BBR April '11 by Sterling Publications

Vol. VII. No. 50 April 2011

Editor’s note

Time to act

Publisher & Managing Director Sankaranarayanan

sankar@sterlingp.ae

MANAGING Editor K Raveendran

ravi@sterlingp.ae

Editor C L Jose

cljose@sterlingp.ae

consulting Editor Matein Khalid

matein@sterlingp.ae

Director Finance Anandi Ramachandran

anandi@sterlingp.ae

GENERAL MANAGER Radhika Natu

radhika@sterlingp.ae

Editorial Contributing Editors Anand Vardhan DESIGN DIRECTOR Ujwala Ranade ACCOUNTS Sujay Raj Circulation Supervisor Printing

ujwala.art@gmail.com

sujay@sterlingp.ae Ibrahim A. Hameed

Asiatic Printing Press L.L.C., PB 3522, Ajman, UAE. Tel. 06 743 4221, Fax: 06 743 4223www.asiaticpress.com, email: asiatic@eim.ae Distribution UAE: Tawseel PB No 500666 Dubai, UAE. Tel: (+971 4) 342 1512 Sultanate of Oman: Al-Atta’a Distribution Est., Kuwait: The Kuwaiti Group for Publishing & Distribution Co.Bahrain: Al Hilal Corporation, Qatar: Dar Al-Thaqafah, Saudi Arabia: Saudi Distribution Company

UAE is different from other markets on several counts though looks similar in many ways. The country has one of the highest mobile penetrations in the world with the number of registered mobiles far exceeding the number of residents. Take for example, the number of banks and number of insurance companies. Though the insurance penetration is extremely low compared with other developed or many developing countries, crowding in the insurance industry here belies the penetration statistics – with 60 insurers serving a population of about 5 million back to the banks, the number of institutions is more than 50, which is again far more than the market needs. This excludes the Category 1 banks that are licensed to operate from Dubai International Financials Centre (DIFC). But the worrying fact is that, while about six insurance companies control about 60 per cent of the underwriting market in the UAE, leaving 40 per cent to be shared by the remaining 54 players, on the other side, more than half of the banking assets are with just four entities. And the slant is worsening by the year, rendering it difficult for most players to make the going viable. Though we have been hearing about the need for consolidation, both in banking and insurance, the ego factor is said to be posing the real stumbling block to the process. While the going was good until 2008, the industry had been overlooking the need for consolidation. But things have changed since then. Banks have started feeling the real pressure; at least a few insurance companies are on the brim of missing their minimum capital requirement.

CL Jose

SterlingPublications FZ LLC Loft Office 2, G 01, Dubai Media City

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2011 1

Right Strategy Pays Off

38 2 BANKING & BUSINESS REVIEW

March-April 2011

CONTENTS BBR EXCLUSIVE 8 10 14 18 46

Foursome takes the half HSBC (UAE) From Red to the Black Mismatch threat eases for Tamweel Low fare airline, high-flying dividend Time ripe to create a master holding company

INSURANCE 40 Insurance Industry needs a Cover

WEALTH MANAGEMENT 52 Opportunities, challenges await Private Bankers

REGION 56 Disconnection in the Middle East

BANKING & BUSINESS REVIEW

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ROUND-UP

NBAD acquires new premises in US A

bu Dhabi International Bank (AIB), a wholly owned subsidiary of the National Bank of Abu Dhabi (NBAD), acquired new premises in a prestigious location in Washington, D.C., the United States. The new office is now located on K street in the heart of Washington, DC. The new office was inaugurated by Yousef Al Otaiba, the UAE Ambassador to the United States, and Qamber Ali Al Mulla, the Senior General Manager of International Banking Division at NBAD. “AIB’s decision to purchase and move to this new location reflects our commitment and expanding business in North America,” Al Mulla said after inauguration of the new premises.

NBAD, K-Sure sign MoU K

orea Trade Insurance Corporation (K-sure) and the National Bank of Abu Dhabi (NBAD), the number one bank in the UAE, signed a Memorandum of Understanding (MoU) to arrange trade and project financing loans to South Korean companies that have secured export insurance coverage from K-sure. Mark Yassin, Senior General Manager, Corporate and Investment Banking Division of NBAD and Ryu Chang Moo, Chairman and President of K-sure attended the signing ceremony. K-sure was founded by the Korean government in 1992 to operate export and import insurance programs for the purpose of facilitating global trade. They covered 22.9 per cent of the total exports of Korea in 2010, meeting demand from clients ranging from domestic large and small/medium businesses to foreign and domestic financial institutions. The MoU between NBAD and K-sure will effectively improve the competitiveness of South Korean companies that are looking to secure future industrial plant and other construction orders in the Middle East. “We are keen on selecting only the best in class partners and very pleased to be cooperating with K-sure to further boost trade and economic ties between South Korea and the UAE as well as other countries in the Middle East,” said Mark Yassin.

Emirates NBD ties up with DCCI for payment E mirates NBD has launched a new partnership agreement with Dubai Chamber of Commerce and Industry (DCCI), that allows Dubai Chamber members to credit their membership accounts with top-up payments through any of Emirates NBD’s 650 ATMs, Cash Deposits Machines (CDMs) or via Internet Banking. This convenient payment option will be available to both Emirates NBD account holders, as well as those who do not currently bank with Emirates NBD. Dubai Chamber members can use the available credit on their accounts to pay for items such as annual membership fees or any number of services offered by the Chamber. These include the provision of research material such as data and information about various economic

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Ajman Bank in mortgage tie-up A

jman Bank has entered into a strategic partnership with Manazel Real Estate, a UAE-based real estate developer. The agreement, which will see Ajman Bank provide Islamic home finance to customers, was signed at a ceremony by Ali Al Nuaimi, Deputy CEO of Ajman Bank, and on behalf of. Mohamed M. Al Mazrouei, CEO of Manazel, Saeed Al Khazaraji, Head of Support Services. Under the agreement, Ajman Bank customers can avail home finance on properties in Manazel developments. “This partnership meets the strong demand for Islamic home finance from customers in Abu Dhabi and Dubai,” said Ali Al Nuaimi. He added that as a company Ajman Bank is fully committed to supporting the economic development of the UAE, and this agreement will help to further stimulate the country’s real estate market.

sectors, markets and trade patterns, including trends and developments of the Consumer Price Index (CPI). There are also Members’ services, including registration and renewal of membership, issuance of Certificates of Origin, authentication of exporting documents and statistical reports. Members are also able to pay for any facility bookings through their membership accounts. Including this announcement, the bank’s payment partners have increased to a total of 32, which makes Emirates NBD the UAE leader in providing convenient payment solutions for the widest range of essential banking services. Other payment partners include Etisalat, Du, SALIK, DEWA, RTA, Emaar Properties and others.

CBD gets award E

mirates NBD has launched a new partnership agreement with Dubai Chamber of Commerce and Industry (DCCI), that allows Dubai Chamber members to credit their membership accounts with top-up payments through any of Emirates NBD’s 650 ATMs, Cash Deposits Machines (CDMs) or via Internet Banking. This convenient payment option will be available to both Emirates NBD account holders, as well as those who do not currently bank with Emirates NBD. Dubai Chamber members can use the available credit on their accounts to pay for items such as annual membership fees or any number of services offered by the Chamber. These include the provision of research material such as data and information about various economic

A ‘golden’ investment scheme R

eliance Mutual Fund, part of Reliance Capital Ltd launched a gold savings fund that enables investment in the precious metal in paper form without the investor needing to hold a dematerialised account. Highlighting the various uniqueness of the yellow metal as an asset class, Sundeep Sikks, CEO, of India’s leading asset management company, Reliance Capital Asset Management, said, “This is unlike the existing gold investments in Exchange Traded Fund [ETF] mode where a demat account is mandatory.” The New Fund Offer (NFO) from the Reliance Capital Asset Management Company which manages $24 billion across a variety of funds, is the first gold fund that provides investors with the hassle-free facility to invest in gold through online and physical application mode — a key differentiator in the domestic mutual fund industry. The NFO that opened on February 14 closed on February 28, 2011. The officials of the fund said investors could directly subscribe or redeem units on all business days from the AMC through the physical mode at the various designated investor services centres across the country, thereby, making it easily accessible and convenient. “We expect this gold investment industry to surpass the equity mutual funds in the next three years and are convinced that this product will offer a simple, affordable and investor friendly solution for investing in gold to the masses,” said Sikka. The investment objective of the scheme is to provide returns that closely correspond to the returns provided by Reliance Gold Exchange Traded Fund. The scheme’s performance will be benchmarked against the price of physical gold

Du-ing a Dh697m royalty write-back D

u, the second telecom operator in the UAE, got a Dh697.348 million boost from the new Cabinet decision on royalty, the analysis of the numbers shows. The company had provided for a potential royalty charge at 50 per cent of the annual net profit for 2008 and 2009 and had provided another 50 per cent of the net profit from the 2010 also as royalty for that year. The company has now received confirmation via UAE Cabinet decision dated January 2011 that royalty is payable commencing January 1, 2010 rendering it amply clear that the du is required to pay royalty from 2010 onwards only. “The Cabinet decision stated a 15 per cent royalty for the year ended December 31, 2010 to be paid by du. The company will be advised of the royalty for future years in due course. Since the Cabinet decision is an event, which occurred subsequent to December 31, 2010, the financial statements have been adjusted accordingly as the event provides evidence of condition that existed at the date of the statement of financial position,” the company statement said. The new decision has unlocked more than Dh697 million, as royalties for 2008 and 2009 at the rate of 50 per cent of the net profit have now been written back, and at the same time, the company requiring to pay only a less-than-provided royalty, at 15 per cent of net profit, for 2010. The royalty paid for 2008 was to the tune of Dh4.124 million against a net profit of Dh8.248 million and that for 2009 was Dh264.124 million (against net profit of Dh528.248 million), and the differential for the 2010 royalty works out to Dh429.100 million as the net profit reported by the company for 2010 was to the tune Dh1.266 billion – adding up to a handsome Dh697.348 million. In accordance with the Cabinet decision No 558/1 for the year 1991, then lone telecom operator, Etisalat Corporation was required to pay a Federal royalty, equivalent to 40 per cent of its annual net profit before such Federal royalty, to the UAE Government for use of federal facilities. With effect from June 1, 1998, Cabinet decision No 325/28M for 1998 increased the Federal royalty payable to 50 per cent. Du started paying royalty at a rate of 50 per cent from 2008 onwards as it started reporting profit only from that year.

BANKING & BUSINESS REVIEW

March-April 2011

ROUND-UP

Emirates NBD division teams up with Hansard E

mirates NBD Asset Management Ltd teamed up with Hansard International, a specialist long-term savings provider offering a range of investment products within a life assurance wrapper, to promote a number of funds managed by Emirates NBD Asset Management through the Hansard platform. Emirates NBD Asset Management is a whollyowned subsidiary and the asset management division of Emirates NBD, a leading bank in the region, and it manages over $1.6billion across a range of funds and asset classes. These include the MENA equity and fixed income funds and a suite of global risk profiled funds. Hansard focuses exclusively on developing, providing and supporting a range of flexible, tax-efficient, life assurance ‘wrapped’ investment products and solutions for international clients. According to the agreement, Hansard has established links to three Shari’a compliant funds managed by Emirates NBD Asset Management, namely the Emirates Islamic Money Market Fund, Emirates Islamic Global Balanced and Emirates MENA Opportunities Fund, which will be promoted through its platform to clients in the Middle East and Far East.

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EIB launches new product: E

mirates Islamic Bank (EIB) has launched a new personal finance product - Investment Murabaha. With this product, customers will now be able to purchase Sharia compliant shares listed on Abu Dhabi Securities Exchange (ADX) or Dubai Financial Market (DFM). The customers can hold or sell their shares depending on their objectives. The product designed for both UAE nationals as well as expats and is based on the Wakalah/ Murabaha structure. Commenting on the launch, Faisal Aqil, general manager, Retail Banking for EIB stated, “ We have always believed that only a truly customer-centric organisation will excel in the present and the future. It is this belief and passion that has endeared us to our customers and helped us acquire more and more customers.” “Investment Murabaha” is available through all 31 branches of EIB as well as its sales offices across the emirates. The product offers competitive rates and payment tenures for as long as 15 years. It also comes with exciting features such as zero processing fees, prestigious Skywards EIB credit card as a preapproved facility and much more.

Good outcome from FDI initiative T he Foreign Investment Office (FDI Dubai), the investment promotion agency of the Dubai Department of Economic Development (DED), has reported encouraging outcomes from its association with The Links Group (TLG), leading company formation specialists in the GCC, said a statement from Dubai Economic Department said. The innovative public-private partnership model formed in October 2010, along with the improving investor confidence has seen more than 40 new entities being established in Dubai to date, said Khalid Al Boom, Executive Director, Investment Support and Promotions, Foreign Investment Office. The Links Group, established in Dubai in 2002, works to enable companies to complete all legal and commercial processes required to set up a business in the UAE. Working together, The Links Group and the Foreign Investment Office collaborate to identify

companies and businesses looking to set up in Dubai and work with them through the transition process. “By offering a streamlined “fast-track” route to the market, The Links Group and the Foreign Investment office are gaining traction and driving companies onshore in the emirate of Dubai. The partnership has also contributed to the growth of positive investor sentiment and consequently brought more foreign direct investment (FDI) into Dubai,” said Al Boom. An A.T.Kearney report recently ranked Dubai among the top 25 global destinations that attract 75 per cent of global FDI flows. The report also showed a strong confidence in the prevailing business environment and growth prospects in Dubai with 28 per cent of the executives surveyed choosing Dubai as their top investment destination for the next three years and 81 per cent of existing investors revealing that they planned to maintain or grow their investments over the same period.

Credit Suisse to issue BCNs C

redit Suisse Group has entered into an agreement with Qatar Holding and The Olayan Group to issue $3.5 billion and CHF 2.5 billion of Tier 1 buffer capital notes (BCNs) with a coupon of USD 9.5 per cent and CHF 9 per cent respectively, for cash or in exchange for $3.5 billion of 11 per cent and CHF 2.5 billion of 10 per cent Tier 1 capital notes issued in 2008 (the Tier 1 Capital Notes). A statement from Credit Suisse said the purchase or exchange of the BCNs will occur no earlier than October 2013, which is the first call date of the Tier 1 Capital Notes, and is subject to the implementation of Swiss regulations requiring Credit Suisse Group to maintain buffer capital and receipt of all required consents and approvals from Credit Suisse Group’s shareholders, including approval for additional conditional capital or conversion capital. The BCNs will be converted into Credit Suisse Group ordinary shares if the Group’s reported Basel III common equity Tier 1 ratio falls below 7 per cent. The conversion price will be the higher of a floor price of $20/ CHF 20 per share, subject to customary adjustments, or the daily weighted average sale price of the Group’s ordinary shares over a trading period preceding the notice of conversion. The BCNs will also be converted if FINMA (Financial Market Supervisory Authority) determines that Credit Suisse Group requires public sector support to prevent it from becoming insolvent, bankrupt or unable to pay a material amount of its debts, or other similar circumstances. Qatar Investment Authority (an affiliate of Qatar Holding) and The Olayan Group own, in addition to the Tier 1 Capital Notes, significant holdings of Credit Suisse Group shares.

Betafence opens regional office B

elgium-based Betafence Group, the worldwide market leader in Perimeter fencing solutions, has opened a new regional head office and showroom in at Dubai Airport Freezone. The opening of the new regional office follows a 22 per cent growth that it achieved in the region during 2010.The new office and showroom occupies an area of approximately 2368 square feet. On the occasion of the inauguration of the new office, Christophe MICHEE, Sales Director, Middle East for Betafence, said the new regional head office and showroom would support the company’s on-going expansion in the Middle East. “The new showroom will provide an excellent opportunity for our customers to meet with us directly and see for themselves the range of fencing systems and security solution (lighting, detection, security obstacle, access control) from Betafence,” he added. Betafence Middle East is currently offering its full service - design, technical and sales & marketing support, to the existing and potential projects in Kuwait, Qatar, Bahrain, Oman, Yemen and UAE. Apart from this, Betafence operates a separate manufacturing entity to handle projects in Saudi Arabia.

