Menzis’ not-for-profit remit and governance structure – its only shareholders are its two million clients – gives it a particular focus on long-term decision-making and sustainability. Ruben Wenselaar explains the company’s mission and how its engagement policy helps it succeed.
Year: 2011
Burgan Private named Best Private Bank in Kuwait
Private banking is about much more than traditional banking services of deposits and loans. In Burgan Private, it’s about offering personal one-to-one services and finding creative approaches to manage high-net-worth families’ as well as individuals’ wealth. Burgan Private is one of the leading private banks and wealth management facilities in Kuwait and the region.
By understanding its elite clientele’s needs, Burgan Private crafts its services through personalised investments as well as financial offerings to high-net-worth individuals. It also provides strong local and international alliances with excellent product ranges both on a local and an international front that have paved the way to facilitate direct and cost-effective access to international investment products that suit clients’ personal risk and reward parameters.
The excellence in Burgan Private’s services mirrors its continuous commitment to provide outstanding advice to its private banking clientele and its vision to implement international best practices; both crafted to ensure the delivery of a trusted premium private banking service. Its success has enabled it to be recognised as Kuwait’s Best Private Bank in 2007 and 2011.
Trust and excellence
Burgan Private was launched in 1999, and since then has been working to create a solid reputation for itself. One of its primary objectives is to always preserve and expand individuals’ existing wealth.
The firm provides wealth management services, investment vehicles and traditional banking services to clients from Kuwait and the local region with high net worth. This includes the provision of gold accounts, VIP flexibility and treatment, preferential terms on loans, deposits, foreign exchange transactions and other facilities through well-established domestic and international third parties. Burgan Private’s Wealth Management unit continues to offer diversified third-party funds. It maintains alliances with Swiss financial institutions that specialise in the administration of collective investment funds, limited partnerships and trusts.
Whether clients like to direct their own investments or prefer to have them actively managed, Burgan Private seeks to offer a full range of investment advisory services that work to preserve and expand individuals’ current wealth. Building on capital preservation and capital growth, Burgan Private’s services ensure that clients are offered the best and most up-to-date products and services.
Burgan Private bankers utilise their expertise in risk management to help preserve wealth and avoid losses caused by market uncertainties. By doing so, they use their local market knowledge and global accessibility to provide clients with new creative solutions to earn high returns that are centred on clients’ risk and reward profiles.
Burgan Bank Group
Burgan Private is the private banking arm of Burgan Bank Group, a subsidiary of KIPCO (Kuwait Investment Projects Company). It is a regional banking group with majority owned subsidiaries in the MENA region. The group is well positioned as a fully fledged commercial bank and has acquired a leading role in the retail, corporate, private and investment banking sectors through innovative product offers and technologically advanced delivery channels. Its subsidiaries include Gulf Bank Algeria (Algeria), Bank of Baghdad (Iraq), Jordan Kuwait Bank (Jordan) and Tunis International Bank (Tunisia).
2010 was a year of recovery for the group; restructuring the balance sheet, improving and controlling the credit costs and strengthening the core earnings were the main highlights. Burgan Bank Group has established a positive growth trajectory through 2011, and its performance positions the group among the leading banks in the region in terms of returns and growth rates.
Future outlook
Burgan Private will continue its record of excellence through sustained improvement and focus on maintaining strong relationships with clients. Customised financial advice and solutions will continue to be one of the group’s primary offerings.
The private banking group is looking to diversify its offering by adding new investment funds. These funds will be well diversified through investments in various asset classes and different geographic regions. The new investment fund offerings will aim to meet clients’ needs and goals with higher levels of service.
As Burgan Bank Group looks forward, the group will continue to focus on its customer-centric approach across all business lines to address the banking and financial priorities of customers and investors alike. Burgan Bank Group is determined to continue the year ahead with on-going fostering of its normalised revenues, exploring growth opportunities and further control of credit costs.
The unlikely hero
At a time when the conventional lending system is going up in flames, a quiet yet fast-growing segment of the financial services industry is emerging from the embers as the hero the industry desperately needs.
It’s always the quiet ones; yet the potential of Islamic finance to become the preferred model of lending globally is sounding out loud and clear.
While conventional share market indices continue their fiery plummet downwards, Islamic indices around the world are lighting up; and Sharia-compliant financial assets are growing faster than any other banking sector, at more than 15 percent per annum. The current market potential of Islamic financial bodies is estimated to be in excess of $5trn, with the value of its worldwide financial assets projected to reach $1.6trn by 2012.
Such growth demonstrates very real opportunities for investors, businesses and governments worldwide.
The new lending model
Islamic finance is spectacularly different from its Western lending counterpart. Guided by Islamic Law, known as Sharia, it is built around principles of fairness, partnership and resistance to excessive risk. Strong emphasis is placed on the existence of an underlying asset to a transaction, and profit and risk sharing is encouraged.
Excessive speculation is banned, and dealings in forbidden assets such as alcohol and gambling are prohibited. Charging interest is illegal and perceived as immoral, since interest does not factor in how a change in the loan’s value could negatively impact the borrower. Instead, the bank will buy property outright and charge the owner a utility fee for its use.
This principle, however, is a cause for contention – depending on whether the institution charges for the “time value of money,” deemed by critics as simply interest dressed up.
The principles of Islamic finance contrast with those of the conventional lending model, frequently characterised by individual gain, exposure to unrealistic risk levels, high interest rates, and the creation of financial products so fanciful and exotic that they can barely be pronounced anymore.
Consequently, Islamic finance is revered by proponents as a more ethical banking option, and better connected to the real economy. This moral character, combined with a low risk profile, is likely to appeal to a wider investor pool in the future, and enhance its potential to become a viable alternative to the Western model of funding.
Engine for growth
Thanks to the sector’s strong principles, the global financial crisis was largely positive to the growth of Islamic finance.
Profit and risk sharing ensured adequate due diligence and risk profiling of investments, shielding many banks from unwarranted exposures. The prohibition against short selling reduced losses further. The sector was impacted by over-exposure to real estate, which was used frequently as a tangible asset to back transactions, but overall the crisis did more good than bad. It normalised pricing between conventional and Islamic debt sources and bought Islamic finance out from under the radar.
In fact, one could commend the industry for the impeccable timing of its coming out party. Just as the global customer was left with a souring taste from the fancy, frivolous spending of the Western lending system now up in smoke, Islamic financing delicately tiptoed onto the world stage as the alternative model of lending.
Beyond timing, a number of key growth factors continue to enhance the investment appeal of Sharia-compliant finance.
As a relatively young market, it has strong untapped potential for product innovation and design. Growth opportunities exist for conventional banks and fund managers to enhance their product offerings. Fund managers can benefit from a diversified source of debt finance, and banks can increase socially responsible investment options through Sharia-compliant funds while simultaneously helping to cultivate social inclusion.
Equally, there are a number of virgin markets to explore: such as Indonesia, which boasts the highest Muslim population in the world. Established markets around the Asia-Pacific are likely to take advantage of regional growth in these markets, as well as establish new Islamic listing platforms later on.
Sharia-compliant financing is also attractive as a result of the strong cashflow out of petrodollar regimes such as the UAE. This creates demand for banks in larger financial markets to offer culturally relevant products and services to absorb the capital.
Emerging power brokers
The value of Islamic finance in petro-dollar markets such as the UAE is best approached with a long-term investment horizon.
Although the UAE is revered as one of the most important centres for Islamic finance – and rightly so, with the highest number of Islamic sovereign wealth funds in the world – large losses from public infrastructure projects financed in part by conventional debt mechanisms have left the overall economy weak.
In the immediate term, a number of smaller transitional markets and future Islamic finance hot-beds are grabbing investor attention.
Pakistan is one such market. The strength of this South Asian nation lies in its large, 180 million-strong Muslim population, with a growing appetite for culturally-relevant banking practices. The country’s Sharia-compliant financial assets have climbed an astonishing 30 percent per year from 2006 to 2010, and Islamic banking is currently worth $4.74bn – or 7.3 percent of the entire banking system.
A particularly attractive growth opportunity sits with the country’s rural market, comprising of customers traditionally sceptical of banks as a result of the interest applied to products. Importantly, and as part of an ambitious plan to double Islamic financial services by 2015, Pakistan’s government has requested that 20 percent of all new branches created by Islamic lenders be opened in rural areas.
In general, public policy has been highly supportive of Islamic finance. The country’s central bank, the State Bank of Pakistan, is using a three-pillared approach to encourage development, and is focused on boosting the number of Islamic banks in the private sector, setting up Islamic subsidiaries in existing banks, and promoting the development of Islamic branches in conventional banks.
To maintain growth and increase foreign investment opportunities, the government will need to focus attention on developing regulatory infrastructure that supports Islamic finance. Currently, the segment operates under the existing laws and regulations of conventional banks. Furthermore, political risk associated with the country’s almost decade-long battle with militants along the Afghan border must be curbed to reduce capital flight.
Further south, Malaysia is another new darling of Islamic finance – in fact; it’s practically a bonafide star. The country currently holds $30.9bn worth of Islamic banking assets, and has the world’s largest Islamic private debt securities market, at $34bn of local corporate bonds. The small Asian nation is revered by the global finance industry for its progressive reform of regulatory and tax structures as complementary to Islamic finance guidelines. Under the Islamic Banking Act 1983 and the Takaful Act 1984, the Sharia-compliant financial market operates separately to conventional markets. Tax laws are largely deregulated, and provide for a number of important exemptions across the industry – naturally, whetting investor appetite. The country has also set high benchmarks in Islamic finance for efficient market discipline and risk management, with policies clearly spelt out in the Financial Sector Master Plan and Capital Master Plan.
