we need to manage risk better.” cont. on page 58

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IN-DEPTH

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There is also an imbalance in the value chain of foreign exchange. This needs rebalancing and ADS Securities has been engaging this issue in forums with regulators and industry peers by educating clients and the market about the need to change. According to Baggioli, credit and capital are the most important elements of a foreign exchange transaction today. After that comes pricing, which needs to reflect the service that the customer buys in terms of credit and capital. The third element is technology, where the industry focuses a lot of their capital, which in turn directly causes them to neglect credit. In this context, technology should not cost too much as it can now be acquired from a broad selection of vendors as opposed to previously when it was a niche market that was specifically region-oriented and expensive.

“There are a lot of variables at play when evaluating global markets and there are no specific pre-emptive measures that could be taken.

However going through each of these events teaches the market to better prepare themselves for the next event so we can only be vigilant and have the right systems to manage credit and risks, having the right collateral from the clients and specifically adjusting from what we have learned,” said Baggioli.

STRATEGIC DIRECTION

“We basically have a clear vision of how the foreign exchange industry is changing and we see an opportunity to be in the front line of the global market.

We are adapting dramatically by changing our business model by being a value-adding focused organisation as compared to the traditional pure broker concept. We have working clients who have specific needs like credit, execution and price. These are needs where we can demonstrate value

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Next year is a year of reckoning for the market as there are big regulatory changes, from capital requirements to bilateral margining of non-clear transactions. These are all coming together alongside some shocks that the markets need to understand and adapt to.

— Marco Baggioli, Executive Managing Director—Global Head of Brokerage, ADS Securities and clients will pay for it, whether through our market making capabilities and our prime brokerage services,” said Baggioli.

“The foreign exchange industry is huge and the problem is that many players are still set in their ways, carrying out the business in an outdated manner and refusing to keep pace with the changes that technology bring,” he added.

Prime brokers, banks, creditors and clients need to be part of a positive value chain and understand that brokers are now paid for the added value they bring to the transaction.

ADS’ focus is on private clients in the GCC region, growing steadily in South East Asia and Europe.

With institutional clients, ADS is refocusing their approach catering to end users of foreign exchange such as corporates, asset managers and smaller banks globally, as well as family offices that choose to be treated as institutional and non-privates to deliver them value.

Baggioli further explained, “We are evolving our model. Currently we provide indirect access between two parties that do not want to work together, so we need to start making our own price. Not only are we talking prices and redistribution to our clients, but also starting market making ourselves. And to this end we have been working on algorithmic market making technology which is currently

in testing and has shown very positive results. This will bring to the region something new representing an important step for the region as a sophisticated financial centre.”

OUTLOOK

Baggioli believes that the financial industry—particularly across Europe and Asia—will provide an opportunity for local banks and institutions from the GCC to play a more global role. This is because the rest of the financial industry now lacks the capital and regulatory environment they previously had that allowed them to play a leading role in the market for the past 20-25 years. New players from the GCC will be able to come on board as the region’s present aim to diversify from an oil-based industry to other economic sectors.

“Next year is a year of reckoning for the market as there are big regulatory changes, from capital requirements to bilateral margining of non-clear transactions. These are all coming together alongside some shocks that the markets need to understand and adapt to. Some big players may decide to exit certain business lines because they cannot afford it anymore or simply because it does not make economic sense. It will therefore be a year of regulatory adjustments where you may find certain banks being in trouble and in need of bailouts, especially in Europe,” said Baggioli.

www.bankerme.com

13/11/2016 15:44

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PRODUCT SPOTLIGHT

Abdul Wahab Al Mutawa

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Creating better value for minority shareholders in unlisted securities Abdul Wahab Al Mutawa, Board Member and CEO of Al Mal Investment Company, speaks to Banker Middle East about the company’s latest product, Takharoj, and its unprecedented service in the region

C

an you describe Takharoj and how it works?