BANKING & BUSINESS REVIEW

March-April 2011

BBR EXCLUSIVE

Foursome

takes the half Emirates NBD, NBAD, ADCB, FGB control more than half of assets

our major banks by assets – Emirates NBD, National Bank of Abu Dhabi (NBAD), ADCB and First Gulf Bank (FGB) have been slowly tightening their grip on the UAE market with they alone now controlling more than 50 per cent of the total assets in the UAE’s banking system that has about 50 banks. While about 51 per cent of the total assets are with these four banks led by the Dubai Financial Market (DFM)-listed Emirates NBD, which alone controls about 18 per cent of the total assets, these four banks also account for 54 per cent of the total loans in the UAE’s banking sector as of December end, 2010. Interestingly, the UAE’s banking system has, apart from about 20 local banks leading multinational banks such as HSBC, Standard Chartered Bank, Citi, RBS, etc that enjoy decades-old presence in the UAE market. Another interesting fact is that while these four banks have marginalized other banks by leaving just 50 per cent of the market to be shared among about 45 banks, they do not have a commensurate market share in the equity. These four banks had Dh93 billion worth equity against a

total Dh231.4 billion enjoyed by the banking system as a whole as of 2009 end. A worrying observation from the analysis of the asset growth in the banking system is that the share of assets controlled by these four banks has been steadily increasing since 2008, the three-year period analysed by the Banking & Business Review (BBR). While the hold on assets by the four banks was at 48.23 per cent as of 2008 end when the banking system closed the asset book at Dh1.456 billion that year, this went up by about two per cent to 50.30 per cent as of 2009 end when the total assets of all banks were at Dh1.519 billion, and again to 50.85 per cent as of 2010 end when the total banking assets grew to Dh1.605 billion. The trend noticed was almost the same in the deposits as well as in loans & advances. While the share of deposits with the four top banks was at 45.86 per cent during 2008, this improved to 48.22 per cent towards 2009 end and to 50.15 per cent as of 2010 end. The loans and advances though followed the same trend by registering 51.20 per cent in 2008 and 54.38 per cent in 2009, a

The share of assets controlled by these four banks has been steadily increasing since 2008

While the control on asset, loans & advances and deposits has been growing, the change seen in the size of their capital [combined] has been inversely proportional to that

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slight easing was noticed in the share of the four biggies as it marginally fell to 54.03 per cent as of December end, 2010. The interesting development among these four banks was the slow climb-down of Emirates NBD on the asset front. Though all other banks were able to strengthen their position on the asset front decently during these years, Emirates NBD’s growth was slow as the bank could add only about Dh4 billion during this period thus losing its market share from 19.39 per cent as of 2008 end to 17.83 per cent when the year 2010 closed. Another interesting observation emerged from the numbers compiled by BBR is that while the control enjoyed by these four banks on asset, loans & advances and deposits – the key elements of growth, has been strengthening through these years, the change observed in the size of their capital [combined] has been inversely proportional during these three years under study. While during 2008 when these four banks held 48.23 per cent of the total assets in the banking system, they held a similar portion of capital – 47.29 per cent. But when the control on assets increased to 50.30 per cent, the capital share dropped to 40.19 per cent and eventually when the assets controlled by the foursome further improved to 50.85 per cent as of 2010 end, the percentage of capital held by them again slipped down to 39.46 per cent. “This amply proves that either other banks are holding huge idle capital or these four big banks have been – over leveraging their capital, which I think is not happening as we understand from the shape of the capital adequacy ratio (CAR),” noted an analyst with a DIFC-based investment bank.

Clamp-down on cash dividend Central Bank wants pay-out ratio to be within 50 per cent By Amit Chettupuzha

ank of Sharjah (BoS) has scaled down the cash dividend from the earlier 15 per cent recommended by the bank’s board of directors to 10 per cent on instruction from the Central Bank of UAE, according to notes to the bank’s 2010 financials. The Central Bank, like in the last year wanted the banks in the UAE to limit to the dividend payout to 50 per cent, which means that the total cash dividend payout should not exceed 50 per cent of the net profit the bank makes for the given year. Bank of Sharjah with a share capital of Dh2.1 billion and a total shareholders’ equity of Dh4.394 billion has made a net profit of Dh403.947 million for 2010. Obviously, 15 per cent cash dividend at Dh315 million is more than 50 per cent of profit the bank made for the financial year ending December 31, 2010. “Globally, there is a move to strengthen the capital base of the banks the Basel III criteria for Tier I capital would require the banks the world over to strengthen their common share pool and retained earnings. In the context, the Central Bank instruction is a good move in the right direction,” said chief financial officer of a Dubai-based bank. During the year Bank of Sharjah sold its 35 per cent equity in an associate whose principal activity was land development in prime industrial areas within the UAE. The total assets of the company was Dh495.114 million and the total liabilities were to the tune of Dh266.331 million bringing the net assets to Dh228.783 and the bank’s share of net assets to Dh80.074 million. The bank having received proceeds from this deal to the tune of Dh87.500 million was able to book a profit of Dh7.426 million from this deal. Further, the bank also disposed of its investment in Ginco Steel and Polyco LLC, two wholly owned subsidiaries of the bank that were acquired previously as part of settlement of bad debts. These were disposed of as they were considered as not related to the bank’s core activity and as such viewed by management as non-strategic. Here also, the bank booked a profit of Dh12.097 million. The bank also liquidated its investment in Wifco Financial Brokerage, a wholly owned subsidiary. Wifco was liquidated at the book value of the investment, at Dh4.5 million and no loss or gain was booked from this deal. In another development, Bank of Sharjah finalised the legal transfer of 30 per cent equity stake in Emirates Lebanon Bank SAL to EL Capital FZC that was initiated about three years back. The bank has stated that this has not had any impact on the bank’s 2010 results.

BANKING & BUSINESS REVIEW

March-April 2011

BBR EXCLUSIVE

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HSBC (UAE)

From Red to the Black T he UAE has once again become the most profitable operation among HSBC’s Middle East offices after posting a profit before tax (PBT) of $324 million (Dh1.189 billion) for 2010. The UAE operations of the HSBC Middle East were in the red during 2009. While the total PBT from the Middle East operations were to the tune of $892 million (Dh3.274 billion), $195 million was contributed by Egypt, Qatar made $138 million and Saudi Arabia closed the year with a PBT of $178 million for 2010. The year 2009 saw UAE operations post a marginal loss of $3 million compared with $861 million PBT the UAE operations posted for the previous year (2009). During that year, while Egypt posted a profit before tax of $224 million, Qatar reported $136 million and Saudi Arabia ended up with a PBT of $193 million, whereas the Middle East PBT was down at $455 million compared with $1.746 billion the bank posted in 2008. While almost all sectors, including Personal Financial Services (PFS), Commercial Banking and Global Banking & Markets (GB&M) had come back to profitability during 2010, GB&M was the only area where UAE operations of the bank could report a noticeable profit for 2009, at $307 million. According to the bank financials posted on its website, loan impairment charges and other credit risk provisions in the Middle East fell

by 53 per cent to $627m as lower loan impairment charges in both PFS and CMB were partly offset by an increase in GB&M following restructuring activities. In its PFS business, loan impairment charges declined by 61 per cent to $227m, reflecting a marked decline in delinquency levels and lower lending balances, particularly in the credit card and unsecured personal lending book, “as a result of managing down higher risk port-

first half of 2010. The improvement in economic conditions during the latter part of 2010 resulted in lower loan impairment charges in the second half of the year. The bank in its comment stated that Dubai had another challenging year in 2010, as it continued to struggle with high levels of debt, falling real estate prices and a stagnant credit market. Although no figures have been released, officials estimated in October that real GDP was likely to have grown by 2.3 per cent in 2010, mostly from global trade as exports rose 35 per cent in the year to the third quarter. “The domestic economy was considerably weaker through most of the year although there were signs of an improvement by the year end. In Egypt, GDP growth returned to 6 per cent by the end of 2010, driven primarily by domestic demand. Egypt’s structural economic strengths leave us positive on the medium-term outlook, although recent political turmoil might overshadow its near-term prospects,” it noted. In October 2010, HSBC completed the sale of its investment in the British Arab Commercial Bank, on which a loss of $42m was recorded. In the Middle East, the network of branches of HSBC Bank Middle East, together with HSBC’s subsidiaries and associates, gives the bank, the widest coverage in the region. HSBC’s associate in Saudi Arabia, The Saudi British Bank (40 per cent owned), is the Kingdom’s fifth largest bank by total assets.

The additional stake from DIB, which effectively makes Tamweel its subsidiary, was welcoming news not just for the company and its shareholders, but the industry as a whole folios.” The report said that the credit limits were tightened and the customer acquisition strategy was revised in the region to concentrate on Premier and Advance customers. “This resulted in an improvement in credit quality. In CMB, lower loan impairment charges reflected a reduction in collective impairment charges and fewer specific loan impairment charges as economic conditions improved,” it added. Loan impairment charges and other credit risk provisions in GB&M rose, mainly from restructuring activity, which drove UAE-related loan impairments for a small number of large corporate customers in the

BANKING & BUSINESS REVIEW

March-April 2011

ADVERTORIAL

A Decade of Success

JCA chalks out expansion plan in the region

CA, a division of Jitendra Consulting Group (JCG), Initially delivering services and extending support has completed a decade of successful journey by to the business houses in the markets where JCA is supporting the businesses in the region and India present, the group built upon the core competencies, through different services that include Auditing & Acadapted to the dynamic market, led business processcounting, Business Formation, Business Advisory, Cores through innovation and constantly surpassed the porate Finance, HR Services, Trademark registrations, expectations of the clients. Intellectual Property, and Management Consultancy. JCA Group is ‘approved auditors’ with most of the He said despite the past two tough years, which banks in UAE. “Our audit reports are in compliance saw the world struggle with the greatest economic with the International financial reporting standards crisis since the Great Depression of the 1930s and 40s - the Recession of 2008, JCA could sail through the “Celebrating the completion of 10 years rough waves effortlessly due to the in January, 2011, we would like to take resolute action and the clients’ unwathis opportunity to thank all our clients vering support to the Group. In 2001, JCA sought to recreate and stakeholders, who have stood by the landscape of the business world us at all times. Our remarkable journey in the region, set its base in one of to success could not have been possible the most dynamic financial capitals of without your cooperation and faith that the world, Dubai. Having earned the ISO 9001:2001 certifications through helped us materialises our vision and its sheer commitment and diligence, achieves unforeseen heights,” said Jitendra and adhering to stringent standards, Gianchandani, the chairman of Jitendra JCA always endeavoured to add quality into business. Chartered Accountants (JCA) “Drawing our spirit from an incredible grasp of fundamental values, business acumen and keen interest in (IFRS) and we maintain utmost transparency while isdelivering the highest standards in all aspects of servsuing the audit report,” Gianchandani said. ices, we won over several multinational corporations, Backed by a 40-odd team of full-fledged versatile, (Motorola, Weatherford, Al Maya Group, Al Adil Tradcreative and seasoned industry experts, JCA expanding, Lals Group and SBI), financial institutions and goved its services into several international financial hubs. ernments,” said Gianchandani.

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“Our aspirations lay in providing an unmatched customer support, insightful services and strategic collaborations that almost create a revolution of sorts,” Gianchandani further notes.

Office Network Today, JCA has several offices in the UAE and India that include, Dubai (HQ), Jebel Ali Free Zone (UAE), Sharjah (UAE) and Mumbai. Gianchandani said the plans are underway to strengthen the group’s branch presence, and soon the UAE and other countries in the region will see new offices being set up in different key cities. JCA’s strategic global partnerships allowed the group to move forward further, serve its clients better and create points of contact that ensure that JCA is always within reach for its esteemed clients. Gianchandani says, “Our primary objective has always been to provide customised solutions to specific requirements of each of our clients. Comprehensively analysing all aspects, we understand the significance of in-depth assessment. At JCA, personalised assistance and attention is not just a norm, rather it’s an inherent aspect that we live by on a daily basis. “We continually invest a lot of time and effort in redefining our processes, upgrading our delivery network, enhancing our technological structure and equipping ourselves with the latest industry education,” he said. The mission of the group is Create greater value, Tap unexplored potential and Partner with the clients towards an incredible new future through innovation, determined action and a ‘resolute will’ to deliver the best. JCA would endeavour to reach the pinnacle of business performance and strive to deliver efficient new-age functionality that helps the group’s global clients to stay healthy and ahead always. Recently, JCA, one of the top ten professional accountancy firms in the UAE, shot into fame after publishing IFRS for SMEs’ Pocket Book, which provides easy navigation and guidance to SMEs on implementing the new accounting standards. JCA has always been keen to support the business in the region, however small or big they are. Despite the recession, the business volume and cli-

ent list with JCA have been expanding all through these years JCA Group, through its international affiliates, provides prompt services to businesses worldwide by coordinating the efforts of its member firms for the utmost advantage of its clients at multiple or new locations. With over 1000 clients, both international and local, the group has already been awarded the prestigious ISO 9001: 2008. The group has approved auditors in Dubai International Financial Centre (DIFC), and has also been approved by local and international banks in the UAE. With registered agents with offshore centres in the UAE – Jafza, RakFTZ, and Rakia, JCA Group ensures that its audit reports are in compliance with the International financial reporting standards (IFRS), and always endeavours to maintain utmost transparency while issuing the audit report. The group is an authorized Training employer for the students of ACCA, ICIEW and ICAI.

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BBR EXCLUSIVE

Mismatch threat eases for Tamweel By CL Jose

amweel and its corporate depositors have agreed to roll forward the deposits worth Dh4.9 billion for five years at a profit rate of 4 per cent, according to a company document. However, the company officials refused to share the names of the corporate depositors that have agreed for the roll-forward with Banking & Business Review (BBR) despite query to the company PR agency. “The maturity gap as of December 31, 2010 arises as a result of contractual maturities of assets and liabilities. The Group [Tamweel] has agreed in principle with its corporate depositors to roll forward the financing obligations amounting to Dh4.9 billion for five years at a profit rate of 4 per cent. Formal agreements have been signed for Dh3.6 billion of these deposits while others are in the process of being signed,” said the company document. Though there has not been any fresh origination of mortgage financing for some time until the deal with Dubai Islamic Bank (DIB) was signed, the market conditions and the twoyear long uncertainty on the fate of the company may have posed hurdles for getting fresh deposits.

While the company’s maturity analysis of assets and liabilities does not show any serious gaps between assets and liabilities during the oneyear period until December 31, 2011, there is a Dh199 million-gap dur-

between one and five years, there are contractual financial obligations worth Dh7.046 billion that would render a maturity gap to the tune of Dh4.831 billon as per the contractual maturity analysis of assets and liabilities. This according to financial experts could pose problem for the company unless certain deposits are rolled forward or the company is able to raise fresh deposits during this period. “The company being in trouble

The additional stake from DIB, which effectively makes Tamweel its subsidiary, was welcoming news not just for the company and its shareholders, but the industry as a whole

14 BANKING & BUSINESS REVIEW

ing the three-month period ending March 31. But during the period ranging

During the period ranging between one and five years, there are contractual financial obligations worth Dh7.046 billion that would render a maturity gap of Dh4.831 billon as per the contractual maturity analysis of assets and liabilities

March-April 2011

Mortgage financial back in profit

Formal agreements have been signed for Dh3.6 billion of these deposits while others are in the process of being signed

for the past more than two years, raising fresh deposits is not an easy thing for Tamweel. Obviously, getting the depositors to agree for a roll forward is the most viable option for the company,” said a banking expert. Tamweel which made Dh553.208 million income from Islamic financing and investing assets for 2010, has posted a net profit of Dh26.024 million for the year against Dh54.458 million loss for the previous year. Tamweel said 2010 was a positive year as the company managed to record a net profit amid continued adverse market conditions, without the origination of new business, proving a successful business model in very challenging times. “The additional stake from Dubai Islamic Bank which effectively makes Tamweel its subsidiary was welcoming news not just for the company and its shareholders, but the industry as a whole,” the directors ‘ report noted. It also said the business of home finance has a fundamental role to help fuel recovery of the UAE property market and Tamweel is happy that with DIB’s backing, the company can support the recovery. “We enter 2011 full of optimism with the key objectives of originating new quality business, managing our existing portfolio and continuing to improve our customer service standards,” the report further added.

16 BANKING & BUSINESS REVIEW

amweel, the largest stand-alone Islamic home finance provider in the UAE, has gone into the black with a net profit of Dh26 million for 2010. The company has thus demonstrated its resilience during a period of increasing stability in the country’s real estate sector. The company has made a turnaround from its financial performance in the previous year, when it reported a net loss of Dh54.4 million. In line with this positive financial performance, and as market conditions improve, Tamweel continues to introduce innovative products and services. The move by Dubai Islamic Bank (DIB) whereby the bank increased its equity ownership significantly in Tamweel has positioned the company to support the country’s real estate sector. In November 2010, Tamweel announced that it would offer up to 80 per cent financing of the current value of ready residential properties in Dubai and Abu Dhabi. Demonstrating its commitment to meeting the needs of end users, the company will extend finance to salaried and self-employed residents who meet the required eligibility criteria. More recently, the company announced the launch of a promotional finance offer starting at a profit rate of just 4.99 per cent per annum.