Similarly, Malaysia’s attraction lies in product innovation, and it proudly boasts a large and holistic product range: spanning from wealth management options aimed at the wealthy, through to microfinance options designed for the less affluent consumer. In particular, Malaysia is revered for its highly sophisticated Islamic insurance product offering (Takaful).
Malaysia also plays a pro-active role in establishing strategic alliances to spread its model of Islamic finance globally. A key example is ING Public Takaful Ehsan, a joint venture between Dutch group ING and the local Public Bank Bhd and Public Islamic Bank Berhad. Similarly, the country works closely with its neighbour to the south, Indonesia.
As the world’s most populous Muslim country, Indonesia offers Islamic finance a tantalising target market of more than 210 million potential customers. It holds promising potential: local Islamic banking assets have grown 47 percent between 2005 and 2011, with account holders increasing from 300,000 in 2001 to 8.5 million in 2011.
Since July 2011, Indonesia and Malaysia have signed two strategic partnerships. The first Memorandum of Understanding (MoU) was between The Association of Islamic Banking Institutions Malaysia and the Indonesian Sharia Banking Association, and focused on establishing an industry taskforce to develop cross-border liquidity management products. The second MoU was between Malaysia’s Maybank Islamic Bhd and PT Bank Syariah Mandiri of Indonesia, and formally initiated a cross-border Islamic treasury, and trade finance products.
Growing beyond borders
Such connectivity and information sharing between regional counterparts is fuelling the Islamic finance growth machine further, with the communication of best practice approaches vital to the long-term sustainability of the sector.
This knowledge transfer is also occurring in more developed markets. Geographically, a politically stable and well-established economy such as Australia is well-positioned within the Asia-Pacific region to benefit from new product flows from its already strong trading partners in Asia.
The Oceanic country’s influential 2010 Johnson Report, Australia as a Financial Centre – Building on our Strengths, linked the importance of Islamic finance to the goal of making Australia a regional leader in financial services. With a Muslim population that exceeds the combined Muslim populations of both Hong Kong and Japan, as well as the Indonesian market on its back doorstep, Australia has significant incentive to boost its access to Islamic products. Australia’s recognition of Islamic finance is a positive indication that conventional markets are supportive of the industry’s growth.
With so many business opportunities in Islamic finance across the globe, and a number of new players to add to the watch-list, a country’s legal and tax structure is likely to be a deciding factor for investors. Too often, the key barrier to the growth of Islamic finance is local regulatory barriers.
In the case of Australia, for example, the Johnson report highlighted how local tax restrictions must be removed to ensure that Islamic products have equal treatment to their conventional counterparts. The government has recently taken heed to this suggestion, appointing the Board of Taxation to perform a comprehensive review of local tax laws to ensure they are complementary to Islamic finance offerings.
Equally positive, this year Oman legalised Islamic banking, the final Gulf Arab state to do so. In Indonesia, the government’s ability to take a leaf from Malaysia’s book and focus on building a legal system that complements Islamic finance will put it in good stead.
Of course, the speed with which countries can amend legal and tax structures will of course determine the pace of growth. Regardless, public sector support will be vital to the sustainability and success of Islamic finance in each country.
Looking forward
There is little doubt that Islamic Finance is blazing a hot trail across the global economic stage.
The sector’s commitment to financing real economic activity rather than engaging in speculation, coupled with a separation of risk and reward, has enabled it to achieve credibility with numerous audiences. Its ‘ethical’ market appeal is also likely to continue to increase its popularity well beyond a traditionally Muslim customer base.
Strong growth opportunities in a number of regional markets give it further potential to become the new, alternative engine of global economic growth. Long-term sustainability will depend on the level of effective public-private co-ordination. Responsibility lies with governments to develop complementary tax and regulatory infrastructure. Similarly, onus lies with the private sector to share lessons learnt and best practice approaches with trade partners and allies.
Should all players continue to work together cohesively, the once-quiet industry of Islamic finance will become a loud force to be reckoned with – and perhaps even the reluctant hero to give finance back its manners.
Tailor-made solutions
“Stick to what you know,” has proven to be a motto that works – and it is a maxim close to the heart of those in charge at Banco Interacciones. The lender insists it does not aspire to be a jack-of-all-trades, but rather to master one – with the objective of applying it to its clients’ advantage.
After a decade of quality control, commitment and hard work, the lender can safely say it has found the key to success. It maintains a constant interest and enthusiasm in banking developments to perfect its work on behalf of its customers. Attentive communication helps the bank avoid surprises and provides timely information to stakeholders when any changes occur. It does that by listening, understanding their positions and paying attention to detail. Teamwork plays a key role in that service too, as it allows for drawing on the experience and qualities of all involved to achieve a common goal. Responsibility, consistency and honesty are dominant facets that drive the group. Above all however, Banco Interacciones has succeeded because it is an organisation that adapts quickly to changing demands and raises the stakes in the market.
Committed leadership at the helm
When in September 1993 Mexico-based holding company Grupo Financiero Interacciones sought and obtained authorisation from the Ministry of Finance to establish a new, multiple banking institution, nobody could guess that Banco Interacciones would rapidly grow to become one of the top banks in the country. The company’s vision to be a leader in its field has become reality through continuous efforts to provide security, prestige, trust, specialised counselling, and the best alternatives to its clientele.
The bank’s CEO, Carlos Hank González, is one of the key people who contributed to itsw vast success and made certain the institution never lost sight of its mission. “We wanted to offer financial products and services that add value and protection to the heritage of each of our customers and adjust to suit their required needs,” Hank says. “At the same time we strived to achieve the return that was expected by shareholders and accomplished this every time. However, none of this would have been possible if it was not for the excellent teamwork within the various departments. Banco Interacciones encourages the personal and professional development of its staff – and they repay us by putting their heart and soul into ensuring client satisfaction.”
Hank’s charisma and affable personality are only surpassed by his ambition, drive and commitment to attain great triumphs on behalf of the bank and its clients. Family history precedes Hank: his grandfather is a renowned professor and his uncle is a former mayor of Tijuana. Despite being the third-generation member of a family often associated with politics, Carlos Hank is much more business-minded than his paternal relatives. Some say he is more like his maternal grandfather, Roberto González Barrera, who is the majority shareholder of Grupo Financiero Banorte.
Hank is very much a man with his own merits, who works hard for his clients and strives towards continuous growth for the bank. He is also a respected member of the board of directors of Grupo Financiero Interacciones and has previously served as co-CEO and as coordinator of strategic planning in the area of promotion and money markets within Interacciones Casa de Bolsa.
He acquired a degree in business administration with specialism in finance from Universidad Iberoamericana and later experienced a rapid rise within Banco Interacciones. He was only 23 years old when he joined the team in 1995, as the country was suffering a heavy financial calamity. The Mexican Peso crisis, also known as the December mistake, caused the abrupt devaluation of the country’s peso in December 1994. It brought hard times for a new bank trying to establish itself in the market. The CEO recalls: “We had to start from scratch… it was a very tough beginning bang in the middle of the crisis.”
Gradually, Hank assumed the leadership of the various businesses until finally in October 2000 he was named CEO of the whole business while his father carried on as chairman of Grupo Financiero Interacciones. According to Hank, Mexico started to work its way out of the crisis around the same time, which meant an action plan was in order to consider all viable options for Banco Interacciones.
“We looked at areas where we could be competitive, and especially looked at what rivals such as CitiBank, HSBC and others were offering. There are numerous professional competitors but we looked to focus at niches in particular, with an emphasis on the financing of states, municipalities and governments and infrastructure projects.” The group is moreover active in representing smaller companies that provide products and services: such as medicines for health programmes run by governments, companies that are involved with transportation of oil, and other similar type of business.
Distinct expertise
Hank believes that regardless of how recognised and established the other lenders proved to be, Banco Interacciones distinguished itself and became noticeable by adopting a different approaching to the business. The bank does not provide a standard product: its ability to proffer custom-made services sets the bank apart from the rest.
“What we presented the market – compared to those large rivals of ours – was different, and it gave us a competitive edge within two facets in particular,” Hanks says. “One was that we are a local business and Mexico is our home, country, and pride. We know our nation’s needs the same way we know our individual needs, especially as we experienced the economic crisis and lived through it. This experience helped us appreciate the wants of the state and the requirements of municipalities. Moreover, we benefit from recognising the diverse structures of the state and can therefore create tailor-made solutions, unique, personalised products to fit each individual client. This has only been possible because we have operated in the close vicinity of our clientele, and learned to adapt to their constraints.”
Another factor that benefited Banco Interacciones, according to its CEO, was its size. Compared to its vast, commercial and chiefly international rivals, Banco Interacciones is smaller and more focused. While its competitors were more concerned with commercial loans, Hank began to instruct and train staff, and plan for increased growth alongside his team which helped him identify operational niches and effective marketing methods.