Takharoj is a product that we at Al Mal are very pleased to launch in the market as it is truly revolutionary. We believe it will change people’s lives for the better. Put simply, Takharoj is an online platform that allows the voice of minority shareholders in unlisted securities to be heard and get more value from their minority shares in return. All that is required is that individuals need to submit their basic investment information in order for them to become part of a sizable shareholding block with the power to negotiate optimal outcomes.

Then, through understanding of the shareholders objectives, Al-Mal’s team of experts will propose short-term and long-term solutions based on thorough analysis in order to maximise the value of the shareholding block.

What has encouraged Al Mal Investment to create Takharoj in the first place?

The creation of Takharoj came about as a proposed solution. We at Al Mal continuously conduct studies to analyse new market trends and needs after which we create innovative products that will satisfy their needs. This market study showed us that there is a large number of people who have minority shares in unlisted companies that are not able to make any business decisions, due to their small size and perceived value. For that reason, we have created a product to aid those minority shareholders by enabling them to have better value for their shares.

Can Takharoj offer solutions to minority shareholders that own any form of investment?

Absolutely. However, Takharoj will only deal with unlisted securities for the time being. cont. overleaf

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PRODUCT SPOTLIGHT

cont. from page 61

There is a large number people who have minority shares in unlisted companies that are not able to make any business decisions due to their small size and perceived value. For that reason, we have created an innovative product to aid those minority shareholders by enabling them to have better value for their shares.

The creation of Takharoj came about as a proposed solution.

Can Al Mal Investment sell investments or act on behalf of minority shareholders without their consent?

At Al Mal, we cannot sell investments or act on behalf of minority shareholders without their explicit consent. Once the website accumulates a certain effective ownership block in the target company, Al Mal will then contact the shareholders to propose the best course of action to optimise the value of their shares. That being said, it is completely up to the shareholders to decide if they wish to be part of the proposed action plan.

What can you tell us about the online security measures that would ensure the confidentiality of the users’ information?

We at Al Mal take security and c o n f i d e n t i a l i t y v e r y s e r i o u s l y.

We are bound by our confidentiality commitment as part of the terms and conditions and our internal controls. For that reason, none of the users registered on Takharoj’s platform can have access to other shareholders information even if they are part of the same block.

— Abdul Wahab Al Mutawa, Board Member and CEO of Al Mal Investment Company What has been the corporate strategy adopted by Al Mal Investment Company to ensure Takharoj’s success in the marketplace?

To ensure the success of Takharoj in the market, we began by educating and informing people about this platform with an aggressive launch campaign that encouraged people to go online and register their investment information.

Luckily, people responded en masse, enabling Takharoj to take off in the extraordinary way it did.

How does Takharoj generate revenue? Are customers required to pay a registration fee?

We believe in a performance-based fee structure. That means that, where applicable, we will only take a percentage fee of the final transaction value once the solution is implemented. To answer your second question, no—customers can register for free on www.takharoj.com.

To do so, they have to create an account and provide us with their basic personal information, investment details, and upload their shares certificates.

62

About Al Mal Investment Company Al Mal is an investment banking and asset management company that offers sustainable and attractive investment opportunities in both traditional and emerging portfolios. Established in early 1980, Al Mal Investment Company has a current capital of KWD 66.9 million. Its investment portfolio is geographically well diversified, offering maximised returns to investors. It caters to its clients through its many subsidiaries and affiliates spread across the world. Al Mal is listed on the Kuwait Stock Exchange and is licenced and regulated by the Capital Market Authority and the Central Bank of Kuwait. It implements and adopts high level of ethical standards, internal controls and corporate governance practises.

Source: Al Mal Investment Company

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TECH FOCUS

It’s time to wake up and smell the coffee Mick Fennell, General Manager Volante Technologies, Middle East & Africa elaborates on the importance of financial messaging and the regulatory environment surrounding it

T

hese days any mention of blockchain, distributed ledger technology, open APIs, real time payments, and/or digital channels will elicit keen interest from those involved in the banking world, and more specifically, in the Fintech world. Each of these initiatives represents the possibility of major advances in our industry in terms of speed of processing, transparency of data, reduction in operating costs, as well as innovative improvements in consumer and corporate customer servicing.