Tamweel announces 2010 net profit of Dh26 million

Islamic home finance provider reverses previous financial trends, eyes significant market opportunities “We are extremely pleased to share our positive financial results for 2010, which follow Tamweel’s recent, successful return to the market,” said Abdulla Al Hamli, Chairman of Tamweel. Varun Sood, acting Chief Executive Officer of Tamweel, said the strong financial performance over the past 12 months reflects the company’s renewed focus on prudence and conservatism, allowing it to book a highquality portfolio of select customers and properties. “At the same time, however, we have set ourselves a challenging plan for this year and we remain committed to continue to launch our unique products and services that encourage increased activity among end users, contributing to stability and growth in the UAE real estate sector as a whole,” he added.

March-April 2011

BBR Mag FP.ai

CMY

5/2/10

4:28 PM

BBR EXCLUSIVE

Low fare airline, high-flying dividend Air Arabia paying out more than it earned By CL Jose

ir Arabia, the first and the most successful low-fare airline in the region has been so liberal on cash dividends that it has given out more than it has made as profit through its operations during the past two years. However, 2010 dividend is yet to be distributed, as the annual general meeting (AGM) to be held

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March-April 2011

By 2016, Air Arabiaâ&#x20AC;&#x2122;s total operating fleet will exceed 50 aircraft, more than doubling the size of its current fleet

these years together will thus work out 110.26 per cent, which is rarely heard of in the UAE. The dividend for 2010 will be Dh373.280 million against a net profit of Dh309.789 million – the payout ratio is 120.5 per cent. The dividend for 2009 was Dh466.6 million against Dh452.234 million – payout ratio was 103.177 per cent. The company had made a statement on its dividend policy, which reads, “The Company is expected to adopt a dividend policy of distributing at least 25 per cent of its net income as dividend payments subject to bank financing, working capital and capital expenditure requirements.” Interestingly, the returns from its deposits with banks have been contributing to the company’s profit substantially all these years. Air Arabia still has Dh1.844 billion as cash, whereas it had collected Dh2.56 bil-

on March 21 (BBR goes to the press before the Air Arabia AGM), has to ratify the same. The company had distributed 10 per cent cash divided for 2009 when the company posted a net profit of Dh452.214 million net profit. The dividend payout on a paid-up capital of Dh4.666 billion worked out Dh466.670 million. Coming to 2010, the board has recommended a lesser dividend at 8 per cent when it has posted a net profit of Dh309.559 million and the dividend payout again would exceed the net profit, and amounts to Dh373.336 million. However, Air Arabia has refused to respond to the queries sent by BBR seeking to explain the reasons for distributing more money as dividend than the company earned as profit during 2010. The dividend payout ratio for both

service to 67 destinations from three regional hubs, has witnessed a decline of 31.5 per cent in is net profit for 2010. Air Arabia’s total turnover for 2010 reached Dh2.08 billion, an increase of 5.5 per cent compared with Dh2 billion reported in 2009. A statement from the company said the airline served 4.45 million passengers in the 12 months ending December 31, 2010; an increase of 10 per cent compared with 4.06 million passengers in 2009. The carrier’s seat load factor – or passengers carried as a percentage of available seats – also increased in 2010, reaching 83 per cent, an increase of 3 per cent compared with 80 per cent reported for the full-year 2009. “The year 2010 continued to witness pressure on yields and higher fuel prices, trends that have impacted the profitability of the sector worldwide. Nevertheless, Air Arabia 2010 results continued to demonstrate solid profitability, higher revenues and increased passenger numbers and seat load factor,” it further said. Recently, Air Arabia announced the expected delivery of a total of six aircraft this year after receiving its first of the 44 aircraft in October last year. By 2016, following the delivery of 44 A320 aircraft, Air Arabia’s total operating fleet will exceed 50 aircraft, more than doubling the size of its current fleet. Air Arabia commenced operations in October 2003 and currently operates a total fleet of 26 new Airbus A320 aircraft, serving 67 routes from three hubs in UAE, Morocco and Egypt.

The dividend payout ratio for both these years [2009-10] together works out 110.26 per cent [average], which is rarely heard of in the UAE lion through a huge IPO four years ago. The total paid-up share capital of the company is Dh4.667 billion. The profit & loss statement of the company shows that the deposit with banks alone has generated Dh115 million as profit for 2010 and it was much more in the previous years. In fact, this Dh115 million has contributed more than 37 per cent to the net profit for 2010 at Dh309.789 million. Air Arabia, which now operates

BANKING & BUSINESS REVIEW

March-April 2011

BBR EXCLUSIVE

ADCB exposure to Dubai World at Dh6.75b? Is ADCB’s exposure to Dubai World Dh6.749 billion? Though there is no specific mention about the bank’s exposure to any particular borrowers of the bank in the 2010 financial report, it somehow says, “Dh6.749 billion represents one single borrower located in the emirate of Dubai.” It went on to state that as per the terms of the restructuring, the principal amount would be paid in full but at a lower interest rate and over a longer period than the terms of the original loan. An e-mail sent to ADCB verifying whether this particular exposure pertains to Dubai World failed to generate any response from the bank. BBR clearly requested the bank to clarify if this does not pertain to Dubai World or not. ADCB’s financial report stated that the bank has agreed the restructuring terms, and the final legal documentation was in the process of being formalised.

ADCB also stated that it has recognised an impairment charge of Dh1.055 billion on account of this restructuring and will be unwound gradually over the period of the loan in accordance with the performance of the account. “This customer account balance was not past due, however since it has been impaired, the same has been classified as renegotiated and impaired,” the bank said.

RBS retail business

On October 1, 2010, ADCB acquired the retail banking, wealth management and small and medium enterprise businesses of The Royal Bank of Scotland (RBS) in the UAE. Based on the fair valuation exercise, the bank has recognised Dh143.400 million as intangible assets and Dh18.800 million as goodwill allocated to the different cash generating units including credit cards, loans, wealth management business and overdrafts.

Focus now on emerging markets T

he equity returns in emerging markets are likely to continue to outperform those of developed markets, Barclays Capital has found in a recent research. This was revealed by the 56th edition of its annual research publication, the Barclays Equity Gilt Study. The emerging market economies are set to continue to deliver higher growth and lower volatility than developed markets, which should translate into out-performance in emerging market equities. The publication noted that the emerging market debt, by contrast, has been largely re-priced, and excess returns are likely to be much smaller over the next decade. The impressive growth of China and India is increasing demand for commodities at a rapid pace, making it difficult for technological advances to allow production to catch up with demand. On a different note it also said that the current focus of policymakers on short-term results suggests that markets and economies are likely to continue to exhibit a high degree of volatility, reminiscent more of the 1970s and 2000s than the 1980s or 1990s. “Current policy settings are extraordinarily easy and,

20 BANKING & BUSINESS REVIEW

March-April 2011

if left in place for too long, will result in destabilizing imbalances and stretched asset valuations,” it stated further. The investment strategies for emerging markets were examined and the individual regions and countries were studied for their respective risk properties and relative attractiveness. The recent impact of rapid commodity price rises on inflation is the subject of an additional article by Barclays, making the case that the disinflationary impact of low cost producers such as China and India is transitioning into an inflationary influence. “As a result, the disinflationary trend of the past 30 or so years appears to be turning.” “The Equity Gilt Study offers a unique opportunity for in-depth analysis of medium-term issues confronting investors,” said Larry Kantor, Head of Research at Barclays Capital. “The extraordinarily easy policies put in place during the crisis are providing a significant lift to financial markets, but at the same time they signal important risks beyond the near term. One of the effects already evident is a sharp rise in the prices of raw materials.

World’s first Islamic bourse eyeing short-selling DFM ready for Delivery versus Payment By CL Jose

ven as Dubai Financial Market (DFM) authorities have announced their intention to introduce Short Selling, and Securities Borrowing & Lending later this year, Islamic scholars have started privately questioning the rightness of such a move on the world’s first Shariahcompliant stock exchange. DFM recently announced its full readiness to introduce the new settlement mechanism “Delivery versus Payment” (DvP) followed by Short Selling and Securities Borrowing & Lending later this year. DFM said it has completed all the technical requirements to apply DvP in coordination with custodians and brokerage firms. The exchange is poised to be at the forefront of regional markets to adopt DvP before the end of the first quarter 2011. A statement from DFM said, this development is phase one of DFM‘s drive to implement international best practices, whilst continuing to respond to the UAE Securities and Commodities Authority (SCA) future regulations and closely cooperating with SCA in its efforts to develop the financial markets in the UAE. It also said Phase two would include getting DFM geared up for the introduction of Short Selling and Securities Borrowing and Lending later this year. A few Shariah scholars the Banking & Business Review (BBR) talked to on the Short Selling initiative on DFM, dubbed the move as not one in the right direction. “I will say that clearly, short selling cannot be Shariah-compliant. Sharia laws do not allow one to do trading in shares without having a title or possession of the shares,” said Dr Hussain Hamid Hassan, a prominent Shariah scholar who serves on the boards of several Islamic institutions within and outside the UAE. Islamic scholars argue that by selling a stock short, more and more short-sellers might be encouraged to follow the act, leading the firm to expensive stock buy-

back initiatives or in the worst case, to bankruptcy. The renowned Shariah scholar Sheikh Dr Taqi Usmani was quoted as saying [not in this context] that by selling a stock short, the ‘investor’ may gain while the underlying company loses value - a clear violation of the ban of unjust deeds. “The Short selling is still at the planning stage. We, at DFM, will certainly hold discussions with Sharia’a scholars before taking any further steps,” a DFM spokesperson responded to a BBR query on the same. DFM said the Delivery versus Payment (DvP) is a an internationally acclaimed settlement mechanism and is a low risk and more efficient system, which is widely used by the international exchanges such as the New York Stock Exchange (NySE), London Stock Exchange (LSE) and Hong Kong Stock Exchange. “It is noteworthy that having DvP in place is one of the key requirements for a potential promotion of the UAE stock markets from ‘Frontier Markets’ to ‘Emerging Markets’ within the MSCI Emerging Markets Global Index. The international index company is expected to review the status of the UAE markets in June 2011,” it added. Essa Kazim, Managing Director and CEO, DFM, said the DvP mechanism is an international best practice recommended by the International Organization of Securities Commissions (IOSCO) in its document “Recommendations for Securities Settlement System” published in November 2001. “DFM has engaged recently in the preparation of a series of progressive plans to enhance the market regulatory infrastructure, anticipate UAE Securities and Commodities Authority (SCA) future regulations and continue to closely collaborate with SCA in its efforts to develop the financial markets in the UAE through the introduction of DvP followed by ‘Short Selling’ and ‘Securities Borrowing and Lending’.

“Short selling cannot be Shariah-compliant. Sharia laws do not allow one to do trading in shares without having a title or possession”

BANKING & BUSINESS REVIEW

March-April 2011

BBR EXCLUSIVE

New management unearths serious accounting flaws Emirates Refreshment overhauls board, management By Amit Chettupuzha

mirates Refreshments Company, formerly known as Jeema Mineral Water Company, has incurred significant losses during 2010 due to certain prior years’ errors identified by the new management, according to chairman’s report of the company. “And this has been unearthed by the new management of the company,” noted the chairman of the company, Ali Humaid Ali Al Owais. The company shareholders appointed new members to the board and gave responsibility to the new board to resolve all the deep-rooted issues. The company reported a loss of Dh11.256 million for 2010. Serious errors in the financial statements of prior years have been identified during the current year. Certain quoted equity securities held by the company and classified as available for sale (AFS) though were impaired as of December 31 2008, no impairment loss was recognised against this in profit & loss account, according to the new management. This has effectively resulted in the overstatement of retained earnings, and the understatement of the fair value reserve by Dh3.93 million as of January 1, and December 31, 2009. The management claims that this has now been rectified in these financial statements. “However, the error does impact and therefore does not

require restatement of the profit & loss or earnings per share for the comparative periods presented in these financial statements,” the management explained. Again, when the management has carried out a physical verification of ‘other inventory ’ items mainly comprising wooden pallets during the current year (2010), significant differences in

and distribution expenses for the year ended December 31, 2009,” it added. Accordingly, the error has been corrected in the corresponding figure as at January 1 and December 31, 2009 included in the statement of financial position with the associated charge recorded in the corresponding figures of selling and distribution expenses for the year ended December 31, 2009 in profit & loss. The report said during the current year, management has reviewed the balance of prepaid employee cost and, based on the calculations, has noted that these balances were significantly overstated in prior periods mainly because the amortisation of these costs was not recorded correctly. “As a result, the balance of prepayments in prior periods included costs pertaining to employees, who were no longer employed by the company and these costs should have been charged to profit & loss in prior periods,” the report notes. Management has recalculated the balance of prepayments at December 31, 2009 in order to correct this error. Accordingly, the error has been corrected in the corresponding figures of prepayments and retained earnings as at December 31, 2009 included in the statement of financial position. The company said since the relevant employee records and details of these costs for periods prior to December 31, 2009 are not available, it is impracticable to retrospectively restate periods prior to December 31, 2009.

Certain quoted equity securities held by the company and classified as AFS though were impaired as of December 31 2008, no impairment loss was recognised against this

22 BANKING & BUSINESS REVIEW

the actual stock as compared with the book stock have been discovered. Consequently, management has reassessed the existence of inventories of these items at prior reporting dates, to determine whether such inventory balances were correctly reported at those dates. The report stated that based on such analysis, the management has concluded that certain inventories did not exist in prior periods and were erroneously included in the inventory balances as at those dates. “Consequently, this has resulted in the overestimate of inventories as at January 1, and December 31, 2009 and an understatement of selling

March-April 2011

IAS 40 takes villain’s role this time

Aldar’s fair value loss on investment properties was Dh7bn By CL Jose

IAS

40 has this time acted a ‘villain’ in the profit & loss (P&L) statement of the Aldar Properties for 2010 plunging the company, the largest listed real estate company in Abu Dhabi, into a huge loss. While Aldar’s loss for 2010 was a whopping Dh12.658 billion compared with a modest net profit of Dh837 million in the previous year, a big chunk of the loss – Dh6.992 billion has been booked by virtue of IAS 40 which deals with fair valuation of investment properties. While the total revenue for 2010 was Dh1.791 billion against similar revenue of Dh1.979 billion for the previous year, net loss before impairments and fair value movements was to the tune of Dh1.357 billion compared with a modest Dh354 million worth loss for 2009. But provisions/writeoffs were to the tune of a sizeable Dh4.308 billion for 2010, but that for the previous year were at Dh605.8 million. Interestingly, Aldar Properties could book a substantial Dh1.797 billion as revaluation gain for 2009 with the support of IAS 40. But coming to 2010, with the property prices falling substantially,

IAS 40 required the company to book a whopping loss of Dh6.992 billion under the accounting standard as revaluation loss taking the company into a ‘Big Red’. “Gain or loss arising from changes

Though there were arguments raised by certain professionals during the latter part of 2000s against using IAS 40 in a market like UAE where the ups and downs in the property prices were yet to be tested, many companies preferred to relish the huge windfall gains IAS 40 handed out to them during their initial years when profits had hardly started coming from their core activities. In the case of Aldar Properties, the company though booked a net profit of Dh837.373 million for 2009, Dh1.797 billion was the contribution from IAS 40 clause. Again, when the company reported a net profit of Dh3.446 billion during 2008, Dh1.532 billion had come from revaluation gain of investment properties. In 2007 also, the contribution from revaluation gain was to the tune of Dh1.821 billion, almost 94 per cent of the net profit for the period, as the company reported a net profit of Dh1.941 billion for that period. “So now the time has come for these companies to shed a huge portion of such profits made in the previous years through the same route

Our objective is to deliver sustainable return to our shareholders through a balanced mix of dividend distribution and capital value growth in fair value of investment properties is recognised in the income statement in accordance with fair value model in “IAS 40 - Investment Property,” the note appeared as part of the company’s 2009 financial statements added while justifying the revaluation gain of Dh1.797 billion during the period.

Many companies preferred to relish the huge windfall gains IAS 40 handed out to them during their initial years when profits had hardly started coming from their core activities

24 BANKING & BUSINESS REVIEW

March-April 2011

– revaluation gain or loss (IAS 40). The companies that had gone for Cost Method did not have to suffer on their profit & loss statement as they had not booked such windfalls offered by Fair value clause,” said the audit head of a medium-sized accountancy firm based in Dubai.