Capital was injected into the bank and Hank’s strategy of specifically penetrating the markets in government banking, infrastructure projects, government-owned firms, agribusiness, and fiduciary services, started to pay off. These market sectors specifically have payment sources with extremely low credit risk, which allows the bank to preserve a healthy balance sheet and a reliable source of payment for its loan portfolios. The lender now enjoys a leading spot in the financing of municipalities and states and was responsible for issuing the first state bond in the country’s history.
Noteworthy achievements
Measured by profitability, the bank ranks among the top three financial institutions in Mexico and has experienced expansion rapidly. “In Mexico the need for growth is tremendous. The country has matured a lot already and we have grown with it,” says Hank. “Yet, we are still far from our full potential, because over the next 10 years expansion will triple in size – particularly within infrastructure. We are fortunate because our country is evolving in the niches we participate and specialise in.”
At the end of August the credit ratings agency Fitch affirmed the bank’s ‘A’ credit rating, reflecting Interacciones’ consistent profitability and its low, well contained impairments and credit losses. “Achieving a high rating is an indicator to our clients that we are a safe and sound financial institution,” Hank says. “Our team has been working closely with the rating agencies, trying to understand what is required. However, more importantly, we now need to maintain the rating and try hard to improve further. As a company we have to project and give our clients the security they deserve. Banco Interacciones hopes to increase our rating even more within the next three to five years.”
The bank has shown a strong positioning in the public sector financing business, and a comfortable loss absorption capacity in the form of capital and reserves. According to Hank this is due to its traditionalist, old-school style. “We are very conservative in our approach because we started at a time when Mexico was amid a major financial crisis. As we want to shield our clients from unnecessary risk the same applies to every type of loan we pay out. Banco Interacciones has never broken that line or taken a larger risk than needed. Our mission is clear, we are not eager to show good results in the short term, we care about long-term achievements,” he says.
Dealing with challenges of global banking
The changing perspective of banking globally and its effect on financial institutions are felt internationally, and Mexico is no exception. The bank is monitoring the economic turmoil closely and is addressing the arising challenges face-on. Its CEO says, by identifying customer requirements and sticking to what it knows best the bank will not suffer a similar fate as that by other lenders: “We will have to be faster and better, and highly flexible without lowering our risk tolerance. There are a lot of respected institutions out there but so far we have been able to maintain our competitive edge.”
Looking to the future, the bank is directly involved with governments, developing workable programmes and solutions through resources in its regional offices. Hank says: “One of the biggest tasks for me is to listen, understand, and as a team develop what fits best. We do not see ourselves as a bank that will grow to compete in every niche. That is not our forte.
“Banco Interacciones is more of a specialised, niche banking institution – a boutique, if you like – which will stay close to its customers to understand their needs and develop the right products for them.”
According to Hank, government banking can be a very safe environment and is a good business if the provider of the service appreciates what exactly is required. “It may be a very sound niche but there is a lot of follow-up, and it requires a significant amount of detail. It is important to know how governments spend the money we lend to them. Although we are ahead of our competitors and know the market, a 100 percent focus is still essential in order to value how governments conduct their finances. I think the only issue that could affect lenders in the field of government banking is if they do not pay attention and fail to monitor the situation. However, we will not allow what happened to other countries to happen to Mexico.”
Carving out a niche
Banco Interacciones offers a broad array of services and products to individuals and businesses, including chequing accounts, debit cards, commercial loans, investment assessments, currency exchange, and much more. The bank concurs that in addition to government banking, its strongest division remains in infrastructure. Yet, regardless of that, the bank keeps a cautious eye on its rivals and their strategies.
“We are not the typical commercial bank and realise that although we have grown quickly, we have still a wide spectrum for progress. At the same time our bank maintains a careful approach because it has a large number of competitors which should not be underestimated,” Hank says.
He is not letting success get to his head. The CEO’s unruffled manner shows he takes nothing for granted in the advancement of the bank – especially when it concerns the services for clients. He admits there are always areas that the company wants to improve further. “We can still improve in the type of services we offer, the method we use to help clients structure debt, and even to aim higher within our financing for municipal governments by managing their income better through new creative products. Our team is consistently thinking of ways to make infrastructure projects more valuable for the state. It does that by anticipating potential issues that could arise from implemented laws within each state. It is our mission to address each predicament individually and discover the most efficient system to tackle those to get the best deal for our clients,” Hank says.
It was this drive to continually achieve more on behalf of its customer base that led to its success. The CEO says: “In the first three years we prepared to start our growth plan and focus in our niches, but it wasn’t until we launched the 3×3 plan, a highly ambitious programme that set out to triple the bank’s assets, capital and profits in the space of three years.”
The niche focus of the bank proved to be the company’s best strategy as the bank grew from an impressive $6bn to a staggering $18bn within its three year target. “Fortunately we were very accurate in our market predictions when we chose these specific areas of business. This, coupled with our highly competitive team, has been the basis of the banks’ main success, and allowed us to become one of the most important players in these industries. For the past eight years we kept very close to our customers’ progress and analysed the risks so that we can evaluate efficiently how to manage their portfolio.”
The three year target to reach $18bn is long gone now, and figures have long since surpassed $43bn. “We continue to see an extremely big opportunity within municipalities because the government here compared to other countries has still a low percentage of debt,” he says.
According to the CEO’s outlook the bank’s credit increase over the next few years will come largely from governments. “I believe about 40 percent will be from states and municipalities, 25 from infrastructure, 20 from government-linked companies, and the rest will be agribusiness.”
Despite its status and expertise, Banco Interacciones continually prepares for any challenges or eventualities that could emerge from such advancement. “We have to pay close attention now. There is a need for sufficient resources, because the government has not been structuring loans and loan portfolios the way they should have done. Because of that, the bank would have to examine closely what the state and municipalities are financing and the way they go about it. By doing this, we hope to achieve a breakthrough in understanding how they can reach their full potential, and manage their debt more effectively so we can be future participants to help out the best we can,” Hank believes.
Banco Interacciones puts great emphasis on teamwork and collective labours. The CEO recognises that it would not have been possible to achieve successes of such dimensions if it had not been for the people he works with. Hank waxes lyrical about the team effort, saying: “I am extremely proud of each and every one of them, they are an outstanding group of talented people and luckily we managed to keep them with us.”
Mexico flourishes
Armed with a strong, experienced team and an in-depth knowledge on market developments, the bank’s positioning remains highly advantageous. This looks to carry on particularly as infrastructure development is heavily on the rise. Concessions packages such as the Mexico-Toluca and Mexico-Guadalajara highways, El Cajon hydroelectric project, and other planned public investments in roads and water infrastructure will continue to drive the country’s industry value this year. International and local utilities are discovering prospects to enter the country’s water infrastructure after talks that it is to be expanded and renewed. This has prompted an above-consensus forecast for construction industry value growth. Hank believes investment prospects, which are fundamental to the progress of the country, are opening up everywhere within the Mexican market now.
“Mexico is experiencing a highly promising development momentarily, and has overall shown tremendous opportunity for further growth. We work with almost all 31 states on improvements of infrastructure, and there is still so much that needs to be done. Toll roads, airports, water plants, prisons, and ports are all seeing enhancement and expansion. Taking all that into account, in addition to our strength in the farming sector, I believe we will reach $60bn by next year and around $115bn by 2014-2015,” he says.
The bank has an exceptional reputation for providing credit and financial support to companies active in the farming and agribusiness sectors. This is an area with a vast potential for growth and Banco Interacciones is well placed in the market due to its longstanding expertise in this field. Hank says: “Mexico’s agribusiness still lags behind where it could be, but the Federal government has played an important role in its current development. Yet, there are infinite prospects for growth in this area. We are aware that as a company we can offer a great deal of experience to this sector and help the Federal government reach its full potential within agribusiness. Banco Interacciones wants to be part of this progress.”
Community support
The company knows that with success comes duty to the public and its nation. Social responsibility and community support is paramount to Banco Interacciones which makes it its business to help in areas it sees as crucial to the development of the country. The bank is a keen advocate of Bécalos, an educational scholarship programme founded in 2006 in Mexico by the Association of Banks, Fundación Televisa and other key banks. Hank states: “The team at Banco Interacciones is extremely involved with the community. The future is in the hands of our children and in Mexico the biggest concern is lack of education. This is a long-term task to help students with talent who lack the resources and means. The programme has grown a lot over the past few years and provides secondary and higher scholarships for academic excellence, for scientific and technical careers, and to train teachers.”
Banco Interacciones also aids Mexicanos Primero, a similar organisation, which focuses on the best resources and best teachers for Mexico. The bank has attracted interest on behalf of both and has already made a huge difference. “Schemes such as these are outstanding in what they are trying to achieve for the community, and we are happy to offer our help and be a contributor to our nation’s successful future,” Hank adds.
The emerging submergence of the developed world
For pretty much all of my career, the rise of emerging markets has been a dominant theme. One of the first books I remember reading after my studies was Hamish McRae’s The World in 2020, which outlined many of the trends we’ve seen in recent years in terms of China’s unstoppable rise onto the world economic stage. It’s been a fascinating period in history, not least because in some ways we are slowly turning full circle. You have only to go back a thousand years, to a time when China’s per capita income was slightly above that of Europe. Two hundred years ago, it was around half. It then bottomed out around the 1960s at a mere eight percent of European levels. That which gave Europe such power in those intervening years (technology, land and empires) has diminished, but this was not necessarily seen as a problem, given that the rise of once-dormant emerging nations brought benefits to Western nations. From here though, I can’t help thinking that the credit crisis has brought about a major shift in the relative dynamics of the developed and emerging nations. The gap between them will continue to close, but it will owe more to the burden holding back developed nations than the unstoppable economic expansion of the emerging nations. This will be quite a shift in the dynamics of the emerging and developed markets, one which has yet to be fully grasped by the investment community.