However, mention financial messaging in the same breath and most bankers or fintechs would look a bit puzzled. What has financial messaging got to do with these major shifts in our industry? In fact, the first question might even be, what exactly is financial messaging?

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The simple explanation is that every payment, domestic or international, single or bulk, every card transaction processed, every trade on an exchange, every electronic statement sent or received, every security settlement started and completed, every trade guarantee provided, each one of these transaction chains relies entirely on the exchange of information between counterparties and their systems, and that data exchange is through the sending and receiving of financial messages.

Consequently, financial messaging is the lifeblood of our industry.

Without support for financial messaging, incorporating the formatting, validating, enriching and orchestration of the messages and their standards,

Mick Fennell cont. on page 56

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13/11/2016 15:46

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The development has distinctive engineering and architectural designs and features. The main facilities of the project include a health club and spa, swimming pools and other recreational amenities. In addition, the boardwalk will act as a point of attraction to the public as it will host cafes, restaurants, retail outlets with a terraced air-conditioned podium, sea views, spacious car parking, marina and landscaped areas. gfh.com | Invested with insight

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TECH FOCUS

cont. from page 54

no financial institution could survive as a viable entity in the modern financial market. Such survival, and more importantly, real competitive success, is predicated on one’s ability to efficiently receive payment and transaction requests from customers, seamlessly clear and settle payments, rapidly trade on exchanges, send the relevant status updates to customers in the formats they demand, credit and debit their accounts in real time, move assets and funds between markets and portfolios. All of these processes are intrinsically based on financial messaging.

Nor is the need to support such message processing diminishing with the arrival of services based on new innovative technologies such as blockchain, or open banking APIs, or multiple alternative digital channels.

Instead, each of these new initiatives are creating an even bigger financial messaging challenge for all of the banks, a challenge which is already seen as a major headache for most organisations.

That is because, most current services in financial markets are based on agreed and openly published messaging standards, be it from a local, regional or domestic clearing or regulatory body. Standards such as ISO 20022, SWIFT MT, ISO 8583, FIX, FpML, SEPA, Fedwire, BACS, DTCC, Target2, etc., all fall under this umbrella. These financial messaging standards can change regularly and can have multiple variants that must be supported. It is a difficult challenge for every bank on the planet to keep up with these changes, on time and on budget, and to support multiple variants in multiple jurisdictions so that they remain compliant and competitive.

Now we have to add into that everchanging mix, the torrent of new services that blockchain, open banking APIs, real time payments, alternative digital channels, etc are creating.

Every one of these new services are

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Without support for financial messaging, incorporating the formatting, validating, enriching and orchestration of the messages and their standards, no financial institution could survive as a viable entity in the modern financial market.

— Mick Fennell, General Manager Volante Technologies, Middle East & Africa

generating expanded requirements for financial messaging. Most are based on new proprietary formats, along with new API mechanisms for sending and receiving the relevant formats.

How many banks in the Middle East are ready for this? Are your financial messaging capabilities sufficiently robust and agile enough to cope with these additional challenges? How quickly can your IT and business groups on-board new formats, new APIs, new messaging standards, be it from a new blockchain service, or a new corporate customer payment format, or a new real time clearing mechanism?

Each of these needs creates the same fundamental financial messaging technical challenge, i.e. is it going to take one week, or two months, or six months, or over a year to enable your bank to process these services every time such requests hit the bank? The longer you take, the more likely it is that you will be saying goodbye to that market opportunity (or at least a part of that opportunity if you consider the ‘time to revenue’ element) or to that new or, valued customer.

So what is required? When are IT and operations groups in the region going to wake up and smell the coffee? Now is the time to set their strategy for the future, and that strategy has to encompass the creation of a specialist financial messaging development capability.

Unlike the banks in the major developed markets of the US and Europe, few if any banks in the Middle East region have so far invested in specialist

financial messaging development and deployment technologies to address these challenges. In the developed markets it was understood a number of years ago that generic middlewares and integration infrastructures, along with vertically focused business solutions, are not the answer to the problem. They neither provide the breadth and depth of detailed message coverage required, nor do they support the facilities required to accelerate the rollout of services to address constantly changing market requirements.