Repair on net asset value

The company has taken some vital steps to strengthen the capital base of the company, especially after the net asset value of the company fell from Dh16.800 billion to Dh4.247 billion as of 2010 end. In order to boost the equity, the Group has taken remedial actions by issuing new mandatory convertible bonds. The total borrowings of the company as of 2010 end stood at Dh19.913 billion compared with Dh26.096 billion at the same time in the previous year. According to the Note No 20, some of the group’s borrowings carry covenants relating to financial measures such as total assets value, net worth and gearing level. “As per the requirements of the covenants specified in two of borrowings, the Group is required to maintain net assets (total equity) of Dh6 billion. At the end of the reporting period, the Group’s net worth was Dh4.3 billion. However, to mitigate this, the Board of Directors has approved the issuance of Dh2.8 billion mandatory convertible bonds to Mubadala Development Company,” the note added. During January 2011, the company has transferred certain completed infrastructure assets on Yas Island including Ferrari World Abu Dhabi, to the Government of Abu Dhabi against a total consideration of Dh10.9 billion. In addition, the company made a sale of residential units and land for Dh5.6 billion to the Government of Abu Dhabi. The company said these actions have strengthened its capital structure and provided the group with a stable and sustainable platform. “Our objective is to deliver sustainable return to our shareholders through a balanced mix of dividend distribution and capital value growth and this will be achieved by creating recurring income streams both from our existing portfolio and ongoing development projects,” the company said.

Mubadala’s bail-out plan for Tabreed The arrangement with Mubadala will be sufficient for Tabreed to transform its business and realise a disciplined growth

ational Central Cooling Company (Tabreed), one of the leading district cooling companies, said it had reached an agreement in principle with Mubadala Development Company (Mubadala) to provide up to Dh3.1 billion in new long-term capital commitments, according to a company disclosure to Abu Dhabi Securities Market (ADX) where the company is listed. The company has also launched an amendment process to settle the Dh246.5 million annual distribution amounts under its convertible 08 sukuk. The amendment process comprises a tender offer and a proposal that on completion will result in the annual distribution amounts being settled in ordinary shares, and the amendment process is scheduled for completion by March 31. The arrangement with Mubadala, according to the company, will be sufficient for Tabreed to transform its business and realise a disciplined growth. As per this deal, Dh1.7 billion worth Subordinated Mandatory Convertible Notes will be issued to refinance the company’s existing Dh1.7 billion bridge financing. The notes that mature in 2019 will have a conversion price of approximately Dh1.13 and are convertible by the holders on certain dates. Further, there is a Dh1.4 billion worth subordinated convertible loan facility, which may be drawn by the company to satisfy certain liquidity needs, to complete its build-out program and to pursue near-term growth opportunities. The facility matures on December 31, 2012 and to the extent not repaid, the drawn amount will be converted into additional subordinated notes. According to the Tabreed statement, the company may repurchase a portion of the subordinated notes in the future. The subordinated notes will be transferable to shareholders and other investors interested in participating in the new instruments. Khadem Al Qubaisai, Tabreed’s chairman, said the company has reached a Dh2.63 billion refinancing agreement with its banks and has secured up to Dh3.1 billion in long-term capital commitments from its strategic investor. “The program provides the foundation for future growth and we look forward to closing the program by March 31. The company’s potential has been underscored by its performance over the last four quarters, which demonstrates the management team’s determination in building the business. By delivering value and dependability to our institutional clients, Tabreed will meet future demand for cooling infrastructure in the region,” Al Qubaisai added. Khaled Al Qubaisi, the managing director of the company said that following the successful completion of the recapitalisation program, Tabreed would be in a stronger position to deliver on its business plan and achieve its full earnings potential.

BANKING & BUSINESS REVIEW

March-April 2011

INTERVIEW

26 BANKING & BUSINESS REVIEW

March-April 2011

Right Strategy Pays Off By CL Jose

ational Bank of Abu Dhabi (NBAD) has become the lone member of the one-billiondollar (profit) club in the UAEâ&#x20AC;&#x2122;s banking sector by posting a net profit of Dh3.683 billion ($1.003 billion) for 2010. While several banks struggled to retain the size of their asset book and profit in the previous years, NBAD kept on growing on all fronts, all these years. While many banks are struggling to honour the maturities of their medium-term notes (MTNs) fast approaching, NBAD is relaxing as it doesnâ&#x20AC;&#x2122;t have a single MTN payment to be made during the whole of this year. Michael H. Tomalin, the group chief executive (GCE) of the bank attributes the overall success of the bank to the consistency in strategy the bank has been following all along. In a recent interview with Banking & Business Review (BBR), Tomalin discussed on the different aspects of the market and his views on banking. Here are excerpts from the interview.

Michael H. Tomalin

BANKING & BUSINESS REVIEW

March-April 2011

NBAD is the only bank the made it to the billion-dollar club (in profit) by posting Dh3.683 billon ($1.003 billion). What is the magic behind the NBAD success? I will just take you through the key numbers for 2010. The net profit grew year-on-year by 22 per cent to Dh3.683 billion, assets were higher by 7.4 per cent at Dh211 billion, loans and advances were up by 3.5 per cent to Dh137 billion and the customer deposits grew by 6.5 per cent (excluding the Ministry of Finance deposits which were converted into Tier-2 capital in Q2, 2010) to reach Dh123 billion as of December 31, 2010. I think the main reason for the success is the consistency in strategy. We agree to the overall plan and strategy, but we ensure that we stick to these strategies irrespective of any market temptations. We always stick to the theory - use the balance sheet to support the customers, and not to invest in things that did not have relationship traction. When you use your balance sheet, you use it to get some business and retain the relationship with the customers and not just because the returns look attractive. If you look at the [many] banks around the world, they have gone for exotic investments that gave them very good returns, but unfortunately they always lacked the relationship traction. Irrespective of the size of returns, I am very particular that when NBAD does a deal, whether it be credit card, trade finance or a corporate deal, it should be to a customer or client the bank knows very well. I know many other banks went out and lent in markets that are not that familiar to them.

most Abu Dhabi-based banks proved to be successful on this front. Can you explain? Even we have exposure to Dubai entities. The distinguishing feature is about sticking to the knitting and staying with the strategy. We always tried to stick to the strategy and we always tried to avoid abusing the balance sheet to build relations. We always wanted to grow organically and hence we did not go along the

banking, wealth management, custody, brokerage, SME, etc, and also to broaden our international footprint. What is the international footprint now? We opened in Jordan, we opened in Hong Kong, we opened in Geneva, We have a licence to open in Malaysia, we are looking to be present in China through a representative office, etc.

In a tricky market like this, it is always advisable for the banks to have good capital base and moreover, it will act as an asset for the country. The fact that all banks are carrying more capital than they need does affect the Return on Equity (RoE), but it is more important for the banks to have comfortable capital during times like these. UAE banks have one of the highest CARs in the world

While many Dubai banks failed to grow their assets or profit,

28 BANKING & BUSINESS REVIEW

acquisition road. We stayed very conservative, growing the bank dayby-day and year-by-year organically. We were able to add 10 to 20 per cent more to the key numbers every year. When I came here, I agreed with the board on the strategy the bank should pursue. We basically followed the strategy over the years though we refreshed it recently. Though we modified the strategy, the basic strands of NBAD strategy that we established ten years ago effectively remains the same – to broaden the product range - private

March-April 2011

Don’t you have plans for Europe and Americas? We have branches in London, Paris and Washington to do wholesale businesses and they are doing well. Our strategy now is to complement these Western branches with branches in Asia. Increasingly, we are looking to expand in the Eastern direction. We would love to have branches in India, but the hurdle is about getting licence. We want to be in India as quickly as possible. Will you go to India through a representative office? We want to go to India only through a branch presence.

You said NBAD has exposure to Dubai. Can you quantify? We have about 10 per cent of the balance sheet exposed to Dubai. We were very clear about what we wanted to do. We don’t have exposure to Dubai World though we have an exposure of $125 million to Limitless and the necessary actions on this are already on. We have exposure to Nakheel, which has taken a much better shape now. We have exposure to other businesses also in Dubai. But generally speaking, with a few

exceptions, our Dubai portfolio is doing well. Many banks have built up huge non-performing loans (NPLs) in the past two years. What is the NBAD scene on (NPLs)? During the last quarter, the addition to NPLs was Dh668 million and for the whole year it was Dh1.6 billion. When the economy continues to have problems, obviously the banking system also will have problems in the form of NPLs. You have to look at our NPLs in context. Our NPLs are 2.3 per cent of our performing loans against 1.6 per cent last year. Our NPL figure is certainly very low compared with the market figure [average] of 5 to 6 per cent. Our NPLs reflect the fact that the weather is not quite as good as it was about two years ago. What about 2011? I believe that the NPLs will continue to rise in 2011. The good thing is that we have done decent provisioning against this and we have started provisions very early – we have done ten quarters of extra provisioning beginning right from the third quarter of 2008. And during this time, we have taken roughly Dh3.5 billion of provisions. At the same time, our collective [general] provisions have reached 1.39 per cent of the credit-risk weighted assets, which is higher than the 1.25 per cent allowed by Basel II and very close to the 1.5 per cent required by Central Bank provisions, to be achieved by 2014.

days seem to be very tight. But we, at NBAD, have already been conforming to that. I would have preferred to see 90, 180, 365 days rather than 90, 120, 180 as required now by Central Bank. If you look at the international jurisdictions like Australia, Singapore or Hong Kong, the general rule is 90, 180, 365. More importantly, in the new norms, beyond 90 days, the provision is 25 per cent and beyond 180 days it is 100 per cent. Which means, the provisioning rule that used to be too liberal have become too tough on banks with the new directives from Central Bank. I think several banks have expressed their reservations on the new provisioning

is programme-based. Every corporate loan could be different from every other corporate loan unlike in the case of a personal loan or credit card. You can’t compare the loan to Dubai World to another corporate and these two books may have different flavours and therefore the provisioning should be based on principles. If a loan is not performing, it should be classified under various stages of classification and one has to take into account the underlying securities also. Central Bank has come out with strict rules to curb certain fees and charges. How do you view this in the context of the ‘free market’ theory? Some banks are very expensive. Generally, our charges are very reasonable and relatively low compared with many other banks and I don’t think we need to worry about this new move. You will find that there is a vast difference in net interest income (NII) among different banks. Some banks have very high net interest margin (NIM) compared with others though they are operating in the same market. I don’t forget the fact that the more retail the bank is, the more the NII obviously is.

The dirham [interest] premium over dollar will come down and this will reflect on Eibor in due course of time

How do you view the new provisioning standards introduced by the Central Bank? Generally speaking I think they are first class though the provisioning requirement between 90 days and 120

rules, to the Central Bank. However, for NBAD, to meet these criterions is not challenging at all. The general direction of the Central Bank in this regard - to be strict on provisioning, is good, but I believe there should be differentiation between retail and corporate. While the provisioning should be principle-based for corporates, there is no harm in making them rules-based for retail because it

Some banks in the UAE have signed up mortgage loans at rates benchmarked against Eibor. Half way through they would change the benchmark from Eibor to their own base rate. How do you benchmark your mortgage rate? We also have four rates – Eibor, Libor, Base and Prime, the third and fourth being our own rates. Using bank’s own rate as benchmark is a practice seen world over and we never change the benchmark

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March-April 2011

signed up with the client half way through, as I strongly believe this is unethical on the side of the bank. The lending rates reflect a bank’s cost of funds and this depends on various factors in different points in time.

rity loans. The exercise was a maturity management and not a funding management act. We will continue to look for such opportunities in the other global markets. We have capacity to raise funds and we have strong rating also.

Lending volume has dropped for many banks, especially for Dubai-based banks. Where do you think the banks can grow in the future? Do you think lending has become lot more risky? The new situation doesn’t have anything to do with the appetite or ability to lend on the banks’ side; rather it is a question of terms that drive the lending activity. Our terms have been very consistent for long – proper security, proper cash flow and proper project. We have enough funds to lend, but we will not dilute on our terms. And I think you are slightly wrong when you say the lending has dropped, because there is aggressive lending going on in the retail. We see a lot of competition in personal loans and credit card. The problem is that some banks are lending on too generous terms. Do you believe if I say some banks give personal loans for 200 months tenure! Banks are competing aggressively in the retail, as there are limited options in the corporate space.

You said you would have greater opportunities coming from capital market deals in the future. How active are you in this area? There are many large corporates in the region raising funds through capital market, and we are very much involved in that. We were involved in the Dewa deal; we were in the IPIC deal where we won an award too.

for quite some time now, deals are not being underwritten in this market. Corporates are now averse to paying any underwriting fee. It is done on a book-building basis and there is good demand for these deals from the banks’ side as well. What happens typically is, three or four lead managers are appointed – one to cover the region, one to cover Europe and another for the United States. We are also there obviously to represent the region. These banks arrange everything including the road shows in different markets in order to take the deal through. There is no secondary market involved and the pricing is very tight. Though there is no underwriting fee, there is an arrangement fee. There are not many banks, which have got the arrangement skills and capacity.

“We always tried to stick to the strategy, and we always tried not to abuse the balance sheet to build relations”

There are no repayments on MTNs coming up for NBAD in the whole of the current year and even thereafter for a few months. But why did you go to Malaysia to raise funds? It is true there are no EMTN maturities coming up in the near future. We raised ten-year money from Malaysia in order to manage long matu-

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Don’t you think our banks still do not have the sufficient size to underwrite big deals? We have created a debt capital market platform in our bank, which is very effective. For your information,

March-April 2011

How comfortable are you on the Lending-deposit ratio? It is the ‘Stable Resources ratio’, which is important and here, we are well under 100, maybe 92 or so. It is true that our lending-deposit ratio is above 100 per cent.

Can you explain Stable Resources? Stable resources have 85 per cent of customer deposits, the bank’s capital, its medium-term borrowings, etc. Stable resources ratio is not lending-deposits ratio. Optical ratio or lending-deposits ratio is not important for banks like ours whose retail book is only around 18 per cent per cent of the total book. Many leading international banks have loans- deposit ratio at 130 and 140 per cent, but their stable resources ratio will be much below 100 per

cent. Our optical ratio for the retail business is below 50 per cent. (Retail Loans/Retail Deposits as per financials is 93 per cent, will need more clarification on the calculation to verify the number).

the system seeking higher dirham interest rate and this process will certainly ease pressure on interest. You can see that the liquidity positions of banks have improved a lot

For example, in our case [NBAD], we have Tier I capital of Dh24 billion including the Dh4 billion perpetual notes issued to the Government. Even if this is taken out, we will be left with Dh20-billion core capital, which is quite strong. I think excepting a very few banks, all other UAE banks are in good shape.

“We don’t have exposure to Dubai World though we have an exposure of $125 million to Limitless, and the necessary action against this is already on”

Most of our banks have very comfortable capital and with the Government deposits, the capital adequacy ratios (CAR) of most banks have gone beyond 20 per cent. Don’t you think these banks have lot of idle money sitting in the form of capital now? In a tricky market like this, it is always advisable for the banks to have good capital base and moreover, and it is an asset for the country. The fact that all banks are carrying more capital than they need does affect the Return on Equity (RoE), but it is more important for the banks to have comfortable capital during times like these. UAE banks have one of the highest CARs in the world. Why we don’t have enough bond issues in dirham? There is still a lot of difference in the interest rates between dollar and dirham. Why should a bank issue dirham bond and pay higher interest rates when dollar funds are available at much lower rates? As an investor, we would love to buy dirham bonds. GCC banks typically run an asset-liability mismatch and that is the reason why we are seeing more bond issues taking place to tap longer-term funds.

compared with that in last year. The banking system is more comfortable now. The dirham [interest] premium over dollar will come down and this will reflect on Eibor in due course of time. Today, the premium is more than 100 basis points and this could settle at 25 bps or at the most 50 bps. And this will trigger the corporate loan market in the coming months.

How big is your credit card business? We are not strong in retail and our credit card market share is just 4 or 4.5 per cent compared with a 12 to 15 per cent share in corporate lending. When will you think the syndicated loan market will recover? All banks, whether they are in Dubai or Abu Dhabi, will love to have good credit. If lending has dwindled, it is because we don’t have enough good borrowers. What are your expansion plans? We are yet to complete the franchise work in the Arab World. We want to become a leading Arab Bank. We are yet to enter Saudi and Qatar market – we have applied in Qatar long back. We are keen to enter the other Arab markets like Lebanon.

“On provisioning, I would have preferred to see 90, 180, 365 days rather than 90, 120, 180 [days] as has now been directed by the Central Bank [UAE]. If you look at the international jurisdictions like Australia, Singapore or Hong Kong, the general rule is 90, 180, 365”

What is the scene on the interest now? I think the pressure on interest will ease soon. New money has come to

What will be the impact of Basel III on our banks? I think all the banks are well capitalised to meet their ratio on core capital (common shares and reserves).

What are the prospects for consolidation? Banks need economies of scale – but I don’t think consolidation will happen soon. Our policy is based on the assumption that there will not be consolidation in this market in the near future. You are Number one in profit. When will you achieve this in assets? We are least concerned about the asset size. We want to become the most professional bank in the region.