The rise of emerging nations in the period since the Asian crisis brought benefits to the West. As Asia shifted to running current account surpluses and building up substantial FX reserves (all part of the post-Asia crisis repairs), the West was subjected to an ever-greater inflow of capital from emerging nations (US Fed Chairman Bernanke referred to this as the “savings glut”). The most prominent manifestation of this was China’s growing investment in the US bond market, which in some ways contributed to the ensuing housing crisis by pushing down borrowing costs for businesses and households to a level that was quite detached from the underlying risks (especially in housing). There was also the benefit of falling goods’ prices. UK clothing and footwear prices nearly halved in the period between 1995-2008, which took 0.26 percent from headline inflation in each and every year during this period.
Deflationary dynamics
This was a considerable deflationary force (also replicated in other goods besides), one which has ceased over the past two years and is unlikely to return. At supermarkets, you can get denim jeans for around five pounds, which leaves little room for further price falls. Furthermore, with wage rises in China comfortably outpacing its already elevated inflation rate, if anything the risk is that we will see further price increases. This is one of the many reasons why UK inflation has persistently surprised to the upside in the past couple of years; the deflationary dynamics that we had come to take for granted disappeared rather abruptly.
The gap between the developed and emerging worlds was narrowing during the boom and also during the subsequent bust. While Asia concentrated on making things, the West (to varying degrees) concentrated on financing things, hence why it was hurt more in relative terms by the downturn. The G7’s share of world output declined from 70 percent in 1970 to 61 percent in 2007, falling to 58 percent in 2010. The BRICs (Brazil, Russia, India and China) doubled their share of world output between 1998 and 2010. Furthermore, those who thought that the emerging world would not be able to de-couple from the downturn in the West were proven woefully incorrect. Between 2007 and 2010, the G7 had yet to reach its pre-crisis peak in output (1 percent real contraction), whereas the BRICs have powered ahead, output increasing 24 percent over this period. In other words, it’s not just a story of emerging market strength – it’s just as much a story of developed market stagnation.
But this isn’t just a temporary setback from which the developed nations will throw off the shackles of the credit crisis and rebound back to the prosperity levels of the pre-credit crisis era. The West has just about won the battle of the credit crisis, but the war is far from over. Private household debt remains well above the historical trend, and for many countries public debt is far from on a sustainable path. The IMF sees government debt/GDP ratios for the advanced economies moving above 100 percent at the end of this year and up to 106 percent in five years time. At the same time, emerging and developing economies are set to see debt fall from 35 percent of GDP to 29 percent.
Furthermore, whilst the West may have lagged behind in output terms during the boom years up to 2007, it benefited in a number of ways previously mentioned, such as lower prices and plentiful capital (although the latter can also be viewed as a curse). With regards to the pricing benefits of emerging markets, those have all but disappeared. Outsourcing to Asia provides a one-off benefit and all the signs are that the West has saturated these. Indeed, some companies are now moving production out of China as rising wage costs diminish the advantages of locating there.
Asia’s surplus
The other factor that may well diminish in the coming years is the surplus of savings in Asia. There’s more debate on this one, both in terms of the potential speed this could happen and also whether it’s overwhelmingly a good thing. Putting it simply, this is a reflection of the global imbalances that world leaders have talked about a lot, but managed to do little to resolve. It is summed up as the West’s penchant to consume and spend beyond its means (Germany being the main exception) and Asia’s preference for saving and exporting capital to the West. China appears to be aware of the dangers of investment running to nearly 50 percent of GDP and wants to move to a more consumption-based society. However, to achieve this, proper state systems of insurance and healthcare are required, something which has taken the West decades rather than years to achieve. China’s latest five-year plan presented earlier this year, recognised the need to grow less, export less, spend more on healthcare and boost consumption.
This sounds like a good thing from China’s perspective, but reduced saving in one area must also equate to reduced borrowing elsewhere. Globally, imbalances are a zero-sum game. A too rapid run-down of global current account surplus would leave countries like the US facing rising borrowing costs and an even longer period of sub-par growth. But in my view it’s a fear that is often over-hyped. Despite the relentless rise of cities (21 are over five million in population), the majority of China is still excluded from this. The pace of urbanisation and growth of social infrastructures is such that China will remain an exporter of capital for many years to come yet. The urban population will exceed the rural one by 2015 (according to an estimate by China’s Population and Family Planning Commission in July 2010), but at this pace it would take until 2060 for China’s ratio of urbanisation to reach the same as the US (not that this is necessarily achievable or desirable).
Nevertheless, this shift towards reducing saving and increasing consumption is something the West, and in particular the US, needs to prepare for. There will come a day when China is no longer a net buyer of US government securities and the best way to prepare for this is to stop issuing as many of them, as an alternative buyer can’t be guaranteed to be waiting in the wings. So far, as the impasse over the debt ceiling showed, it’s pretty clear that many US politicians have not grasped the implications of this situation. But if the US chooses to shift more slowly than China, then borrowing costs will rise, due both to less demand from China and also from higher supply as the US lacks a solid budget-consolidation plan.
US debt burden
The debt ceiling issue in the US was the epitome of this, with the incentives in the political sphere not sufficient to deal with the structural budgetary issues that many Western nations face. The burden being placed on the working population of the US is ever-growing, but the working population itself is declining. At present, only 58 percent of the US population is in the labour force and less than half is in employment. It’s going to be difficult to reverse the declining trends of both these numbers in the face of population ageing. Yet the political elite appear almost oblivious to the issue.
The current decade will be one in which emerging markets continue to benefit from younger populations, positive resource allocation, far lower debt burdens and competitive labour costs. But developed markets, with political malaise, ageing populations and rising debt burdens, will be just as responsible for closing the gap. At the same time, the benefits of emerging market growth will be far more limited for Western nations than was the case previously. For many, the world of 2020 is not necessarily going to be a pretty one.
Simon Smith is Chief Economist at FxPro.
Broadening the playing field
The world listens when Kirk Radke shares insights on key trends and developments within the private equity industry. The New York-based partner at Kirkland & Ellis can boast 27 years of solid experience as one of the globe’s leading lawyers for corporate and private equity work. He has advised and acted on behalf of clients in all types of complex business transactions, and is renowned as one of the go-to people for intricate private equity deals.
Radke believes PE houses remain one of the most influential drivers of competitiveness within the global economy. The industry expert’s opinion is that as PE firms act increasingly as equity investors, mezzanine or senior lenders, they help broaden the playing field. “This leads private equity houses to a more dominant position in motivating competition by advancing the efficacy of their portfolio companies,” Radke says. “Also, capital markets potency has contributed to the groundwork for this movement, and the significant confidence held by the majority of private equity houses has continued to boost new deal activity.”
US movement
Overall, the PE industry in the US in all types of transactions has been healthier since the middle of last year and included IPOs, purchases of companies, refinancing and selling of portfolio companies. The US is still an industry leader, as the top three funds, KKR, Carlyle and Blackstone, are all US-based.
According to Radke all of the above assists the US market to maintain a principal position globally, with around $28.5bn of capital going into private equity, compared to $9.9bn in Asia and $7.7bn in Europe. It seems also that some of the large buyout shops, including KKR and TPG, are now entering the real estate market. Radke sees this as a natural development: “It is simple. Those players believe there are prospects in that asset class and they have the confidence to hire people and exploit those opportunities. I am not surprised, real estate is an area with significant potential and these participants can see something worth taking further.”
Euro stability and recovery remain at the forefront of market concerns and have been a worry for a number of months globally. Curiously, this has not affected US deal opportunities as those can still be found and financed, Radke believes. To date the US has not seen a negative impact in the way private equity houses raise financings. People have so far not sat on the sideline, but keep pursuing and simply absorbing the questions and concerns of euro stability. “When you are able to formulate investments in times of uncertainty, they tend to have the highest returns. But perhaps this is a good question to ask again in a couple of months,” Radke states.
Flowing exit activity
A further trend over the past few quarters has shown a surge in exit activity. Values for exits are at all-time highs as fund managers take advantage of present market circumstances to exit investments that were entered post-financial crisis and during the buyout boom-period. “Quite often deals were pre-crisis purchased, say between 2006 and 2007, and as the majority span over three to five years, a large proportion is at a point that requires a push towards an exit,” Radke says.
A record 309 PE-backed exits worth a staggering $120bn were reported in the second quarter of 2011. They take up the biggest share of fund manager activity despite deal flow having bounced back from the lows observed throughout 2009. “As more capital is gradually returned to investors, the rise in exit activity may ease the thorny fundraising conditions, especially because the money goes straight into new funds to keep existing allotment levels,” Radke notes.
Radke also believes that the exits observed were predominantly US-based with only a few occurring in Europe. This is not a surprising market development, he says: “They are a continuing trend that began in late 2009 and has continued all the way until now. We can even say that they reflect the force and health of the portfolio companies.”