Instead, specialist financial messaging development technologies provide the key that unlocks the competitive potential of the organisation across all processing areas of the bank. By creating a consistent, agile and universally deployable financial message development service within one’s environment, one can address the issues of quicker time to market and lower implementation fees for every one of these services that, at their heart, rely on the exchange and processing of financial messages.

The good news for banks in the Middle East is that it’s not too late.

However, the bad news is that the blockchain, open banking API, real time payments, and digital channels trains have all left their stations, and without actively seeking to enable your environments to consistently address the varied and changing messaging challenges that these innovations generate, you will miss these fast trains and end up metaphorically chasing after them, on foot.

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11th Islamic Business & Finance

Awards 2016

Excellence through innovation Rewarding pioneers in Islamic finance

23rd November 2016 The Godolphin Ballroom, Emirates Towers Hotel, Dubai 7pm cocktail reception followed by dinner and the awards ceremony

SUPPORTED BY:

www.cpifinancial.net

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

For other information please contact CPI Financial’s events team Tel: +971 4 391 4682 or Email: events@cpifinancial.net 07/09/2016 09:47

TECH FOCUS

Digital banking: the road ahead Ashish Desai, Director at Cedar Management Consulting International points out emerging trends in the technological space and how this affects the evolution of digital banking Ashish Desai

C

onsumer preferences and being changed are becoming more demanding. Banking is no longer a transactional business of just deposits, withdrawal and loans, but is moving towards being a part of the customer’s lifestyle. Banks have to respond to this by moving from being a transactional-centric organisation to customer-centric. Digital banking provides an avenue of personalised, real time, customised offering and service to the customer. Innovations in technology, changing consumer behaviour and pragmatic regulations are shaping the adoption and implementation of digital banking.

EMERGING TRENDS IN TECHNOLOGY

As technology evolves, various technology systems start behaving correspondingly or start giving similar outputs. Information technology, telecommunications and media are now undergoing a phase of convergence. Previously there were different devices and bearers for voice, data and video. However, with advancement in technology, devices are becoming agnostic. Data has become a channel and applications support various

68 page 68-70 Tech Focus.indd 68

devices irrespective of what device it is.

Voice, data and video can synergistically coexist on the same device giving unparalleled consumer experience.

The internet of things (IoT) is the network of physical devices, including buildings, automobiles etc. that are embedded with electronic sensors and communication devices, which use network connectivity to enable these objects to collect and exchange data.

Machine learning studies pattern recognition and does multivariate analysis using artificial intelligence.

Digital Banking Drivers Challenges n Competition from Fintech n Shirking revenue pool n Increasing operational cost

Challenges n Rapid growth of internet n Mobile penetration n Changing consumer habit n Availability of data set n Decision techniques n Enhancement in connectivity n Changing regulation

Source: CEDAR Management Consulting International

Machine learning explores the behaviour and construction algorithms that can learn from data and make predictions.

This helps in building operating model around consumer behaviour and helps in data-driven decision making, rather than on just human intuition or experience.

Cloud technology and software as a service (SaaS) partnered with agile technology manages both software and hardware costs. Hardware needs are optimised through customised, low-demand IT. It is designed around business needs and eliminates the once

Digital Banking Key Focus Areas Digital Channel Adoption

n Omni channel experience -

Digital Channel Convergence

n Optimised product bundle -

Virtual Point of Presence

Higher usage and transaction

Higher cross sell index n Digitisation of branches -

Lower transaction cost

Digital Fulfilment

n Electronic processing -

Converged Channel Platform

n Open architecture -

Lower transaction cost

Higher customer lifetime value Source: BCG

cont. on page 70

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TECH FOCUS

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costly hardware needed to support robust applications and systems. Cloud-based banks’ time to market is swift, and costincome ratios are low because of lower hardware and software cost.

Block chain development of tamperproof distributed ledgers, where the financial transactions can be recorded, can have grave implications on how some of the financial transactions are recorded and stored. It can eliminate the concept of a trusted third party and simplify the process of digitisation and sharing/ storing of contracts and deeds.