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March-April 2011

BBR EXCLUSIVE

Jamal Saeed Juma bin Ghalaita

Public offering of CDs from Emirates NBD Emirates Money eyeing IPO By Amit Chettupuzha

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March-April 2011

mirates NBD, the largest bank in the GCC by assets has many firsts to its feats and many more to be added. The bank which showed the UAE a big merger in 2008 in a market which is otherwise viewed as crowded for banking, also set a pioneering example for securitisaiton by taking its D1 billion worth auto loans into the securitisation market last year. Explaining its new plans in the consumer banking space, a top official of Emirates NBD said the bank would launch a certificate of deposits (CDs) sale soon in the UAE. “We are planning to launch a sale of certificate of deposits (CDs), which is under study now. As per the plans, the bank will seek to sell longer term certificates in the retail market,” said Jamal Saeed Juma bin Ghalaita, the Group Deputy Chief Executive Officer of Emirates NBD, while talking exclusively to Banking & Business Review (BBR). Bin Ghalaita said the bank has enough funds and the programme is not aimed at boosting the fund base, rather to address the issue of long-term funding. He said the bank would aim to raise a few billions through bond issues with maturities ranging from three, five to ten years. “As is obvious, the rates could be relatively good for the investors and on the other hand this will help the bank in managing the asset-liability mismatch, which is a big issue facing the Gulf banks. The issue which is under the final stages of study will hit the market soon, subject to the Central Bank approval,” said Bin Ghalaita. He said the bank will introduce to the market more innovative instruments in the future. Touching upon the performance of the retail banking division of Emirates NBD, Bin Ghalaita informed BBR that the retail profit of

the bank grew by 32 per cent during 2010 from Dh900 million to Dh1.2 billion, at a time when the bank went through a tough time, especially on the profit front. “This may seem to be a really covetable achievement given the bad market conditions, but I am sure, we will improve this number in the current year by another 40 per cent,” he added. The deposit base of the consumer banking division has grown to a whopping Dh72 billion, and backed by new initiatives, the bank is hopeful that it will register handsome growth on all fronts of its activities in the future. Emirates NBD, which opened its private banking unit in Singapore, will continue its growth domestically and regionally and internationally, according to Bin Ghalaita. “There will be more products launched in gold which has proved to be a success-guaranteed space through its other similar initiatives launched in the past few months,” he expressed confidence. The bank has already chalked out growth plans for markets such as Saudi, Singapore and London among others. Saudi operations, which are now at Dh800 mil-

Retail profit of Emirates NBD grew by 32 per cent during 2010 from Dh900 million to Dh1.2 billion lion mostly through its retail banking, hold out good prospects in the future. Emirates NBD, which is already present in Qatar Financial Centre (QFC) has applied for licences in Qatar (mainland), Kuwait and India where the bank currently operates a representative office. In Singapore, the bank has upgraded its representative office into an offshore branch. “India is very important to us as it is now the biggest trade partner for UAE. We have a presence in India’s banking through a five per cent stake in Federal Bank, one of the largest private sector banks in the country,” Bin Ghalaita noted. Amidst the rumours that many banks have quit the mortgage lending, Bin Ghalaita said Emirates NBD has not stopped mortgage lending, but has restricted it by suspending lending to projects under construction and thus confining mortgage finance to only completed projects. Moreover, the lending has been limited to Dubai, Abu Dhabi and select northern emirates.

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March-April 2011

He said despite the steep fall in property prices, Emirates NBD’s mortgage loan portfolio still maintains an average loan-to-value of above 90 per cent. The bank believes fresh mortgage loan at a loanto-value of 80- 90 per cent is viable in the present market scenario. Responding to a query how Emirates NBD views the Central Bank directive to bring down certain fee and service charges, Bin Ghalaita said though the fee depends on many factors and hence different banks are bound to have different fee structure, Bin Ghaliata stated his bank had already cancelled charges on six services much before Central Bank sent out the directives to the banks on service charges.

Retail banking to get boost

Bin Ghalaita acknowledged the fact that banks have been focusing more on retail banking since lending to corporates has drastically come down. Globally, banks are making more money from retail banking and banks in general are slowly moving ‘back to basics’. Moreover it remains a fact that during bad times the first to be hit would be retail and early to recover also will be retail. Bin Ghalaita said he believes the recovery has started, however, Emirates NBD will not go for high leveraging in retail. The recent ventures announced (products were more to do with gold) by the bank are testimony to what is the risk perception of the bank on the retail side. Noting that non-performing loans have increased substantially for all banks as a class, he said Central Bank has clearly said that the banks need to be conservative on provisioning against bad loans. “There are clear-cut directives from the International Accounting Standards Board (IASB) on how to make provisioning. I believe Emirates NBD has taken into account both these while doing provisioning,” he added.

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Retail portfolio

The retail portfolio used to be about Dh23 billion as of 2009 end, but has thereafter come down to Dh18 billion as of 2010 end. Bin Ghalaita said the bank has taken a cautious stand on certain sectors. “However, things are slowly stabilising now and I am sure the size of the retail portfolio will start growing soon.” Bin Ghalaita handles retail, private banking and priority banking in Emirates NBD and he claims all these sectors are growing now. He said the bank has also started of-

Emirates Money

Emirates Money, a 100 per cent subsidiary of Emirates NBD, is looking to expand further into other GCC countries. The consumer finance arm of Emirates NBD already has six branches in the UAE and according to Bin Ghalaita, getting licences in other markets should not be a big issue and are relatively easy. He told BBR that the company with a capital of Dh100 million has generated a net profit of Dh30 million for 2010. “If our plans work out as charted, we may launch a public issue for

The bank has applied for licences in Qatar, Kuwait and India where it currently operates a representative office fering seed money for small businesses run by nationals, as this is a new area, which holds out big prospects. On the issue of liquidity in banking, he said the scene is improving, but rates are still high. However, he said, during the last 6 or 7 months alone, the rates have come down by about 200 basis points. “As a leading bank, I can endorse this. We are now getting fresh deposits and the book is growing on an average by about Dh2 billion a month.”

Bio

Emirates Money and offer the shares in the company within two years from now,” Bin Ghalaita added. Emirates Money offers a comprehensive range of loan products ranging from unsecured personal loans to loans for used cars & trucks. It has also tied up with leading insurance companies in the region to bring to offer innovative insurance plans for business as well as personal requirements. The loans also include working capital, rent, school fees, renovation, fleet financing, etc.

Jamal Saeed Juma bin Ghalaita has been Group Deputy Chief Executive Officer of Emirates NBD Bank since May 2009 also serves as its General Manager of Consumer Banking & Wealth Management (C&WM) & Group Marketing. Bin Ghalaita is in charge of Consumer Banking and Wealth Management activities of Emirates NBD Group. He served as General Manager of Consumer Banking & Wealth Management of Emirates NBD Bank until May 2009. He serves as an Executive Director of Emirates Islamic Bank also. Moreover, he serves as a Director of Emirates Islamic Financial Brokerage and SHUAA Capital.

March-April 2011

How far did the recession affect the retail banking business? If so which products specifically? Banks act as important players in the financial markets and play a vital role in the economy of a country. The recent challenging times have impacted the revenues and profitability of all businesses worldwide. As the UAE is increasingly integrated into the world economy, we are no longer immune to the things happening outside our country. Built on strong financial fundamentals, vigilance on risk appetite and firm monetary guidelines, banks in the UAE have proved among the most resilient and sound financial institutions in the world. The retail banking sector faces profitability pressures due to higher funding costs and asset quality pressures due to a slowing economy. The strong economic growth in the past, low defaulter ratio and proactive adjustment of our policies and priorities have helped us in these challenging times. Most banks are stuck with substantial outstanding with credit card and personal loans. How do you seek to tackle this? Is outsourcing debt collection a solution? Third party arrangements for customers who have left the country without settling their debts are one option. However, Emirates NBD willingly helps customers who

are in a debt default situation with a flexible approach, thereby mitigating the chances of this happening. We also focus on assisting customers with managing their debt as best as possible during periods of transition such as changes of employment. Emirates NBD has shrunk its loan book substantially. Is this applicable to corporate loans only or retail also? At Emirates NBD’s Consumer Wealth Management Division, we remain focused on our consumer lending business. Having the largest personal loan & auto loan portfolios in the UAE, we remain committed to the growth of our lending portfolios. Over the past year, this focus has led our consumer lending business to grow from strength to strength. For 2011 loans will continue to be a key focus area for the bank. However, our lending will be based on the ‘Borrow Wisely’ theme, which assists customers to assess and manage their ability to repay the loan amount. In keeping with the significant shift towards secured lending, Emirates NBD has also developed a host of innovative lending schemes, which are customised to customer requirements. This includes the ‘Loan Against Gold,’ which is being offered by Emirates Money, a wholly owned subsidiary of Emirates NBD. The first product of its kind in the GCC,

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March-April 2011

this innovative loan initiative enables customers to borrow up to 80 per cent of the value of the gold they deposit. It also offers competitive interest rates that are among the lowest in the market for retail loans, while at the same time ensuring the safe and secure storage of the gold. We also recently launched an overdraft facility for accountholders that offers customers a credit line available against their net monthly salary or fixed deposit, enabling customers to meet temporary cash shortfalls and emergency cash requirements. In addition, we provide specialised products such as Seed Capital Loans for UAE nationals and this encourages entrepreneurs to set up their own business. For both UAE nationals as well as expatriates, we have the Personal Loans against End of Service Benefits, which allows customers in the medium and lower salary range to avail personal loans by considering the EOSB amount as collateral against the loan, which again assists customers in borrowing wisely. What are the changes in strategy you implemented in retail banking in the wake of the current slowdown? What about the bad loans in retail? The lending strategies of the bank are periodically fine-tuned in line with business priorities and market dynamics. This enables us, as an organisation, to focus our energies on our strategic goals and priorities. The changes need not necessarily be only to tighten/restrict, but also involves launching new products, introducing new segments and even a relaxation in policy wherever needed. We

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carry out these adjustments from time to time and will continue to do so, in both the interest of the bank and our customers. Once again, there has been an increased focus on our existing huge customer base and their needs. We have developed more segment-wise propositions for affluent, high net worth and SME customers. Geographically, we have diversified across different regions such as Singapore and Saudi Arabia, amongst others. From another perspective we have continued investment in fundamentals such as branches and ATMs and investing in technology and alternate channels. We have also launched a wide range of innovative products and services for a diverse range of customer profiles. Overall our asset quality has improved significantly across products over the course of the current year, and continues to do so. Despite having a strong retail division for Emirates NBD, what was the logic behind a stand-alone retail finance company – Emirates Money? Emirates Money was formed to offer innovative lending products to both the business and salaried segments in a fast, friendly and efficient manner. The company offers a unique value proposition to its target segment, supported by the parent bank. Emirates Money has launched numerous innovative products such as business loans, commercial vehicle loans, loan against gold & loan against POS receivable, thereby ensuring a wide range of loan products at different interest rates. You have mortgage loan. What is the benchmark for mortgage loans? Mortgage loans are floating rate loans where the pricing comprises the Consumer Base Rate (CBR) plus margin. The CBR is revised regularly and the same is updated on the bank’s website for ready reference. A few recent new moves were connected to gold. Is this to make sure that security comes first and foremost in the future deals? We continue to listen carefully to our customers. Over the past year, there has been a growing interest, locally and internationally, in gold. This has inspired us to offer such an innovative product. We offer customers the potential benefits of gold as an investment, while removing the expense and security worries of associated physical storage. We recognise that commodities are a key asset class and we aim to extend our services across other precious metals and commodities.

Has there been any change in the criteria for personal loans and credit cards? Lending is based on individual credit behaviour. All credit worthy individuals continue to avail retail consumer loans from the bank. We extend retail consumer loans only after carefully assessing the applicant’s monthly financial commitments. Only after we are fully convinced about the repayment capacity of the applicant, a loan is disbursed with a suitable repayment tenor that the borrower can comfortably repay in. There are complaints that most banks have jacked up interest rates heavily in the last more than a year. What do you have to say? Product pricing is dynamic and a periodic activity. For all lending products it is based on cost of money and has to cover the risk associated (priced to risk). Since the above variables are not fixed and are continuously changing and is different for different individuals so is our pricing for our products. There have been segments and areas where we have continuously reduced price since 2008 based on the above factors. How do you seek to address the increasing delinquency in loan payments? Since the middle of 2010 the delinquencies have been on the downward trend, which is an encouraging sign. Overall, our asset quality has improved significantly across products over the course of this year, and continues to do so. How will the new provisioning norms affect your loan book and profitability? Emirates NBD has in place robust provisioning policies and will further strengthen these over the course of time. The bank’s current provision policy allows the bank to take prudent measures in terms of recognition and treatment of impairment. Over the last two quarters the retail bank has shown stability in terms of delinquency and we expect trends to further improve in the near future. Owing to its income and loss recognition policy, the bank currently holds adequate provisions against its impaired assets and also holds impairment provisions for its standard assets. Considering the bank’s current position in terms of provisions and delinquency trends on retail products, we do not expect a substantial impact on the P&L as well as quality of assets for the retail bank in the coming year.

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March-April 2011

Gary Dugan

Relevance of gold to continue By Amit Chettupuzha

espite the high gold price, which is hovering around $1400, most experts are still very bullish about the yellow metal. Gary Dugan, Chief Investment Officer, Private Banking, Emirates NBD, wants to recommend his clients to hold gold as a hedge in their portfolios irrespective of the short-term volatility in price. Gold has hit stiff resistance so far this year, and is currently

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With most leading currencies losing their credibility, the natural choice of reserves increasingly becomes gold now

well below the all-time high. Even the all-time high at around $1,432 a troy ounce, according to Gary Dugan, still remains well below the inflation adjusted highs seen in the early 1980s. Citing an HSBC estimate, he said the high reached by gold in early 1980, of $850 adjusted for inflation, should be worth $2,300 in current dollars Many central banks are now buying gold to be made part of their reserves. “The way central banks are holding their assets – in the past they were comfortable with holding dollar, euro or Japanese yen – shows that the patterns are changing now,” Dugan noted while talking to Banking & Business Review (BBR) during a recent interview.

cession is not the main reason for this shift, but increasingly, it is the structural changes that is taking place in the world currency value equations,” Dugan added. The ongoing quantitative easing in the United States that will pump

country still stays low despite the announcement of QE2,” Dugan said. Referring to the last two years when UAE has been passing through a bad patch with its real estate prices coming under huge pressure and a couple of financial restructuring affecting the level of investor confidence, Dugan said it is a matter of time for the UAE to see once again investments flowing into its economy. “It may take some time to rebuild that confidence,” said Dugan adding that at the current margin [bond] levels more international money has been flowing into the UAE and this has been amply proven by the response certain bonds issues from Dubai, for example, the Dubai Government, Dewa, etc, received in the last couple of months.

We need to see a world led by volatile currencies replaced by a world led by stable currencies and until then, the relevance of gold will continue

The financial crisis saw most of the world currencies being undermined. Dugan said this is inevitable as the respective economies declined and the de-stabilisation of their currencies is a natural fall-out. “With most leading currencies losing their credibility, the natural choice of reserves increasingly becomes gold now. So it makes sense for all central banks to build their gold reserves. So many Central banks have now fairly good gold reserve, as this is the safest currency now,” Dugan told BBR. He said it would take a few decades’ adjustment for the world led by United States to give way to a world led by China and India, the fastest growing major economies in the world. “We need to see a world led by volatile currencies replaced by a world led by stable currencies and this could take a bit of a time and until then, the relevance of gold will continue. Re-

about $600 billion into the US market will in turn will chase attractive valuations in asset prices. According to Dugan the general view is that emerging markets are going to be the primary beneficiaries of this. Again with most emerging markets having established new checks and other entry barriers, the GCC especially the UAE could also see funds flowing into their economies. “This reminds me of 2007 when about Dh200 billion worth of hot money flowed into the UAE chas-

“We have seen some bonds being sold at coupon at about 7 and 8 per cent in the UAE. These are high rates indeed and I am sure, down the line Dubai will be able to sell bonds at much lower coupon when the confidence is rebuilt leading to greater international money inflows,” he added. He said the bond prices will go up bringing down the yields and hence investing in Dubai bonds at this point of time could prove to be a good investment decision. Even the Libor-Eibor gap is also narrowing. Dugan said a lot of companies want to raise money from capital markets once the pricing comes to a proper level. Noting that all banks are having good capital ratios, he said they still want to build it to a higher level in order to absorb the possible bad loans that may unfold in the future.