The high amount of cash generated from exits in Q2 2011 is certainly encouraging confidence in the PE asset class. Radke has no doubts about PE-backed exits. “They have really shown their resilience amid the financial turmoil and have supplied new buyers with buoyancy and confidence. Having watched their performance persistently improve, although it is never guaranteed, they provide a great deal of confidence to the future outlook of the industry and help to fuel transactions,” he says.
An additional factor driving this movement is what has emerged as increased confidence of private equity firms to invest in good businesses. Radke believes there are signs of a strong credit market in the US. “The trend cannot be denied, and all signs indicate that it is expected to continue. I believe the issue within the US will be mostly on the side of the seller. This is because as portfolio companies continue to perform well, private equity companies will look to sell their investments.”
PE industry trend
Despite encouraging forecasts and positive movements, the state of the PE industry has so far seen a difficult first half. A bulk of the PE fundraising environment is still showing a drop and extensions to fundraising periods. However, it is improving, Radke says: “We have reached the conclusion that PE as an asset class has demonstrated its worth by living up to its promise in times of turmoil. Within that we have seen a value-added corporate governance that affixes worth to investors and can employ a significant amount of capital to add a positive response to good PE houses. There has been great market reaction with favourable middle-market funds also receiving good feedback. PE houses are not dependent upon their size as smaller firms proved in their performance that they deliver just the same way a mid-market fund can.”
Radke believes that PE houses will either emerge as winners or losers in the near future. The outcome will depend on whether the houses have shown they can add value to their portfolio companies. “Once it may not have been as important, but today investors are looking for value that is added to the real economy. Although it is a little early to say which houses will prevail as winners, the trends seen within fundraising results will speak for themselves. It is likely that we will see indicators of how it is going to shape up in about half a year, while this time next year all of the firms will have come through, and we will have absolute clarity on the successes,” Radke says.
As to whether the larger buyout shops are pushing out smaller investors, Radke notes: “I don’t believe this is happening. Private equity fundraising affects all sizes even though it is much easier for partners with increased capital to deploy those funds, as opposed to those with smaller firms. It is true that larger firms position generously proportioned amounts of capital, but overall the fundraising market will reward good PE houses of any size as long as they have superior models in place.”
The latest trend within the industry indicates that financing is readily available for new PE-backed deals. Radke feels that most houses do not anticipate the number of new buyouts to decrease over the next few months because they are not struggling with the funding of new deals. There are specific sectors that have stood out because they triggered some of the largest deals in the previous quarter. “The outlook is positive overall for the industry but some areas stood out.”
Hot sectors
The Kirkland partner points to a few specific areas that appear to be hot temporarily. Healthcare has materialised as one of the stand-out sectors as it accounted for three of the largest deals in the previous quarter with PE firms demonstrating a growing interest. In addition, Radke observed a higher proportion of technology transactions, he says. Two of the largest deals in the second quarter included Lawson Software’s $2bn buyout by Golden Gate Capital and the announcement by Providence Equity Partners of its acquisition of SRA International for $1.9bn. “The market has noted a higher proportion of technology transactions and healthcare deals, and both seem to represent areas of growth. The disposition of private equity investors concerning technology-centred acquisitions stays optimistic thanks to abundant cash balances, strategic goals and low-cost debt. However, it remains clear that clients have been looking for good investment opportunities in all areas of growth over the past year.”
Meanwhile, PE warrants that optimum corporate governance practices are employed on behalf of clients. This looks particularly relevant with emerging markets, and is paramount for improving the economic position for possible shareholders and regulators internationally. Radke notes that many PE houses have shown an increasingly global investment outlook. He believes risks come hand-in-hand with growth in economies around the world. “Challenges include currency exchange concerns as well as regional and country-specific security and stability issues. In spite of those tests the private equity corporate governance model supports shareholders, management and directors to defy those trials,” Radke says.
Technology drive signals new era
Avea, Turkey’s youngest and fastest growing mobile communications company, was established in 2004. The company offers innovative and qualitative services to its customers with its advanced infrastructure and technology investments. By mid-2011 the company had 12.2 million subscribers, a market share in Turkey of 20.3 percent, and international roaming agreements with 649 operators in 199 countries.
The company is a majority-owned subsidiary of Türk Telekom: 81.37 percent of Avea’s shares are owned by Türk Telekomünikasyon AS, and the remaining 18.63 percent belong to the Bankası Group.
Avea’s revenues for 2010-11 grew six percent over the previous financial year to TL 2.6bn. Revenues even grew in the typically negative fourth quarter, and despite increasing competition. A key driver for growth was 3G data revenue, which increased 164 percent compared to the prior financial year.
Avea, which aims to become the “most favoured and preferred” mobile communication company of Turkey, continues to work as a mobile partner of life, easing and pleasing its customers by providing the most innovative technological solutions.
The company closed 2010 with an EBITDA of TL 332m, an increase of 508 percent over the previous year (EBITDA margin: 14.1 percent). Year on year growth was also seen in ARPU, which increased 11 percent to TL 18.5.
Investing in R&D
Avea has started a new era by launching its near field communication (NFC) technology in association with Garanti Bankasi. The company’s new NFC-enabled SIM cards allow Avea subscribers to make contactless payments with their mobile phones without the expense of upgrading their handset. The joint project won a Best Innovation award from Best Business Awards and the Best New Product award from the Telecoms World Conference.
The company is also working with Nokia Siemens Networks to implement Long Term Evolution (LTE) high-speed data technology, currently using commercial base stations and user equipment to realise the LTE standard at the Avea R&D Centre.
It has aimed to differentiate significantly from its competitors with solutions for corporate customers and SMEs – offered under the brand AveaBiz – to instantly meet the changing needs of its customers and increase the quality level of its service.
Avea Incubation Centre in AveaLabs, which was launched in March, provides office space to entrepreneur companies which are intent on expanding their businesses. In the Incubation Centre companies can benefit from Avea’s infrastructure and test laboratories and its consultancy services.
Social responsibilities
‘My Homeland is Anatolia, My Profession is Technology,’ is a project initiated by Avea in the disadvantaged and underdeveloped regions of Anatolia with the goal of developing new mobile applications. The project creates a new entrepreneurship platform, enabling young entrepreneurs to develop innovative business ideas, and giving them an opportunity to make their dreams come true. Since May 2011, 144 developers have applied for the project.
‘Avea Extraordinary Music’ is an annual programme of concerts, now in its third successive year. More than 305,000 people have attended the 90 concerts so far, with performances by more than 50 artists and music groups. Avea also continues to host giants of electronic music in Turkey as the main sponsor of the ‘Escape to Music’ concert series.
The ‘We Produce In Spite Of Our Handicap’ project, which Avea has been running for 50 years in association with the Foundation of Physical Handicapped, helps handicapped people find a job. Within the frame of the project, 2,782 handicapped citizens have been employed by a number of different companies.
Stars of the World
In order to contribute to the physical and mental health of young people in Turkey while supporting the education of future star football players, Avea initiated a new social responsibility project in cooperation with FC Barcelona. As part of the ‘FCB Avea Camp – Children of Turkey, Stars of the World’ project, elementary school students from all over Turkey are given the chance to be trained by FC Barcelona’s training staff at FCB’s facilities.
Potential stars are selected through a series of football matches, organised by the General Directorate of Youth and Sports, the Ministry of Education and the Turkish Football Federation. The project is also supported by the Turkish School Sports Federation and prominent sports clubs.
Elementary school students aged 13-14 who attend the Star Boys Football Turkey Championships are evaluated according to their performance by experts. The 18 best performing children are then selected to train at Barcelona Nou Camp.
Awards success
Avea has recently been achieving repeated success at the prestigious Stevie Awards, which are given to international companies that are successful in areas such as as management, product development, creativity, customer services, human resources and marketing.
The company has received the major award in the category of Human Resources Department of the Year and the award of honour for the categories Best Human Resources Team of the Year and Customer Relations of the Year. Elsewhere Avea received the 2010 Oracle Interim Software Integration Innovation Award, and in 2011 was awarded Golden Brand of the Year by TTKD, the Association of Protection of all Consumers.
Defence and security to rely on R&D
Global markets have been turbulent and the pinch has been felt across all industries. How will this affect the future of the aircraft industry? How will it affect Saab?
As with many global markets, the defence and security sector is faced with difficult market conditions and we foresee that they will remain at least throughout the rest of 2011. But the recent turbulence on the financial markets in the US and in Europe will not affect our scheduled investments and recruitments. However, despite declining defence budgets globally, Saab remains well positioned, as one of our core strengths is to ensure the delivery of affordable, high quality products within budget and on time.
Over the summer, the company announced that it maintains its fiscal year 2011 financial guidance but estimates a slight full year decline compared to 2010. What is the expected revenue for this year and what have been the key contributing factors?
We are not able to provide any detailed outlook for revenues or suchlike. Key issues for us are the market conditions – which remain challenging – and budget priorities.
Saab is one of the leading names within the jet industry. Who are your direct competitors and how do they compare?
Currently, very few nations in the world are capable of developing and producing the latest generation supersonic fighter aircraft and Sweden is one of those nations.