Another trend in this space is the emergence of devices, biometric and remote sensing. These have increased in popularity such as the Apple Watch, fitness watches, and other smartwatches.

These devices represent another avenue of exposure for interaction and communication. Biometric technology is increasingly being used in the financial sector for additional security.

EFFECTS ON DIGITAL BANKING

Payments and banking are being integrated in the daily life of the consumer. Hence, it is essential to embrace convergence in platforms and adopt a higher digital channel that is adaptable to the ecosystem. For example, if a customer does postpaid bill payments through his mobile application, when he logs on to internet banking, he should get a pop up asking if he would like to do a bill payment and a URL link to quickly navigate to transaction page for bill payment. Another example would be if a customer researches home loan product online and visits an ATM, it would prompt him if he wants a home loan and send the lead to a call centre. Converged platforms will also need to enable larger ecosystem for the customers, be it payments or transfers with integration in social media.

This unified customer experience induces customer to migrate to digital channel as it is unparalleled customised.

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Value Levers Growth via Digitization

Objectives n New customers n New/optimised products and services n New/optimised channels n New pricing & earning models

˜ 30-40%

n Revenue:

˜ 10-15%

Digital Business Value Effeciency via Digitization

n Overall Impact:

n Cost Saving:

˜ 15-25%

n Process effeciency n Asset utilization n Agility n New cost models

Source: CEDAR Management Consulting International

Tools of machine learning and big data analytics allow better understanding of customers. Product channel convergence opens a number of avenues and tools that banks can use to gain better insights on their consumers and prospects. Next best action analysis refers to the use of predictive analytics to identify the products or services customers are most likely to be interested in for their next purchase. FNB South Africa is using pattern analysis and algorithms, applied to predict a customer’s next best offer at the right time; through the right channel. This has helped in enhancing customer value.

With advent of IoT and the development of devices, the focus is shifted towards a self-service channel. Establishing a virtual point of presence through self service centres, using devices such as cash recyclers, kiosks, mini ATMs and cash deposit machines, video kiosks for specialised advice will gain prominence.

These lite branches which are highly automated with small staff, and are sales focused will gain prominence.

Administration expenses are dramatically reduced by automating simple and repetitive tasks. It is therefore pertinent to facilitate digital process fulfilment and have a system on the cloud.

Automation harnesses digital resources to re-engineer operations. This removes the associated costs, such as man hours and equipment, and even addresses hidden

n Provisioning

Reduction : ˜ 2.5 -3%

Source: BCG

costs like errors which can be avoided through well-developed technology. In India, IDFC Bank has implemented rural banking targeting the unbanked massmarket customers. They can open an account using biometric authentication integrated with government’s unique identification authority of India system.

IMPLICATION FOR BANKS

The competition to banks will not just be other bank, but will also be new fintech disruptors. Banks need to proactively embrace digitsation. It is imperative not only for growth but also to safeguard the existing market share. Banks need to view the entire value chain and deliver a personalised customer experience.

Personalised offerings and a converged channel experience would result in increased transactions, thereby leading to an increased variable cross-sell index per customer, and higher customer lifetime value. It is assessed that the revenue impact could be 15-17 per cent.

Using digital channels and kiosks will also have an impact on transactional cost as well as operating cost, and it is assessed that the impact count would be 20-25 per cent. However, digital banking implementation is not a piecemeal activity but a holistic organisation-wide philosophy implemented through a judicious mix of technology, processes and structure.

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EVENTS

Tariq Bin Hendi, CEO, Emirates NBD Asset Management, discussing the implications of new regulations.

Business defence forum: the compliance front line BAE Systems last month conducted an exclusive discussion on the issues surrounding cybersecurity threats for banks and compliance regulations

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AE Systems organised a highlevel forum to deliberate on the state of cybersecurity risks surrounding the financial system in the Middle East as well as rigid compliance regulations that aim to prevent it. Held at the Armani Hotel on the 10th October 2016, speakers at the event thoroughly elaborated on various

aspects of the subject ranging from terrorist financing issues to reasonable due diligence.