Investing in Dubai bonds at this point of time could prove to be a good investment decision ing the dirham revaluation story and when this had to leave the country, it had cast its share of problems for the UAE. “One has to see whether the inflow is sensible or ‘crazy’. If we analyse the asset valuation in the UAE, we will realise the inflow into the

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March-April 2011

INSURANCE

Omer Hassan Elamin

Insurance Industry needs a ‘Cover’ By CL Jose

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March-April 2011

nsurance companies had tough time since the last quarter of 2008 through 2010. The economic downturn has taken its toll on the insurance business, especially the construction and motor segments, which are certainly large revenue contributors to the industry. On the one hand, about 60 players have rendered the market overcrowded exerting pressure on premium, and on the other, the slowdown has dampened the business volumes for the industry as a whole. As the directors’ report of Orient (formerly Arab Orient Insurance Company) has put it, “The UAE insurance market is truly at a critical stage with 60 insurance companies operating in a rather limited market. In a substantially overcrowded market, where six companies are controlling 60 per cent of the market and 54 companies are hunting for the balance, there can be nothing but tremendous pressure on premium rates. It is estimated that compared with the period prior to the economic crisis, the rates have dropped by almost 50 per cent.” Here we have got for this issue, Omer Hassan Elamin, the senior managing director or Orient to talk about the industry and share his views with the Banking & Business Review (BBR) on the challenges faced by the insurance industry as well as the future of the business as he views.

cally free from catastrophic incidents, which are mainly caused and associated with heavy rains and thunders. The construction insurance is written for the period the construction is on and is generally of larger sum compared with other insurance premium. For these reasons, construction insurance used to contribute to an extent of 20 per cent of the total insurance premium the companies collect on a normal course. Motor insurance, which accounts for approximately 50 per cent of the total premium, has also been down substantially during this period due to the slow-down in the car sales. What is the scene on car sales now? Though the car sales were substantially down during the last quarter of 2008 and the whole of 2009, the sales

this is by lowering the rates and this has started reflecting in the market. Some companies have reduced their rates by about 50 per cent compared with the rates they used to charge during 20062007. What is the band of rates? The lower end of the band in some cases has dropped below four per cent or even touched three per cent. This is a free market and everyone has the right to quote his rates however low it is. Notwithstanding the lower rates in motor insurance, the revenue thus generated used to fetch some good investment income in the past. The stock markets were doing well and the real estate was a good investment option. And through this the companies used to get compensated for the lower rates they quote for motor insurance. Now things have changed – stock markets are not advisable for investments, and needless to mention, the real estate market is staying at its bottom at this point in time. Not only that the opportunities are absent, there are insurance companies, which have got their money stuck with stock markets and real estate. There are no ideal avenues now for the insurance companies to invest the money they collect through premium. The insurance companies need to have investment avenues where the premium can be efficiently invested and this would help these companies generate income.

When six companies are controlling 60 per cent of the market and 54 companies are hunting for the balance, there can be nothing but tremendous pressure on premium rates

BBR: How has the recession affected the insurance industry? It is a fact that all businesses have been affected by recession. Businesses in general have been slow. Coming to insurance, the construction insurance, which is technically called the ‘contractors’ all risk insurance’, has been down in Dubai by about 85 per cent compared with that of the boom period that lasted until the end of third quarter of 2008. This segment of business has been always profitable as the region, to an extent, is typi-

have started picking up and I believe the sales were up by about 50 per cent in 2010 from the levels of 2009. The growth in sales will continue through 2011, and by 2012, things should revert to normal. How do you view the competition in motor insurance? The competition has heightened with the volumes coming down. There is a rate war going on in the motor insurance space and this is having a bearing on the premium rates in motor insurance. The cake has become smaller and every one wants to retain his/ her slice of the cake. One way to do

Does the lack of liquidity in the market affect insurance companies? Certainly, it is. The tight liquidity is affecting the premium collection by the insurance companies. Some companies are finding it difficult to settle the premium dues with the insurance companies in time. These are mainly from the corporate client accounts. Worse, local brokers are facing big problem on this count as many companies are facing liquidity problems. Insurance companies may have to allocate higher provisions against these dues. But things are chang-

BANKING & BUSINESS REVIEW

March-April 2011

ing. We have started seeing noticeable improvement on the debt collection. In the absence of proper investment avenues, what are these insurance companies doing with the premium collected? True, the insurance companies which are really following a prudent path cannot afford to risk the premium money. They are following a wait-and-watch policy on this issue. The companies, which have already invested their money in stock markets and real estate, are in difficulty, as they cannot liquidate these assets in the immediate future. Is there any investment law that prescribes how insurance companies can invest their premium money? The insurance authority has prepared a draft on the guidelines for investment by insurance companies. The insurance Authority is busy working on the full set of regulations that would include that on investments also. The comprehensive insurance regulations should be ready for implementation during the current year itself.

sents the financial ability of the company to meet its obligations. The Insurance Authority of the UAE will require the local companies to follow some of the clauses of the Solvency II margins. There will also be some changes in the Reserves policies for the insurance companies. At the moment, the insurance companies are required to keep 40 per cent as unearned premium reserves. We expect this to be increased marginally in order to make them more realistically represent the risks involved in the business. This is kept to address the risks that are yet

no mergers have taken place in this market, willingly or unwillingly, some companies will be forced to merge with their larger counterparts or else they may face the possibility of closure. Some companies may need recapitalisation as their equity has fallen below their minimum capital requirement in the wake of the economic slowdown. One would not be surprised if their shareholders object to injecting fresh capital â&#x20AC;&#x201C; basically some takaful companies. What is the scene on Reinsurance? The market at the moment is soft â&#x20AC;&#x201C; local as well as international reinsurance market. The local market depends on the international market and hence it can be said that the local market is soft because currently the international market is soft. Generally the international markets have had a good year in 2010 as there were no major catastrophic losses. There is too much of capacity available in the reinsurance market internationally.

Some companies may need recapitalisation as their equity has fallen below their minimum capital requirement

Which are the areas these regulations will have greater focus on? The main areas will obviously include investments, capital requirements, solvency margins, etc. This will help improve the transparency as well as will increase the financial strength of the company also, and will help bring in discipline into the system.

to come in the future. You will see lots of regulations in the insurance industry to be introduced during this year. It is a fact that the premiums are under pressure and the business volumes have taken a beating. Do you think this could lead to consolidation in the industry? Unfortunately, we have not seen any mergers or moves towards consolidation yet in the industry. So far so good

Why is the retention ratio with UAE companies very low? There are so many small companies with small capital. So obviously they cannot retain large amount of risks with them and hence will be forced to reinsure most of the risks they write. It is a fact that many companiesâ&#x20AC;&#x2122; commission income makes up for the bigger portion of their net profit.

Insurance companies may have to allocate higher provisions against the dues from corporate clients

Do the insurers in the UAE required to follow any solvency margins now? At the moment there are no fixed margins set by the regulators. But currently the authorities are coming out with specific numbers with regards to Solvency margins to be followed by the insurers. Can you explain Solvency margin of an insurance company in simple terms? Solvency margin by definition repre-

42 BANKING & BUSINESS REVIEW

and every one has been happy with their own portfolios however small they are. The problem is five or six companies are controlling 60 per cent of the market. This means around 55 companies are fighting out for the 40 per cent of the market. Though so far,

March-April 2011

You said the market is soft now. What are the symptoms of a hard market? Higher retention, lower reinsurance commission, stricter treaty terms, loss participation clauses and lower capacity are the symptoms of hard market.

How does the Islamic insurance fare in UAE? Takaful across the region is facing difficulty in capturing market. There is a need for creating awareness in the market as far as Takaful is concerned. I think the Takaful market share could be less than 10 per cent currently.

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NEWS

‘Trim and fit’ Shuaa on a strong footing Staff Report

huaa Capital has trimmed its balances sheet to equip itself to take on the new challenges and to implement its turnaround program, according to the company statement. Shuaa Capital reported revenues of Dh188.4 million for 2010 against Dh267.9 million in the previous year, and an overall loss for the year of Dh223.6 million compared with a 2009 loss of Dh529.8 million. The primary drivers for the decrease of both assets and liabilities were liquidation of legacy investments and the one-off reduction of risk exposures. During the year 2010, Shuaa Capital reduced its legacy investment portfolio by Dh457 million to Dh564 million from Dh1.02 billion, or 44.7 per cent. Cash generated from investment exits was consistently used throughout the year to pay down debt and de-leverage the balance sheet. Shuaa’s total assets as of December 31, 2010 were Dh1.92 billion, a decrease of Dh927 million or 32.5 per cent, compared with December 31, 2009 (Dh2.85 billion). This includes a healthy cash position of Dh397 million. Total liabilities were Dh447.6 million at year-end 2010, a decrease of Dh704 million or 61 per cent versus total liabilities of Dh1.15 billion at year-end 2009.

significant steps to implement its turnaround program. “As a result, we closed the year with a very strong balance sheet, a refocused business model, a clear strategy, a restructured organisation and an improved corporate governance framework. We believe that these actions place the company on a strong footing

income statement. However, we believe that these adjustments allow us to put these legacy investment issues behind us and place us in a better position going forward,” the report said. Valuation adjustments and provisions totaling Dh157.9 million in respect of legacy investments have been recognised in 2010. This predominantly reflects a prudent approach to the valuation of the non-core legacy portfolio. The company said it remains determined to maintain its capital strength and low gearing ratio of 16.1 per cent. Moody’s Investor Service recently reassigned a Ba2 rating with a stable outlook. Shuaa believes this rating is on par with some of the best securities firms worldwide and continues to support Shuaa’s access to liquidity at relatively favourable conditions.

Shuaa Capital reported an overall loss for the year of Dh223.6 million compared with a 2009 loss of Dh529.8 million

During 2010, Shuaa Capital took

44 BANKING & BUSINESS REVIEW

and enable us to navigate through protracted and widespread market disruptions,” the directors’ report of the company said. The company said it remains focused on investing and building its core fee generating businesses, which continue to hold market leadership positions. The company has pursued a range of measures across Shuaa Capital to manage expenses. As part of this, the company’s cost structure has been adapted to the new business environment although it continues to focus on cost control. “We also continue to apply our approach towards risk mitigation within the legacy portfolio. In the fourth quarter, we took some conservative valuation decisions that inevitably left a mark on Shuaa’s

March-April 2011

2010, an year of challenges

During the year 2010, the financial services sector continued to face extraordinary market disruptions and unprecedented challenges. Shuaa report summed up the equity market in the UAE, which started off the year on a good note. “Equity markets in the UAE started the year on a positive note during the first quarter, followed by a negative trend that continued during the second and third quarter and despite a small recovery remained volatile until the end of the year. These events led

to a difficult trading environment, particularly in investment banking and brokerage,” it said. The Asset Management, Private Equity and Finance division generated profits in 2010, whereas investment banking and brokerage were impacted by subdued client activity, further reduced investor appetite for UAE equities, and the absence of primary issuance in UAE equity markets in 2010. Shuaa Asset Management’s flagship Arab Gateway Fund was ranked as the top performing fund in the

MENA region for 2010 in its investment category, recording a gain of 19.41 per cent versus 11.35 per cent for the S&P Pan Arab Composite Index. The Qatar Gate Fund (N) was the top-performing fund in Qatar with a performance of 37.11 per cent against 24.75 per cent of its benchmark. In addition, all other funds, including the Saudi and Emirates Gateway Funds, and discretionary portfolios managed on behalf of clients, outperformed their respective benchmarks.

RakBank enters billion-club, Mashreqbank retreats O

ne more bank has entered the billion-club in profit as the ADX-listed RakBank has posted a net profit of Dh1.002 billion for 2010 compared with Dh726.149 million the bank posted for the previous year. On the other hand, Mashreqbank, which was part of the billion-club in 2009 has lost its seat in the ‘billionclub’ as its net profit dropped from Dh1.064 billion in 2009 to Dh836.602 million in 2010. While RakBank showed overall growth on all fronts, Mashreqbank has shrunk on key areas with the asset reducing from Dh94.622 billion as of 2009 end to Dh84.845 billion after one year, as on December 31, 2010. Mashreqbank which made a net interest income of Dh2.291 billion for the period has also booked a fee and commission income of Dh1.135 billion and an ‘other income’ (net) of Dh912 million that includes Dh563 million worth insurance underwriting profit, for the year ending December 31, 2010. However, Dh1.767 billion impairment allowances hit the bottom-line hard and the bank had to settle with a lesser net profit for 2010. The bank seems to have been cutting down on the asset size through the last couple of quarters, and during the whole of 2010, the bank had reduced the asset base by about Dh10 billion. While the conventional loan book was down (Islamic financing size was almost retained) by more than Dh6

billion to Dh35.919 billion, the customer deposits also dropped by about Dh4 billion during this period. While the cash and balances with Central Bank dropped from Dh20.176 billion to Dh13.373 billion, this was to an extent compensated by the ‘deposits and due from banks’ as they increased from Dh8.261 billion to Dh13.652 billion as of 2010 end.

Big jump for RakBank

In fact, the RakBank profit made a big jump of 38.1 per cent to reach the billion-club in profit. The directors’ report of RakBank said, “On the lending side the problems which were experienced in 2009 extended into the first four months of the new year, but we then saw a much improving situation as the year continued. Liquidity in 2010 was also significantly tighter in the first half of the year as opposed to the second where improvement has led to reductions in retail deposit rates.” RakBank has continued to focus on the segments, namely personal and auto loans, small and medium enterprises, credit cards and mortgages. The net interest income rose to Dh1.61 billion an increase of 30.9 per cent over 2009. Total advances as of December 31, 2010 stood at Dh16.4 billion an increase of 22.1 per cent over 2009 while total assets increased by 25 per cent to close at Dh21.4 billion during the period.

RAKBank profit has crossed Dh1billion in 2010.Mashreqbank’s asset base has been dropping through the last couple of quarters and during the whole of 2010, the assets shrank by about Dh10 billion

BANKING & BUSINESS REVIEW

March-April 2011

BBR EXCLUSIVE

UAE EXCHANGE:

Sudhir Kumar Shetty

Time ripe for consolidation By CL Jose

46 BANKING & BUSINESS REVIEW

March-April 2011

aving pulled off more than 50 per cent market share in the UAE’s remittance business and after establishing its presence in close to 25 countries spread over five continents, now the time has come for the UAE Exchange Group to think really global. UAE Exchange, one of the world’s largest and most diversified remittance companies, may bring all its operations spread over different parts of the world under a master holding company, according to a top company official. Speaking to Banking & Business Review (BBR) recently in an exclusive interview, Sudhir Kumar Shetty, COO - Global Operations, UAE Exchange, said, “the company needs to consolidate the global operations under one umbrella before it could pursue its future global ambitions, including the entry into the capital market. Though the master holding company still remains a good idea, establishing a presence in the European markets is one thing that we believe needs to be achieved before the global consolidation goes underway.” UAE Exchange has decided to set up its offices in select markets in the European Union and the work on the same has already been undertaken. Shetty said the company has all along been expanding into different parts of the world and all of these operations are independent entities, where the main promoters hold sizeable or controlling stake. “And hence, technically speaking, these entities are not part of our global operations, but independent entities.” He said a master holding [financial services] company will streamline the global operations as these entities can be brought under one fold through this exercise. “Moreover, all these operations are interdependent.” However, Shetty didn’t want to commit on the country, where the

BANKING & BUSINESS REVIEW

March-April 2011 47

new global hub will be located. “It is true, in today’s world with all sorts of technological and IT advancement, location holds little relevance in terms of logistics. But we have to see and weigh the key aspects such as the tax regime, regulatory framework, the flexibility that a particular market offers, the universal acceptance of the place etc., before drawing a conclusion on the same,” he added.

Remittance volume keeps growing

While the total global remittance carried out by UAE Exchange during 2009was to the tune of about $17 billion, GCC operations alone accounted for the lion’s share of the remittance - approximately $12 billion. In fact, UAE Exchange, with a global presence has about 90 branches operational in the UAE alone. It was in 1995, it spread its wings to other countries and currently, it operates in 22 countries in five continents and they include, Oman (32 associate branches), Kuwait (22 branches), Bahrain (6), Qatar (5), Jordan (6), United Kingdom (9), United States (3 states through arrangements), Canada (6), Hong Kong (7), Australia (36), New Zealand (2), Fiji (2), Uganda (2), Sudan (14), Rwanda (1) and India through approximately 250 branches. There are some countries where the group doesn’t have branches but operates through its liaison offices, and they include Bangladesh (2), Manila, Jakarta, Beijing, Colombo (Sri Lanka), etc. India operations have six back offices. “Our business policy envisages that the markets where we do not operate through full-fledged branches, we work very closely with branches of our correspondent banks. In fact, we maintain these back-offices primarily to maintain healthy relations with our correspondent banks,”

added Shetty. Though the company is keen to set up full-fledged branch operations in these countries, Shetty says, that there are regulatory and licensing issues that need to be addressed before it could seriously think of opening shops there. “Moreover, already the correspondent banks offer us good services and they have advanced technology platforms that help us run our business well” Shetty added.