Saab AB is one of the world’s leading aerospace companies in the design, production and manufacture of aircraft and has a long and proud history with more than 70 years at the leading edge of military aviation. More than 4,000 aircraft have rolled off Saab’s production line over the years. Fighter aircraft, as well as civilian aircraft like the successful Saab 340 and Saab 2000, have been developed and produced since the end of the 1940s. The skills needed throughout the design, implementation and production are extremely high-tech,
and Saab’s engineers are some of the finest in the world.
There are several competitors in this market sector from within Europe, the US and also from the East, and what we can say is that the competitive environment is fierce. There is never one competition that is really the same. However some principles such as a need for affordability in terms of acquisition and through life support costs as well as the operational effectiveness remain two of the most important factors.
Gripen is currently in service within Sweden, South Africa, Hungary, Czech Republic, Thailand and the UK Empire Test Pilots’ School, and is being evaluated by several other countries.
Saab’s acquisition of Sensis Corporation has just been completed. How will the merger benefit the company?
The main reason behind the acquisition is that Sensis strengthens our offer within radar, sensors and Air Traffic Management solutions as well as establishing a stronger market presence globally, especially in the US.
The acquisition is a further step in our long-term strategic plan for growth in the North American market and provides a strong growth platform from which we can build on the combined installed base and excellent skills in systems engineering, design and integration.
We also believe that the coupling of Sensis’ and Saab’s broad portfolios of advanced Air Traffic Management solutions creates comprehensive and world-leading solutions in the market place.
Tell us about the Gripen’s position within the industry. Which aircraft are its main competitors and why? What sets it apart in your opinion?
There are a lot of reasons why Gripen stands out from the competition. Gripen was designed with affordability in mind. The key requirements during the initial development were to minimise cost increases, both in terms of operational running costs and the cost of development, while at the same time being able to adapt to all future operational requirements. A simple strategy of buying the most technologically advanced equipment available and off the shelf was adopted with the result being that Gripen has the best price/performance ratio and the lowest operating cost of any fighter currently in service.
Gripen has a very high operational performance. This basically means its ability to perform multi-role missions efficiently and effectively is second to none. This is achieved by ensuring that all the sensors on board, such as data-link, multi-mode radar, reconnaissance pods and so on are ‘fused’ to give the pilot total situational awareness of the scenario they enter, ensuring that they can perform the mission successfully. In addition, a very high reliability rate means that, the one Gripen in a combat zone can perform up to three times more operations than its closest competitor. This means more time in the air, rather than on the ground being repaired.
One other unique selling point of the Gripen is the fact that we are flexible in terms of how we deliver the contract, and we listen closely to what the customer both wants and needs. In addition to the regular direct sale, financed perhaps via a commercial bank or a state’s own financing, it is possible to deliver Gripen capability through “Power by the Hour” (PBH), as we do with the UK Empire Test Pilots’ School, or through all-inclusive leasing schemes. The benefits of both the PBH and lease schemes are that the customer’s risk is minimised and need to find an acquisition budget is reduced – and therefore the overall effect on national economy is minimised. An added benefit has been the provision of Industrial Cooperation, otherwise known as Offset, where we provide industrial benefits to our customers, to offset the acquisition. This Offset includes, for example, the transfer of technology, or transfer of production or design elements of Gripen.
The Swedish government in July approved $163m in state funding for further development and maintenance work on the Gripen. What are the key areas these funds will go towards? Where else does funding come from?
The funding approved by the Swedish Defence Material Administration (FMV) in July included:
• Maintenance of the aircraft as they are today. Half of the funding is for technical support on a level above what the Swedish Air Force’s own technician’s work on, and the other half is test resources such as simulators and test aircraft;
• Test resources for the future and to ensure that technical competence is available in the future. It could be new simulators or competence development;
• Studies on what resources the Armed Forces want the present aircraft fleet to have in
the future;
• Studies on what abilities that could be important on a longer term.
Saab has been striving to increase the Gripen’s exposure to international markets. What is the company doing to achieve maximum publicity?
Our strategy for success is to be visible in our markets, close to our customers; mostly this is achieved through establishing local offices. Achieving maximum publicity is a matter of being visible in the market including giving presentations, exhibitions and air shows, and that is something that we put a lot of focus on. We prefer to be visible to the customer in those markets we prioritise through different activities, such as trade shows.
Are there any technology breakthroughs that Saab is currently working on or developing to further its standing within the aircraft industry?
Much is happening within Saab at the moment. Advanced technology and engineering have been, and still are, the keys to our success. We invest roughly 20 percent of our revenue in research and development, in Sweden and in several other countries. For example we’ve established technology centres in both India and Brazil in the past few months.
Some of our most research-intense areas at the moment are Unmanned Aerial Vehicles (UAVs), such as Neuron and our own rotary wing Skeldar. We’re also currently working on Remotely Operated Towers (an area where Sensis will be a great asset) and we are also proud of being part of SESAR (Single European Sky Air Traffic Management Research) and Clean Sky.
We know that we’re facing an increased part of self-funded R&D. The Swedish Armed Forces and our other customers need and want the best products and solutions, irrespective of origin, in a timely manner. That’s why an increasing part of R&D will be self-funded for the defence industry, and it’s a global trend.
CapitaLand’s ‘3+3+2’ strategic focus
Property giant CapitaLand’s formula for achieving sustainable growth and profitability in the next decade lies in doing more in the markets it already has a presence in, before investing in new cities. Its latest ‘3+3+2’ strategic focus denotes the company’s three core markets of Singapore, China and Australia; its three secondary markets of Vietnam, Malaysia and Europe; and two opportunistic markets in Japan and India.
More than a decade after it was created through the merger of Pidemco Land and DBS Land in 2000, CapitaLand manages total real estate assets of SGD 55bn ($46bn) – making it south-east Asia’s largest property group. This is a sizable expansion from the SGD 27bn ($22.5bn) assets managed at the point of inception. The combined market value of the group’s nine listed companies, including six real estate investment trusts (REITs), stood at SGD 28.4bn ($24.8bn) at the end of September 2011. It is a global real estate player, operating in more than 110 cities in more than 20 countries.
In August 2011, the developer announced a net profit of SGD 500.5m ($417.1m) for 1H 2011, a 35 percent increase year on year, with a total revenue of SGD 1.4 bn ($1.2 bn). Over the past five years, it has delivered net profits totalling more than SGD 7.4bn ($6.2 bn). Having looked at what had worked successfully, the ‘3+3+2’ strategy will sharpen management’s focus to deliver higher returns in these markets over the next decade.
‘3+3+2’ Strategy
In all the three core markets, the group already has a strong presence, which includes homes, offices, shopping malls, serviced residences and integrated mixed-use developments.
With a net debt equity of 0.2 times, CapitaLand has so far committed more than SGD 10bn ($8.3bn) of new investments in both Singapore and China markets over the past 18 months. In fact, the developer expects the total investment in 2011 to exceed its initial target of SGD 5-6bn ($4-5 bn).
Singapore
In Singapore, CapitaLand aims to become one of the top three players over the next three to five years, targetting a 15 percent share of total units sold in the residential market.
There is currently a total market annual demand of 10,000 to 15,000 private residential units in Singapore according to Urban Re- development Authority of Singapore (URA) 2Q2011 data. This year, CapitaLand is on track to launch 1,700 apartments in Singapore, with 2,700 homes in the pipeline for the next two to three years. Some of its new launches include d’Leedon, The Interlace and Urban Resort Condominium, and a 583-unit residential project at Bedok Town Centre subject to regulatory approval.
In the retail space, the group is Singapore’s leading shopping mall owner, developer and manager with 20 shopping malls (four under development) under its belt. From the iconic ION Orchard, Plaza Singapura and Raffles City Singapore along the prime shopping belt, to the highly successful Junction 8, Tampines Mall and IMM Building in the suburbs, CapitaLand’s malls cater to the full range of retail needs.
China
In China, the group holds an upbeat view on the long-term prospects of the market. CapitaLand aims to have about 45 percent of its total assets in the mainland over the longer term, up from 36 percent or SGD 10.5bn ($8.7 bn) at its current level.
In the residential space, it is keeping its target of launching 4,000 units for sale by the end of 2011, with 1,700 units launched in the first six months of the year. It has a pipeline of 22,000 residential units in China to sustain its development activities over the next four-to-five years. Despite property cooling measures, prices have edged up in the first half of this year with the average selling price at RMB 16,000 per sq m, up from RMB 15,000 per sq m in the corresponding period last year. Projects such as Dolce Vita in Guangzhou, The Loft Phase in Chengdu, The Pinnacle in Shanghai and The Metropolis in Kunshan are achieving good sales.
CapitaLand views the government cooling measures to stabilise the property market in China positively, as the company is a long-term rather than a speculative player. In 2010, it announced its move to develop value housing in China so as to cater to Chinese citizens who have been priced out of the non-subsidised housing market. The growth of this business was accelerated when it acquired a 40 percent stake in the former building and development division of the Singapore Housing and Development Board, Surbana, in April 2011. Surbana holds stakes in four townships in the Chinese cities of Xi’an, Shenyang, Wuxi and Chengdu, with a total housing inventory of about 41,000 homes to be developed for sale. With this acquisition, CapitaLand’s total residential pipeline now stands at more than 64,000 units in China.