Simon Goldsmith, Head of Cybersecurity & Financial Crime at BAE Systems, opened the event providing a brief picture of the current financial landscape. Tariq Bin Hendi, CEO, Emirates NBD Asset Management, cont. on page 74

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We apply our steadfast vision, our entrepreneurial spirit and our investment expertise to add value to your wealth management strategies.

Union Bancaire Privée, UBP SA Rue du Rhône 96-98 | P.O. Box 1320 | 1211 Geneva 1, Switzerland T +41 58 819 21 11 | E ubp@ubp.com | www.ubp.com

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EVENTS

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went on to discuss the heavy burden of international compliance regulations as they personally implicate compliance managers. Tom Keatinge, Director, Centre for Financial Crime & Security Studies, Royal United Services Institute, provided a global macro view of counter-terrorist financing, while Edward Doyle, Head of Compliance, BAE Systems provided an explanation on how to optimise anti-money laundering (AML) investments.

David Pije, Head of AML & Sanctions, Enterprise Risk Management Group, FGB presented a case study on how to perform enhanced due diligence as well as insights on how AML and sanctions team collaborate. The last speaker of the day, Robin AmlĂ´t, CEO of CPI Financial provided an overview of the financial landscape in the region as he discussed the opportunities and the pitfalls of the industry.

Money laundering and counterterrorism finance have become front-page news and continue to be perpetrated in various cities around the world including Dubai. Shedding light on the numerous ways and means terrorism financing can happen, Keatinge pointed out that funding can come from various sources— from the government via student loans to personal financing against one’s salary. It is therefore crucial for financial institutions to monitor these transactions. Smaller financial institutions particularly need to exercise extra caution as they are perceived to have weaker defences due to their size. This is why it is important that the smaller institutions also have access to relevant technologies and systems.

Financial institutions have a legal and moral obligation to excercise all means to prevent financial criminal acts. Discussions have proven that this is something difficult to do because one has to make decisions based on customers with very limited information.

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Tom Keatinge, Director, Centre for Financial Crime & Security Studies, highlighting the many methods of terrorism financing.

Attendees listened intently as they learned the demands of cybersecurity.

Money laundering and counter-terrorism financing regulations require financial institutions to monitor for designated sanctioned persons and entities, and politically exposed persons and their associates, to ensure banks do not pursue a potential customer relationship.

However beyond this, it is difficult to ascertain whether a customer is a potential threat to an institution at an early stage.

In the Middle East, this is a particular challenge as so many names are quite common and similar. cont. on page 76

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EVENTS

cont. from page 74

Distinguishing between a legitimate and an illegitimate customer becomes a fairly difficult task. One of the problems is if banks get it wrong, they will be very heavily punished regulators who are very aggressive in their punishments with fines that can reach billions of dollars. The challenge for financial institutions here is how they can walk that line between meeting their national and international audience in AML issues while managing to effectively serve their customers in a normal way.

Another point that was raised

by Hendi during the forum was the difficulty in dealing with some regulators as that they almost always assume that financial institutions are corrupt or complacent. It was said that there is almost an expectation that financial institutions were bad and that makes a working relationship with the authorities particularly difficult.

To address these issues and combat the wider threat, it is very important to have better information sharing amongst the financial community.

This can be established through partnerships between the government and the private sector, using shared information as well as financial footprint to prevent criminal acts.

The problem now is the sheer economics of compliance that has now become incredibly burdensome. For example, some banks now employ more people in payments compliance rather than in payments operations. Thus the people that check the transactions outnumber the people that actually facilitate/ make them and this cost have grown exponentially. In 2007 HSBC employed 199 people in compliance globally.

Today it employs over 10,000. In the last eight to nine years, it has had from 200 to 10,000—it is a massive scale. And the cost and impact of failure is enormous to financial institutions. The key theme in the

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Edward Doyle, Head of Compliance, BAE Systems, pointed out that cybersecurity challenges that face large financial organisations exist just as much for the smaller ones.

recent months is the way prosecutors help financial institutions become more effective in their implementation of systems and the processes.