New areas of business

UAE Exchange, which has been adding new markets to its operational map ever since its inception, is also exploring possibilities of entering new business ‘territories’. The Travellers Cheque, which

vided they are compatible with the regulatory regime. In fact, UAE Exchange pioneered accepting third party credit card payments, and now many other exchange houses have followed this as a new revenue and business enhancement model.

Wage Protection System (WPS) UAE Exchange has a big presence in wages protection system, which was introduced in the UAE during 2009. Stating that recession has affected remittance business and hence the UAE Exchange’s overall business, Shetty said a few counter-cyclical factors helped check the impact of the recession to a good extent for UAE Exchange. Recession has affected the construction and real estate sectors in a big way in the Middle East at a time when many new markets like UAE had just started witnessing its first big boom. Shetty acknowledged that this certainly has had an impact on the number of blue-collared workers in the region as the recession left many of them jobless. “If you look at the period 2006-2008 when the economic activity was at its peak, the growth was phenomenal in the remittance business and the year-on-year growth was in the region of 40 per cent in terms of numbers,” Shetty noted. For the remittance business, he explains, the number of transaction is a very relevant factor, as regardless of the volume of transaction, each transaction fetches a fixed income in the form of fee. And obviously, the fall in construction industry has impacted the remittance business in a big way.

UAE Exchange, which has been adding new markets to its operational map ever since its inception, is also exploring possibilities of entering new business ‘territories’

48 BANKING & BUSINESS REVIEW

used to be a thriving business until a few years back, has dwindled in volume and size, of late, and in the new scenario, travel card is being viewed by the company as a new business proposal. “By Travel card I mean a preloaded card which can be used to foot the travel expenses. For this we need to have a platform – MasterCard or Visa,” revealed Shetty, while sharing his new ideas on future business plans. He underlined that there are a lot of opportunities in the ‘smart pay space’ pro-

March-April 2011

Flip side

But there is a flip side to this story. UAE Exchange, as any other remittance business, is a human resources-

oriented industry. It takes care of all its employees right from the manager to messenger and hence the drop in the rentals across the country obviously meant a lot of savings to the company’s bottom-line. Today, the company has 2,700 people and 90 branches in the UAE alone. The drop in rental has brought down the cost of operations as rent and salary account for 70 per cent of its expenses in the group. “When there is a reduction in rent this will certainly help a group like ours,” he said. Having said this, it remains a fact that there has been a marginal drop in business volumes to the extent of 5 to 8 per cent during 2010. However, the bottom-line has still showed a growth thanks to the drop in rental, and this is typical of businesses like UAE Exchange, which uses massive distribution network. UAE Exchange Group runs 90 commercial spaces and about 400 residential units in the UAE.

he added. However, the business witnessed a dip in 2010 after a gap of many years as many projects got cancelled thereafter bringing down the number of workers employed by them. Shetty reminded that the dip was mainly in Dubai but was compensated primarily by growth in Abu Dhabi and in a smaller way in the Northern emirates, mainly Sharjah. “This is strictly in view of the numbers involving our business,” he added.

Next focus for branches

UAE Exchange Group is targeting

Transaction volume

UAE Exchange executes on an average, a million transactions every month, mostly to the South Asian markets – India, Philippines, Nepal, Pakistan, Bangladesh etc, with India accounting for more than 50 per cent of this. “In fact, with these sorts of numbers and growth, we always knew that this was not easily sustainable, at least at this rate and speed, and we were prepared to face a drop or flat growth. “Of course, we started seeing numbers across the economy going down in 2009, but for us there was a growth – 18 per cent because there were some ongoing projects,”

lished strong branch network in the delivery markets such as South America, Africa, Asia, especially South and South East Asia that include Indonesia, Philippine etc. Among the products launched by the company, Xpress Money is a crowd-puller, especially in the GCC markets. This is a product being operated through agency relationships with the participation of three parties - receiving agent, paying agent and the service provider – here the third party is the UAE Exchange itself. Shetty said though the Dh15 charged for this product may look a bit on the higher side, many do not know that this is being shared among the three parties resulting in a relatively small slice for each. “One thing I would like to emphasise here is that if you compare this with the remittance charges being levied in different parts of the world by banks and other institutions, you may realise that it is charged on percentage basis and depends on the money transferred,” he said. But on the contrary, here it is a flat rate, and hence the more the amount, the cheaper it becomes for the sender. UAE Exchange has established relationships with banks in almost all countries and carries out electronic fund transfer to any bank account. But this also involves committing a lot of funds from the side of the remittance major. Shetty explained that if the money has to be credited to the accounts [third party] next day, the exchange needs to have enough of local currency at any given point in time for the banks to execute the deal before funds reach from the sourcing country. The funds sent from the sourcing country will reach the delivery coun-

UAE Exchange Group is targeting sourcing countries for new offices the markets where the remittances are being sourced from the sourcing countries for new offices - the markets where the remittances are being sourced from, and they include the United States, Canada, UK, the European Union countries, the GCC, Australia, New Zealand and the Far East countries such as Singapore, Malaysia, Hong Kong etc. We have already estab-

BANKING & BUSINESS REVIEW

March-April 2011 49

try only on the third working day. “There is an element of exchange risk, there is an element of pre-funding cost, back-end charges etc., and we end up getting not much from this exercise,” he explained. “Typically,” Shetty adds, “this kind of business depends on the volume, as the revenue per transaction (RPT) is very low compared with any other businesses. The volatility in exchange rates can put the whole business to risk because the exchange keeps a very thin cushion to address the exchange risk.” According to Shetty, rate or price is not the only factor that defines the standards of service. Factors such as the number of correspondent banks the organisation has tied up with, the consistency in delivery, the number of delivery channels, etc., also add a lot to the quality of service. There is a cost involved in maintaining relationship with banks. “The differentiating element is the people and the technology. Margins are shrinking.” Shetty reminds us that the rate per transaction that exchange houses charge today was introduced more than 25 years ago and it still continues at the same level.

send. Those days, exchange business had a good time enjoying the benefits of ‘float money’ – the duration the money remains with the exchange houses, and this used to be rather long those days as the process of buying a draft, sending it the beneficiary and the beneficiary

long, the market witnessed the core banking system taking shape in India where the entire network of branches of a bank getting connected through their core banking platform to the Central location. This resulted in the money reaching the customers within 24 hours. Today not only the money is credited to the customers’ account within 24 hours, an SMS message is also automatically generated confirming to the customer about the remittance of the cash. Further, about a few months back, UAE Exchange introduced ‘Flash’ which ensures the instant transfer of money into the bank account and the customer could get a confirmation of the transfer before he/she leaves the exchange house premises. Shetty said, “As of now, we have signed up with only very few banks for this product, but in six months down the line, we will be able to do this with any number of banks provided the banks are equipped with the system that support this transfer mode. This is the ultimate in the speed of money transfer, I guess.”

For remittance business, the number of transaction is a very relevant factor, as regardless of the volume of transaction, each transaction fetches a fixed income in the form of fee claiming the money from the banks, used to take a long time. Shetty says, “those days, the exchange houses had seven days time to buy rupee and hence were able to buy rupee at the best possible rates. Moreover, those days no-

It remains a fact that there has been a marginal drop in business volumes to the extent of 5 to 8 per cent during 2010

New trends in remittance

About 15 years ago, there was only one product available with the exchange houses – printing draft, and at that time it was the responsibility of the customer to send the draft to the destinations, they wanted to

50 BANKING & BUSINESS REVIEW

body had a clue whether the draft had reached or beneficiary had collected the money or not. But things have changed dramatically over the time. In the year 1998, we ourselves started downloading the data and printing the draft in India with the permission from the Reserve Bank of India (RBI).” This was replicated in different markets in due course of time. Here, UAE Exchange undertook to reach the draft to their beneficiary in three days time. This went on for a few years and before

March-April 2011

Competition from banks

“I am glad to know that banks are entering this business [retail transfer]. There was a time when the banks were not keen to service this segment of business that was dominated by large number of small ticket transfers because lot of manual work and hassle were involved in this transaction until a few years ago. Today, increasingly banks in different parts of the world are keenly looking at this industry, which has grown to a $350 billion business globally. And

it has been growing steadily over the years. And this will grow faster as more and more workforce is shifting from developing countries to developed markets.”

Internet, mobile, swiping card….

Shetty said he had been able to convince his delivery partners about the need for speedy delivery and UAE Exchange has gone a long way on this front. “Now we have to work on the other side of the transaction [sourcing side] by helping the senders to do the transaction without requiring to go to the office. If they can do the transaction sitting at their office or home, it will add a lot to their convenience,” he said. It all depends on two things. Real-time settlements should be made possible. A customer, who is registered with UAE Exchange, can virtually place an order to make a transfer provided he can make the payment from his office or home. This mechanism is not available today. Automated clearing system, which is not there now, is the solution to this. Or if there is a mechanism that allows a customer to do a remittance from his/her office or home through a card, it will take things forward, far and fast. “Today, if you use your credit card to do a money transfer transaction, it is treated as a cash advance, which attracts three per cent [cost] upfront – this is a real issue and needs to be addressed on a priority basis,” he pointed out. Shetty believes that if there is a demand, the mechanism will emerge soon. Noting that the convenience for receiving money is there, he said more needs to be achieved on the

sender’s side. Shetty is optimistic that this will be accomplished sooner than later. “This is the advancement one can think on remittance.”

New products

“From our side, we are willing and ready to embrace any technology advancement and we believe this is the key to new products. We will be the first and the quickest to introduce

established business in other GCC markets as well. And now the company is entering into other parts of the world. In the UK, UAE Exchange is under FSA and by the virtue of this it can do business in all parts of Europe without the need for any additional licence. “Hence it is natural that our next move will be to spread our wings in the European Union. We are in the process of establishing in Dublin (Ireland), we are going to Germany, Spain, Italy, France, Portugal, etc. Our intention is to cover the entire European Union markets where there is scope for remittance business – the local demand,” Shetty said. Today, the cost per transaction is very high in European market. It is worth noting that the World Bank wants to bring down the cost per transaction down from the present levels – the cost of transaction in most of the developed countries is about 10 per cent of the amount transacted, in some cases, because the cost of operations is very high there. World Bank wants to bring this down substantially. Shetty revealed that the cost of transaction in this business is less than 0.5 per cent. “We will be able to penetrate into these markets easily as we are far ahead of most players in terms of technology and reach. With the experience we earned from this market [GCC] for the last 30 years – technologically and in terms of reach, we are far ahead of any one in the world,” Shetty said emphatically.

Our next move will be to spread our wings in the European Union. We are in the process of establishing in Dublin (Ireland), we are going to Germany, Spain, Italy, France, Portugal, etc. Our intention is to cover the entire European Union markets where there is scope for remittance business new technology and products. We have more than 150 engineers inhouse who are working on technology alone. We believe that continuous value addition to the customers is what helps us in commanding the loyalty from our thousands of customers.”

Market share

There is no authentic data on the remittance figures. Shetty says from his company’s own research and estimates, UAE Exchange commands about 50 per cent of the remittance market here, which has 117 players altogether.

Expansion plans

UAE Exchange has been in this market for decades and has successfully

BANKING & BUSINESS REVIEW

March-April 2011 51

WEALTH MANAGEMENT

Opportunities, challenges await private bankers BBR Report

he wealth markets of Saudi Arabia and UAE put together could be as big as $830 billion even as the total liquid wealth in the region is estimated between $1 trillion and $1.2 trillion, a recent report by Booz & Company has revealed. According to the recently released report, there is tremendous individual wealth in the Middle East region, particularly the six countries of the Gulf Cooperation Council (GCC) that will continue

52 BANKING & BUSINESS REVIEW

Individual liquid wealth in the region is estimated at between $1 trillion and $1.2 trillion, with Saudi Arabia and the UAE as the largest wealth markets at $550 billion and $280 billion respectively

March-April 2011

to grow in the years to come. And thanks to the financial crisis, which undercut confidence in many established private banking relationships, a significant part of this private banking business is up for grabs, revealed the Booz & Company report. “We estimate the total liquid wealth in the region to be between $1 trillion and $1.2 trillion, with most of that wealth in the hands of local families. By market size, Saudi Arabia and the UAE are the largest wealth markets, with $500 billion to $550 billion and $260 billion to $280 billion, respectively,” said Peter Vayanos, partner at Booz & Company. To shape their wealth offerings appropriately and succeed, private bankers must understand how the financial crisis has altered investor behavior at least temporarily but perhaps permanently, the report underlined.

Private banking in the GCC Private bankers have spent two years coping with one of the most difficult periods in modern financial history. “A global ‘perfect storm’ of assetprice declines and the near or actual collapse of well-known financial institutions and even sovereigns, have altered the private banking landscape and the behaviour of wealthy clients in the GCC. Now, thanks to the financial crisis, which severely battered the reputations of some of the most well-known, established providers of wealth management services to the region, much of the wealth-advisory business is up for grabs,” said Dr Daniel Diemers, principal at Booz & Company. Indeed, many high net-worth individuals (HNWIs) moved their assets out of these global institutions and back onshore with local banks until the crisis passed. Now, they are ready to re-deploy their capital and are mulling their options.

Daniel Diemers

BANKING & BUSINESS REVIEW

March-April 2011 53

However, Middle East HNWIs have very specific characteristics. Most wealthy nationals are business owners or entrepreneurs. They often have multiple businesses and overlapping needs that range from corporate finance to personal wealth management. Their companies also often involve large extended families with various roles and interests. What’s more, the governance and finances of these family businesses can be opaque. Religion is also a factor in the GCC private banking market: Arab HNWIs often want some or all of their investments to adhere to Shari’a law. Unfortunately, designing Shari’a-compliant products that can match the returns, diversification, and liquidity of conventional products is difficult and – for certain asset classes – still almost impossible.

Successful growth from capabilitiesdriven strategies These characteristics make the GCC private banking market unique but not impenetrable. To succeed, private banks must choose their cornerstones for growth, articulate sources of competitive differentia-

Peter Vayanos

Designing Shari’a-compliant products that can match the returns, diversification, and liquidity of conventional products is difficult and in some cases, almost impossible 54 BANKING & BUSINESS REVIEW

March-April 2011

tion, and select a distinctive, capabilities-driven strategic play. More specifically, local banks – which often have rather unspecified private banking offerings – will need to take a number of steps to further increase the share of wallet with their wealthy clients: define their target client segments, improve customer-centricity, upgrade their value propositions, continue investing in state-of-the-art IT and sales and advisory tools, and transition to a more comprehensive, advice-based wealth management model Meanwhile, the established, global players will need to defend their market share against local players by continuing to raise the bar on value proposition and operating model, while retaining best-in-class resources (and that includes keeping the best talent from being poached). Their challenge is to cost-effectively leverage their brand and global capabilities while maintaining a localised, ‘high touch’ relationship model, and catering more specifically to local needs in the GCC. “As the region continues to recover quickly from the financial crisis, especially compared to some Western markets, we expect competition to heat up over the next few years as local players upgrade offerings and the global players - the incumbent private banking powerhouses - reassert themselves to defend and pursue market share”, said Vayanos. There are a few key success factors that will be necessary for these players to thrive in this challenging market: • A comprehensive and integrated client offering that extends from individual wealth management to family business advisory services, including corporate finance and investment banking services. • An acute sensitivity to cultural predispositions, family relationships, and behavioral preferences. • Advice-led coverage models must

consider investable assets, sources of wealth, ethnicity, and needs based on lifecycle and life style. • A best-in-class delivery model that serves the client in an efficient, personalised, and hassle-free manner, and is flexible enough to accommodate additional client requests, such as Shari’a compliance, comprehensive trust solutions, and offshore investment. • A strong brand or at least an established track record in the region, a clear long-term commitment to serving clients in the GCC, and a strategy based on continuity and client centricity, not product sales and short-term profits. “Last but not the least, private banking in the Gulf requires immersion in the local cultures, where traditional private banking values - secrecy, security, diligence, trust, and honest and fair advisory relation-

ships - blend well with cultural values and predispositions in the region,” added Diemers.

In conclusion

The bottom line is that post-crisis, the GCC offers private bankers both opportunities and challenges. Those with aspirations in the region can analyze the GCC market in order to identify “sweet spots” of client needs, differentiate their wealth offering (and articulate this effectively to clients), and pursue a growth strategy related to the size and scope of their operations. “By taking these steps, private bankers from around the world, and from institutions of various sizes, can win a place in this lucrative, promising market. With the financial crisis coming to an end, now is the time to rethink your strategic positioning and seize the private banking opportunities in the GCC,” concluded Vayanos.