In the retail sector, CapitaLand is the leading retail mall developer-cum-operator, owning and managing 54 malls presently. This includes seven Raffles City brand developments in its portfolio across China. It aims to grow its retail portfolio to 100 malls in the medium term by entrenching its presence in key gateway cities of Shanghai, Beijing and Chengdu and expanding in other growth cities of China. The favourable retail prospects in China continue to be underpinned by the rapid urbanisation trend, rising consumption spending and fast growing economic development.
Australia
In Australia, CapitaLand’s businesses are undertaken through its listed 59 percent-owned subsidiary, Australand. The latter has a market capitalisation of some AUD 1.3bn ($1.2 bn) as of 19 August 2011, with operations in Sydney, Melbourne, South East Queensland, Adelaide and Perth. They include development of residential land, housing and apartments, development and investment in income-producing commercial and industrial properties, and property management. As of the end of June 2011, Australand’s Investment Property division had a total portfolio value of AUD 2.1bn ($2.0bn) with 69 properties, including four properties under development, with a total lettable area of 1.1 million sq m. The industrial portfolio comprised 49 properties with a total lettable area of 878,629 sq m, with an average lease term of 6.1 years (by income) and occupancy rate of 99.4 percent.
Malaysia, Vietnam and Europe
The ‘3+3+2’ strategy recognises Malaysia, Vietnam and Europe as its secondary markets while Japan and India are deemed as opportunistic markets. Besides building homes, CapitaLand Group manages five malls with a total gross floor area of 4.7m sq ft in Malaysia.
In Vietnam, its portfolio has more than 4,000 homes across four prime residential projects including The Vista and Beau Rivage in Ho Chi Minh City and Mulberry Lane in Hanoi.
For now, CapitaLand’s presence across Europe is via its footprint of serviced apartments which comes under the Group’s serviced residences unit – The Ascott Limited. Ascott plans to deploy SGD 1bn ($800m) in capital for investments in Asia and Europe in 2011, aiming to own and manage 40,000 serviced residence units globally by 2015.
Japan and India
In Japan, CapitaLand’s focus is on achieving yield investment. Besides operating seven malls in Japan via a private equity fund, it has a 20 percent share in a 298-unit residential, office and retail development Shinjuku Front Square which is scheduled for completion next year. In India, CapitaLand plans to operate nine malls (seven under development).
A complete value chain
CapitaLand offers a complete real estate value chain with leadership positions in being an investor, developer, operator, and asset manager in residential homes, shopping malls, offices, serviced residence and mixed development. At each position, it has created stable fee income flows and strong development profits. This is done through its proven capital recycling model, which involves building or buying quality assets and offering them to the REITs or unlisted private equity funds upon achieving optimal income flow. The capital raised is then used in its expansion and the cycle is repeated.
From its humble beginnings as a Singapore-centric developer, CapitaLand is now the leading foreign real estate developer in China, the largest shopping mall developer, owner and manager in Asia, the world’s largest international serviced residence owner-operator and the leading Asia-based real estate fund and REIT manager. Over the past decade, it has built more than 22,000 homes in China, managed more than 94 shopping malls across Asia, operated more than 27,000 serviced apartments worldwide and provided real estate financial services including managing seventeen private equity funds and six REITs.
Despite its diverse operations, it has kept its primary focus of operating in the real estate space, so that it can leverage fully on its competencies in the area. At the same time, it consciously balances its business with a good mix between real estate sectors; between trading income and fixed-fee income; between developed and emerging countries; a mix of its talent pool among the different business units and successfully bridging the real estate financial requirements with efficient capital markets management.
Looking ahead, CapitaLand will continue to focus on quality performances and building its people so as to produce profitable and sustainable businesses. In doing so, it aims to bring sustainable value add to its shareholders.
Raffles City Brand
CapitaLand’s success with mixed developments under its Raffles City Brand is a testimony on how it leverages on its various competencies in investment management, development and operational capabilities.
A Raffles City project is an integrated development comprising residential, serviced residences, retail, offices and entertainment facilities. Another characteristic is its strategic location within business and cultural districts and with close proximity to central transportation hubs. One other factor is the innovative design by renowned architects.
Modelled on the first Raffles City development in Singapore, the formula has been replicated in Shanghai and Beijing. This will be followed by similar developments in Chengdu, Hangzhou, Ningbo, Shenzhen and Changning in the next few years.
For more information Tel: +65 68233 200/205; Email: harold.woo@capitaland.com;
lorna.tan@capitaland.com
Exploration drive in Middle East
Genel Energy International is an independent oil and gas exploration and production company registered in Anguilla. The company is the signatory of the production sharing contract (jointly with Addax Petroleum International) with the Kurdish Regional Government of Iraq for the development of the Taq Taq development block and Kewa Chirmila exploration block in northern Iraq.
Following completion of 2D seismic data acquisition works at the Taq Taq field in March 2006, Genel Energy established Taq Taq Operating Company Limited jointly with Addax and implemented an initial appraisal and development drilling campaign consisting of six wells. The 3D seismic data acquisition programme within the Taq Taq licence area was also successfully completed. The short-term test results and flow rates obtained from all appraisal and delineation wells range from 17,000 bbl/d to 44,240 bbl/d production capacity. These results confirm that the daily production capacity in Taq Taq oilfield can reach up to 180,000-200,000 bbl/d.
Genel Energy and Addax started full field development at the end of 2010 with a previously approved plan in Taq Taq. Drills TT-12, 13 and 14 have been completed, and TT-15 is currently being drilled. The current processing capacity of the CPF at Taq Taq has reached 110,000 bbl/d with additional rental and test separators. Including the planned additional wells the production capacity is expected to reach 200,000 bbl/d.
A permanent camp will be constructed at the Taq Taq site to facilitate ongoing future operations. A tie in the pipeline to the export pipeline is planned for 2013.
The technical evaluation of currently available data of the three productive reservoir sequences of Cretaceous (from 1,600m to 2,100m) resulted in calculated oil in place of high quality (46-48 API degree gravity) in the Taq Taq structure to be around 1.9 billion bbl. The predicted amount of recoverable reserves during the life of the project from all productive zones is estimated to be approximately 450-500 million bbl, which confirms Taq Taq as a world class project. In addition to oil reserves, Jurassic and Triassic are deeper exploration targets for gas which was tested positively in the Taq Taq-1 well.
Tawke success
In 2007, Genel Energy undertook operations at the Kewa Chirmila Exploration Block through the Taq Taq Operating Company. After implementing a 2D seismic data acquisition programme it drilled a first exploration well at Kewa Chirmila Block, which was spudded in January 2009.
As of the end of 2009, Genel Energy acquired participating interests in five exploration and production licences in northern Iraq: namely Tawke (25 percent), Dohuk (40 percent), Miran (25 percent), Chia Shurk (20 percent), and Ber Bahr (40 percent).
In Tawke, another producing asset of Genel Energy, the operator DNO carried out a seismic acquisition program and the first exploration well, Tawke-1, was drilled and discovered oil (23-27 API degree gravity) in several layers in 2005. To appraise the discovery, a 200sq km 3D seismic survey was acquired during 2006 and an appraisal well programme was initiated. Fifteen wells have now been drilled and the field is currently producing 70,000 bbl/d, with the expectation of 100,000 bbl/d by the end of the year.
An export pipeline to the Fish Kabour area has been installed for tie up to the Kirkuk-Ceyhan Export Lines. A topping plant with a capacity of 5,000 bbl/d is operational in the field.
Miran exploration
In October 2007, Heritage Oil Plc signed a production sharing contract with the Kurdistan Regional Government and was appointed operator of the Miran Block, with Genel nominated as third party participant. This block contains two large structures, Miran West and Miran East, which have been mapped from 2D seismic data. The Miran West structure is believed to be one of the larger structures in Kurdistan, with an estimated areal extent of approximately 200sq km, while Miran East has an estimated areal extent of 130sq km.
A drilling campaign commenced in Miran West in December 2008. The first well MW-1, reached a total depth of 2,935m in March 2009 and tested approximately 3,000 bbl/d of 15 API oil from the Cretaceous Shiranish formation at a depth of approximately 800m. Tests were completed in August 2009 and the well was suspended as a future producer.
MW-2, was drilled approximately 3km northwest of the MW-1 well. It commenced drilling in November 2009 to test Cretaceous, Jurassic and Triassic reservoirs. The Shiranish formation was found to be tight, while the Qamchuqa zone and the Triassic reservoir were found to be water-bearing.
Three separate intervals were tested in the Jurassic at an average rate of approximately 25 MMcfpd and a condensate gas ratio of 7 bbl/MMcf. Heritage announced 13Tcf gas in place resource on the Miran structure.
3D data from a seismic campaign, commenced in December 2010 and completed in August 2011, is currently being processed. An additional 2D seismic acquisition totalling 214km was started in September 2011 covering the south-east of the Miran block.
Genel Energy also has 25 percent interest in Chia Surkh block covering approximately 985sq km on trend with existing discoveries. A shallow Jeribe discovery, drilled in the block in 1936, reportedly tested at 4,800 bbl/d.
The 307km 2D seismic programme was completed in 2010 to delineate the previously discovered oil reservoir and assist in the selection of the first well location. This is expected to be spudded during the fourth quarter of 2011.
The upcoming well has been designed as a future oil producer, and upon successful testing, the joint venture intends to promptly build early production facilities and bring the well online.