It has been proven quite difficult and ineffective to fine them. In past cases, these fines have come up to the billions and yet these failures continue to happen. It is therefore almost as if no matter what the fine is, the bank will be able to pay for it if they are big enough.

This is why regulations are now implicating senior managers not only in compliance but also in other functions of the bank to make them personally accountable—they can be criminally prosecuted. It is in the interest of compliance managers that they fully understand and meet the highest possible standard. In this respect, the way the law is, if a manager simply fail to prevent a criminal act, he has committed a criminal offence.

This is how it is done in the US and this requirement is expected to be adopted in many other countries in the near future.

The measurement of the effectiveness of this new law is not a successful prosecution of these senior managers. But the key benchmark is that, when banks start to fear that their key personnel may be incarcerated in the next two to three years, they will adopt a remediation programme for this. And this is actually what the regulators want. The goal of the law is not to put people behind bars, but to change the behaviour of financial institutions towards these issues. The measure is the rate of change in terms of process and system improvement.

In the UK, it became law in March this year and in US, it is projected to be implemented in New York next year. The criminal prosecution model against corporates and banks have not achieved the outcomes desired.

Thus by moving the burden/liability to the person who holds the role within the financial institution, who can see the weaknesses and prevent the act before they occur, is hoped to be more effective. Whether it is something that could work, only time will tell.

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PERSONALITY

Ziad Awad

Chief Executive Officer, Awad Capital I have been in investment banking for 22 years. I spent 13 years with Goldman Sachs (GS) in Paris, London then Dubai. I then moved to Merrill Lynch and was with them for five and a half years in Dubai. Then I set up Awad Capital in early 2013, and we moved to the DIFC early 2015.

I was studying at ESSEC business school in France and did an internship with Paribas in 1992. My Paribas mentor recommended me to her ex-colleagues at GS so I did the 1993 summer programme at GS in London and was hired out of that. From the minute I saw the Paribas trading floor in 1992, I became passionate about the financial markets and knew that this was the sector where I wanted to spend my career.

I am very proud to have founded a thriving pure investment banking advisory business. This has been against all odds as the common accepted wisdom was that regional clients do not appreciate the value of advice and are only willing to pay for branded advice or for financing. Thanks to our team and our clients, we have been able to prove that the regional markets are maturing and that a new generation of business leaders is emerging who want to secure the best and most independent and candid advice possible.

I really enjoy my work as 70 per cent of my time is spent advising clients and executing transactions for them. The other 30 per cent is spend on managing the team, including my regulatory responsibilities, as compliance and corporate governance are high priorities for me, not least given the regulated status of our firm.

Given the expertise we have and the large dollar amounts we are working with, we have the ability to make a massive difference to our clients businesses and their lives.

Our advice typically impacts business valuation or go/no go decisions on transformational acquisition or divestiture transactions. I really enjoy receiving calls from my clients who are CEOs of blue chip listed companies or owners of large private businesses, asking me for advice on important transactions and situations, which I know are crucial for their business. Knowing that they trust us and value our advice is extremely rewarding.

I am currently re-reading Antifragile by Nassim Nicholas Taleb. I have found great inspiration in Taleb’s work, which I use in my personal and professional life as well as when advising others. I enjoyed all Taleb’s books, particularly The Black Swan, but Antifragile is my all-time favourite read.

There is a fundamental issue in our capital markets, which is the lack of a developed institutional investor base for the regional equity and bond markets.

This is particularly acute in equities, which remain controlled by retail investors and as a consequence trade on sentiment rather than fundamentals. Similarly in bonds, when regional governments want to issue debt, they have to turn to the international pension funds and mutual funds. This is an entire segment of asset management that remains to be developed in this part of the world.

The regional markets have—in the big picture—great fundamentals, based on the wealth of natural resources (not just oil), the young and growing populations and the strategic geographical location between the East and West.

However, in the short term, the key drivers will continue to be the price of oil and the political instability. Factors such as the development of regional tech hubs and the very enlightened young leaders emerging across the private and public sector, give me great hope for our region.

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