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REGION

Disconnection in the Middle East Egypt in focus

By Gerard Lyons

hat are the implications of events in Egypt? There are three direct issues to focus on at the local, regional and global level. Namely, what happened within Egypt, how this could spill over into the region, and then the global impact via energy, trade and geopolitics. There are common economic challenges across the Middle East and North Africa (MENA) region, which are outlined below. Despite this, it is premature to draw too many conclusions from events in Tunisia and Egypt for the whole region, as there are wide

differences in economic performance, and in demographic and social terms. The Gulf Cooperation Council (GCC) countries have, in general, seen significant benefits from high energy prices, reflected in strong

lation. That said, there are still some deep-rooted economic issues common to most countries across the region. The three ‘Ds’ We have continued to stress in recent years three inter-related factors: demographics, diversification and the dollar. All are important for understanding the backdrop to events in Egypt now and for the outlook across the MENA region. Good economics is good politics. When the economics is not good, this – at some stage – affects the

The symbolic importance of Egypt across the Arab world, plus the scale of the country, in terms of its population and size, leaves the outcome there crucially important

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recent growth and higher transfer payments to the mass of the popu-

March-April 2011

politics. The huge young populations across countries in the region highlight the need to create jobs. That is the demographic dividend. But it can become a demographic disaster if the jobs are not created. This is an important message for some countries outside the Middle East and North Africa (MENA) as well – for instance, politicians in India need to bear this in mind, as that country has the greatest demographic dividend in the world. For the MENA region that leads directly into the diversification dynamic, it is essential that countries across this region diversify their economies away from energy.

As vital as energy is – and as important as it will remain – it is capital intensive and does not generate jobs in scale for their populations. Even for those countries not rich in energy there is the need to attract investment into a diverse range of areas in order to grow. Unemployment rates

Directing money to the people, almost as a transfer payment, is the approach in richer Gulf countries, like Qatar, the UAE and Saudi Arabia, but even wealthy nations need to create jobs at some stage. Egypt, in contrast, is not wealthy by Western standards, but its reform program of the last five years or so highlights a determination to open up and diversify. There has been inward investment, the signing of free-trade agreements and a rise in income per head. Yet the gains are not feeding through quickly enough to the majority of the population. In some respects Egypt’s growth has been more capital- than

Egypt needs a much higher growth rate than the 6 per cent it has averaged over the last five years are high across the region. Thus, it is vital for MENA countries to diversify their economies, allowing a host of different sectors to prosper.

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labour-intensive, with higher investment not yet being directed to sectors that generate jobs. This could change, but it requires not just more of the same, but stronger domestic demand and a self-feeding growth dynamic. That takes time. And then there is the dollar issue. This has been seen as much less important in recent weeks, but is still significant nonetheless. ‘Dollar’ here effectively refers to macroeconomic policy. Countries across the region need to set economic policy to suit domestic needs, and not be tied to the US Fed and economic cycles in the US. This matters more for the Gulf than others in the region, and should become more important, as growing demand from the East has an increasing influence on demand for energy. Against these longerterm structural issues, events in Egypt highlight that cyclical – or nearer-term – factors can have a profound impact on economies where the foundations are fragile. High food prices were, it seems, the trigger for recent problems. But, in turn, this unleashed a host of other issues, economic, social and political. According to the Institute for International Finance (IIF), unemployment rates for those in their 20s are: 73 per cent in Egypt, 82 per cent in Morocco and 62 per cent in Tunisia. It notes, “Unemployment is concentrated among the younger members of the working age population and especially new job seekers graduating from school or university.” Thus, it is easy to understand that once the demonstrations began, the media identified them as largely made up of the middle class and the educated. If wages are not rising, rising relative prices can have a

devastating impact. This was seen in Tunisia and Egypt but is rather true anywhere. Across economies such as Egypt, food accounts for a high proportion of spending by the poor. So, imagine the impact of higher food, energy and transport prices, reports of rising rents, but little increase in wages. Within this context, how should one view the recent events in Tunisia and Egypt? The national impact Jobs, or the lack of jobs - is the fundamental issue. It ties in directly with the overall theme of this monthly report: a disconnected and divided world, whether it is measured across MENA through high un-

it was a net 47 per cent worse and China a net 89 per cent better. The symbolic importance of Egypt across the Arab world, plus the scale of the country, in terms of its population and size, makes the outcome there crucially important. There is much discussion of the various political scenarios, which I will not dwell on here, as the situation is dynamic and could change quickly. But a waiting game is increasingly talked about in the context of overall democratic change. Tourism accounts for 11 per cent of the economy and will undoubtedly take a hit – but usually the impact is V-shaped recovering after prices have fallen and stability restored. Likewise, investment may suffer near-term. While one should expect a setback, it might be premature to dismiss Egypt’s prospects. Admittedly, Egypt needs a much higher growth rate than the 6 per cent it has averaged over the last five years. It has been reforming its economy in recent years. This has already attracted inward investment, including into the financial sector. Its stock market is the largest by capitalisation in the region. And per-capita incomes have doubled, but still remain low. Thus it would be wrong to say there has not been progress. There has. But it has not generated enough jobs. My colleague, Marios Maratheftis, calculates that Egypt has a dependency ratio of 58 per cent. That is, for every 100 people of working age (15 to 64), there are 58 dependents. The lower the ratio, the better. With 32 per cent of Egypt’s population below 15, this dependency ratio should fall further, provided there are jobs. But, across much of the MENA region, these figures may not capture the full picture, as in addition to those without jobs there are

Would the result of the popular rising be more like Poland, a move to pro-Western democracy, or Iran, Islamic fundamentalism? Or, perhaps it is more realistic to think of Turkey, a secular country

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employment, low income levels or limited expectations. Consider some relevant results from Pew’s recent global survey, which probably captures some of the underlying themes that are still relevant. Let’s compare Egypt with China. In answer to the question, ‘How satisfied are you with the way things are going in your country?’ the result was 67 per cent dissatisfied in Egypt; for China it was 9 per cent dissatisfied. For the question, ‘ How would you describe the economy?’ in Egypt the reply was a net 44 per cent very bad, versus, for instance, China where it was a net 69 per cent somewhat good. And in response to the question, ‘Will life be better for your children?’ for Egypt

March-April 2011

many who do not participate in the labour market. A common feature across the region is the low participation rate of women. While cultural, it is of economic relevance. Within Egypt, the working-age population is 53million. But the labour force is only 26million, of which 4.5million are women, almost one-quarter of whom are unemployed. So about 3million women work out of 27million of working age. Taking this into account, a more realistic dependency ratio is 220 per cent for Egypt. This is high, and not sustainable, and is more reflective of the problems within the country. At the very least this adds weight to the need for further, deeprooted economic reform within Egypt. But the question, which is hard to answer, is whether there needs to be cultural shifts in terms of women in the workforce. This reinforces the need for jobs for the young, and addressing the problem that has not yet been solved for those in their 20s and younger. Unless addressed, further problems beckon. In Egypt, 32 per cent of the population is younger than 15 years old. If Egypt did change, what form would it take? Would the result of the popular rising be more like Poland, a move to pro-Western democracy, or Iran, Islamic fundamentalism? Or, perhaps it is more realistic to think of Turkey, a secular country. The regional impact In terms of the regional implications, it is hard to say that unrest naturally spreads from one country to another. But if the circumstances that bred the discontent in Egypt and Tunisia are seen elsewhere, then there could be regional contagion. This might explain why Egypt’s neighbours are keen for it to stop the demonstrations. In recent weeks

I have been asked about the benefits of democracy versus less democratic regimes. This issue surfaced, slightly, at Davos. The key issue is not just that people need a say through the ballot box – in some respects that is the shock absorber and a vehicle for peaceful dissent – but often overlooked is the importance of institutions. This can include economic institutions, such as a credible central bank and fiscal authorities, but also there is the wider issue of civil society, a free press and judiciary and freedom of expression. Corruption and weak institutions are often the downfall because, even with growth, the benefits are not distributed fairly

and this may persist. The countries the market is more concerned about include Yemen and Sudan where poverty is high. Perhaps the greatest concern would be if any of the major oil producers encountered turmoil. When Iran’s monarchy fell in 1979, it is said that not only did experts not see the revolution coming before the event even with the benefit of hindsight they might not have seen it. That lesson, plus latest events, suggests the need to take seriously the risks. The global impact Egypt’s importance in terms of trade is one aspect of the global implications of events there, as it is home to the Suez Canal, through which 8 per cent of global trade passes. The Egyptians have always, it seems, taken pride from overseeing this, so it is hard to imagine deliberate disruption. Likewise, the world’s fourth-longest telecommunications cable, connecting Europe and Asia, passes through the country. The biggest global risk is the impact on the oil price. The impact on the gas price, although secondary, could also be a risk. Egypt’s importance as a gas producer, and in particular as a supplier of energy to Israel, should not be overlooked. Risks could materialise very soon – in the form of regional contagion spreading into the oilproducing countries of the Gulf on which the general perception is that it is unlikely – and when one considers oil output, it is Saudi Arabia, the so-called swing producer, that is key. (The author is the Chief Economist and Group Head of Global Research at Standard Chartered Bank - Gerard.Lyons@sc.com)

In the MENA region it is necessary to differentiate the Levant from the Gulf and the Maghreb. The Gulf States are in better shape; according to the IMF; For instance, income per head in Qatar is $74,000 versus $2,600 in Egypt among the population. China, for instance, is not a democracy. But there, as in many other East Asian countries, its macroeconomic policy tools and institutions work well. Disparities have widened, but growth has been strong enough for most to feel they are getting a larger slice of a rapidly enlarged cake. In the MENA region it is necessary to differentiate the Levant from the Gulf and the Maghreb. The Gulf States are in better shape; according to the IMF, for instance, income per head in Qatar is $74,000 versus $2,600 in Egypt. Will there be contagion? There already is, in terms of the market applying a higher risk factor to countries across the region,

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March-April 2011 59

AUTO

Driving Experience with Power Staff Report

l-Futtaim Motors, the exclusive distributor for Lexus in the UAE, has announced the launch of Lexus’ first high performance sports sedan from the track inspired F marque series, the Lexus IS F. Exclusively powered by a performance tuned 5 litre

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V8 engine and teamed to an eight speed sport direct shift transmission, the IS F delivers a driving experience with a power punch of 417 horsepower at 6,600 RPM. Saud Abbasi, General Manager for Lexus, Al-Futtaim Motors, said, “Not only is the IS F Lexus’ first per-

formance vehicle, but it signals the UAE birth of our F range of vehicles designed to bring a new level of performance and emotion to the Lexus range outside of its traditional luxury segment.” The F marque derives its name and design from Japan’s Fuji speedway, which is home to Lexus’ high performance vehicle development and the birthplace of the IS F. Based on the IS sports sedan se-

ries, the IS F underwent an extensive re-engineering and development program to deliver its unique performance attributes. In addition to the technically advanced 5 litre V8 engine, the IS F features many performance tuned components including a sports adaption of the Vehicle Dynamics Integrated Management (VDIM) system, Brembo brakes and a specially developed eight speed direct sport shift transmission which

allows the IS F to reach 100kmph in just 4.8 seconds. On the road the IS F is distinguishable from the other IS models by its low stance and deep front spoiler with larger grille and intakes. Wider wheel arches featuring side vents house the 19 inch forged alloy wheels and the bespoke tyres designed in conjunction with Michelin, all combine to promote the car’s high performance capabilities.

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MANAGING RISKS

Expect the unexpected By VA Tommy

f ever a risk manager or a historian specialising in risk and insurance decides to write the comprehensive history of risk management, Gregorian 2010-11 are likely to stand out as ‘watershed’ years. The developments emerging since the last quarter of the year 2010 and evolving through the year 2011 are forcing the risk managers and insurance professionals to reinforce the basic lessons they learnt in the schools of insurance – expect the unexpected, at all times.

tap water in the homes of Tokyo, situated 240 kms from the nuclear plant, are above the acceptable levels of human consumption. Political disturbance in the MENA region on the other hand are impacting the businesses to unimaginable scale. Reports of multinational companies (MNCs) shifting their offices – lock, stock and barrel – from the affected cities like Bahrain have started pouring in during the last few weeks.

Implications and Lessons

Unexpected Risks

The unexpected jolts that the world has been facing are a combination of Acts of God and man. Acts of God ranged from the earthquake of 7.2 Richter grade that struck Christchurch, New Zealand in September 2010 to the latest one of 9 Richter grade that struck Japan in March 2011. While it is not unusual for Japanese to encounter earthquake tremors and shocks quite frequently, the scale and strength of the earthquake that struck the North Eastern parts of Japan left everyone, including the worst pessimists, with disbelief. The ramifications and economic implications of this earthquake, not only for Japan, but also for the global economy including insurance industry, are still evolving. To imagine that a single act of a young man immolating himself, would ignite a fire that will unleash a chain of events leading to political violence and disturbance across North Africa and Middle East, is forcing the wise and prudent to believe in the age-old fact that nothing can be unexpected in this uncertain world. What are the changing interpreta-

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tions of risk in the light of the two events – one caused by God and the other made by the Man, one of the five most powerful earthquakes to have struck the world and the unprecedented political disturbance across the Middle East and North Africa?

Fast evolving events

The latest earthquake is reported to have moved the Japanese coast by 8 meters and shifted the Earth’s axis leaving major implications arising from its devastating effects. The gigantic Tsunami waves that resulted from the earthquake have washed away villages and towns and parts of concrete cities killing more than 10,000 people and displacing millions. The Act of God has caused a man-made disaster in the form of radiation leaks from the 40-year-old Fukushima Daiichi nuclear plant. Reports coming from Japanese Government indicate that radiation levels in

March-April 2011

The economic losses from Japanese earthquake are still being counted and measured – and the least of the estimates is $50 billion. How much of it is insured losses, is still a question not answered. What is important for the risk managers to ponder are: are the losses caused by earthquake, floodwaters (Tsunami), or Nuclear perils (radiation leaks)? And what about the business interruption for factories and establishments worldwide that rely on the production sites in the affected Japanese Towns? Political Violence including strikes, riots and civil commotion are normally not covered in the standard insurance programs offered by insurance companies, and hence are the risk managers trying to protect their assets against these perils by buying them separately? And most importantly, do the businesses have a disaster recovery management plan in place, which can be activated immediately on a calamity striking them? The views expressed by the author, a Director for Sun Reinsurance Brokers LLC Dubai, are his own and not necessarily contributed to by his employers. You may contact him via email: vatommy@gmail.com

11606_ADCB_Enterprise_Credit_Ad.ai

CMY

1/27/10

3:04:24 PM

Realty & construction shares still drive DFM T

he month of February saw the Dubai Financial Market (DFM) market index fall by a substantial 8.1 per cent, from 1534.4 points as of January end, to 1410.7 when February closed for trading. The market capitalisation, the combined market value of all the stocks listed on DFM, dropped by 4 per cent to reach Dh185.3 billion as of February end from Dh193 billion a month earlier. The value of shares traded during February reached Dh2.7 billion, compared with Dh3 billion recorded during January, a contraction of 9.7 per cent. Number of shares traded during this period went down by 6.2 per cent to reach 1.84 billion shares compared with 1.96 billion shares that traded during January. Number of transactions executed during February also dropped marginally by 1.7 per cent to reach 38,200 deals compared with 38,900 deals carried out during the previous month. In terms of sectorâ&#x20AC;&#x2122;s contribution to trading volumes, the real estate and construction sector ranked top in terms of the value of traded shares, as it reached Dh1.372 billion, or 50.6 per cent of the total value of shares traded in the market during that month. Transportation sector

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ranked second at Dh444.4 million, or 16.4 per cent, followed by Communications sector at Dh332 million, or 12.2 per cent, with the Banking sector amounting to Dh261.5 million, or 9.6 per cent of the total traded value. The investment and financial services sector accounted for Dh240.5 million worth trading, or 8.9 per cent of the total value of transaction. The value of shares bought by foreign investors during this month reached Dh1.332 billion, which accounted for 49.1 per cent of the total value of shares traded. The value of shares sold by foreign investors during the same period reached Dh1.266 billion representing 46.6 per cent of the total value traded. Thus the statistics show that foreign investors were net buyers on DFM by Dh66 million during February. The value of stocks bought by institutional investors during this month reached Dh790.5 million, which was 29.1 per cent of the total value of shares traded. The value of shares sold by institutional investors during the same period reached Dh910.1 million, which constitutes 33.5 per cent of the total value traded. DFM net institutional investment out-flow amounted to Dh119.6 million during the month.