Expanding interests
Genel Energy is the operator in the Ber Bahr Block with 40 percent participating interest. Processing and interpretation of the previously acquired seismic data was completed and a drill location is identified on surface structure of the Ber Bahr well, which is expected to be spudded in the fourth quarter of 2011.
As the leading foreign oil company in the Kurdistan Region of Iraq, Genel Energy has successfully overcome severe competition in the market. In order to form a well-developed corporate foundation, the company has developed certain strategies in 2011; especially regarding the further improvement of its health, safety and environmental policies.
Genel Energy’s vision is to become a world-class exploration and production company by holding significant oil and gas reserves. To meet this corporate objective, Genel Energy defined an expansion strategy by entering into upstream and downstream opportunities in various geographic locations around the world.
In addition to the current project investments, Genel Energy has been pursuing further business opportunities in Iraq, the Middle East, North and West Africa and Central Asia.
A national network for the national interest
In autumn 1996, Azerbaijani TV channels started to air an ad campaign that – with the country in only its fifth year since declaring independence from the USSR – was both surprising and original in the way it grabbed the attention of its viewers. “You will step beyond limits,” it announced; “Now, everybody will speak!” The company that introduced the advert was Azercell – and when this new mobile telecoms provider appeared on the Azerbaijani market in December 1996, it immediately set about fulfilling these grand promises.
Today Azercell has more than 4.2 million subscribers who enjoy the company’s long-standing commitment to providing reliable, high-quality and affordable services, and paying close attention to its clients’ needs.
Obviously, such commitments do not come easily. To defend its position in the highly competitive modern telecoms industry, Azercell is in the process of modernising its equipment and introducing new, innovative technology to help to expand its reach.
Currently the company controls 54 percent of Azerbaijan’s mobile communication market. Its network covers 80 percent of the national territory, meaning 99.8 percent of the population has access to Azercell’s services. To enhance its customer relationships and get closer to its clients, Azercell has opened 31 Express Offices – one-stop-shops for payments, new purchases and customer support – 19 of which are located in Azerbaijan’s regions.
Embracing the nation
The quality of a mobile network depends mainly on the number of base stations it has and the penetration rate of mobile technologies. In order to extend its communication services, by the end of 2010 Azercell had deployed 18 base station controller systems, 18 mobile communication switchboards and 1,794 radio base stations. During 2010, the company installed 170 stations in the regions of Azerbaijan.
Indeed, thanks to these investments, Azercell is now proudly omnipresent. From subway stations and tunnels to the tops of mountains, the company can provide the means of communication to people everywhere in Azerbaijan. Many of the opportunities such a network opens up were made available for the first time in Azerbaijan by Azercell. The company is also ready to apply 3G, 4G and other technological innovations to the market.
The company pays particular attention to the development of international communications, because in a time of continuing globalisation telecoms cannot be limited to just one country. By the end of 2010, Azercell subscribers were able to call phone numbers on the networks of 406 operators in more than 152 countries by using the RoamCell service. In 2010 the company started providing additional roaming services with 20 mobile operators in 18 countries; and also became the first operator to sign agreements allowing GPRS roaming services with foreign companies. By the end of the year, Azercell had established this type of cooperation with 258 mobile telecoms operators in more than 100 countries.
Such activities require significant investments. In 2010 Azercell invested almost $108m in developing its network, while the total level of investments made over the last 15 years is approaching $885m. Azercell is the largest investor in the national non-oil sector.
Investing in people
Human resources are the main asset of Azercell, and are of paramount importance for the company in its aspiration to provide better services to its subscribers. Accordingly, Azercell invested almost $1.3m in the development of its employees in 2010 – contributing to a total investment over the last 14 years of $11.2m. It would be hard to find any other company in Azerbaijan that invests so much in the development of its staff.
Azerbaijan is known for its ancient charity traditions. Azercell has always preserved these traditions and defined corporate social responsibility as one of the main priorities in its activities. In 2010, Azercell spent almost $1.4m (totalling $14.7m in 14 years) on the implementation of social projects in the country.
Over the last 14 years Azercell has acted as the general sponsor for the Umid Yeri Shelter and Rehabilitation Centre for Street Children. During this time nearly 1,000 children were raised and brought back to a normal life in the Umid Yeri Shelter. This represents a great achievement, because children living on the streets are at risk of being exploited by criminals, having their lives ruined by disease, and falling prey to human traffickers. Currently there are 45 children in the shelter.
In 2004 Azercell launched its ‘SAY’ poetry and storytelling contest, with the objective of identifying and encouraging talented children from all over the country. In 2008, working with the Ministry of Labour and Social Protection of the Population of the Republic of Azerbaijan and the United Nations Children’s Fund (UNICEF), the company launched its ‘Every Child Needs A Family’ campaign to help children to grow up in a family environment. The aim of this campaign was to promote information about the right of children to live in a family environment, promote adoption and fostering, and support the efforts of the government in creating integrated social services for children at local level.
The company was also instrumental in creating the Mobile Dental Clinic and Mobile Eye Clinic, which serve to protect the health of children, particularly those in orphanages and toddlers without parental care. In 2010 the Promising Future Youth Organisation launched a Children’s Hotline with the support of Azercell, the Ministry of Education, UNICEF, Save the Children and World Vision. This hotline provides emotional support and counselling, as well as advice on various problems, signposting to rehabilitation centres, and urgent aid.
And in 2010 Azercell Telecom committed to the fight against human trafficking by supporting the Azerbaijani events that took place as part of the international End Human Trafficking campaign – including a visit by Vaira Vike-Freiberga, the former President of Latvia and Special Advisor to the UN Secretary General.
Ready for the future
Azercell also recognises the importance of being a good taxpayer, and has become a good model for others in the sector. In 2010 Azercell paid almost $114.6m to the state budget, and around $868.2m over the last 14 years of its activities. Azercell’s payments in 2010 amounted to 1.85 percent of the state budget. The company is one of the largest taxpayers in the non-oil sector, making it a significant player in the Azerbaijani economy.
With the aim of bringing further pioneering innovations to the Azerbaijani telecoms sector, Azercell started the Barama project (literally: Cocoon) in 2009. Barama is designed to enable the development of creative and innovative ideas related to ICT – not only with the aim of presenting new solutions and innovations in the field of telecommunications, but also contributing to the social prosperity and economic development of the country.
Technology innovation key factor
Kazakhstan’s state insurance sector is growing rapidly and presents many opportunities to ambitious companies that are not afraid to invest time and effort to bring the best deals to consumers. With the help of technology and through close government collaboration, BTA Insurance has achieved exactly that. The group has taken the helm at the forefront of the insurance industry’s developments within this growing country. In fact, recent figures showed that Kazakhstan’s economy is on a path of recovery with GDP growth exceeding 6.9 percent in the first quarter of the year with an average of around the same over the next five years from its current $9,000 to around $15,000 by 2016, the government of Kazakhstan reported. This presents an immense opportunity for a company which is striving to grow to its full potential.
BTA Insurance is a subsiduary company of BTA Bank, which in turn is a subsidiary of the Samruk Kazyna National Welfare Fund. The bank has shown involvement in various segments of the market and has emerged as a significant player in the Kazakhstani market.
According to the company, one of the most equitable divisions within insurance has proven to be international reinsurance. The group has recently stepped into this field and is hoping to expand further to be able to provide the best service to its clientele. It has long been known that BTA Insurance has an established proficiency within the insurance business. It is because of this knowledge and standing that it endeavours to discover new mechanisms of communication for its clients by providing novel, superior services that are also easily accessible to consumers.
In December 2010 BTA Insurance joined forces with two other industry players, Atlanta Polis and BTA Zabota. Progress since the merger and the company reorganisation has already revealed promising end results as the companies work together to bring into line their efforts to produce the best products and services for their clientele.
Sergey Lavrentiev, the Chairman of BTA Insurance’s board, said: “At the end of last year we assumed our assets in addition to all rights and obligations of the other two companies. This was quite a challenge yet taking into account the harmonious work of the three teams we were able to combine all assets and capture rights and obligations of the two new insurers within the space of only a month. Thanks to this we have successfully accomplished the reorganisation, and as of the start of 2011 were again in a position to continue separate insurance activity on behalf of BTA Insurance as well as for both legatees, BTA Zabota and Atlanta Polis.”
The unification was not easy however and the insurance company faced some obstacles on its way to integration. These were especially related to IT technologies as each of the three companies used different software systems. Luckily, this was swiftly resolved with an arrangement between the IT teams which were able to amalgamate the three insurance databases. On a smaller scale BTA Insurance had to deal with employment-related issues linked with the merger but was successful in meeting its social obligations and kept on most of the integrated companies’ staff.
It seems BTA Insurance’s timing slots perfectly into place with the recent diversification plan that has been announced by the nation’s government. The authorities have undertaken plans to expand the economy from its dependence on commodity prices. Kazakhstan’s government also hopes to achieve a balanced growth based on competitive and dynamic industries. In spite of all the progress however there are still elements that require advancement.
The company’s reorganisation took place within the Kazakhstan insurance market, which despite its signs of positive trends, is nonetheless poles apart from any other insurance market due to its more complex operating system. According to BTA Insurance’s chairman, the Kazakhstani Insurance market differs from other markets within CIS because of higher requirements from the National Bank of the Republic of Kazakhstan towards financial sustainability and reliability of insurance institutions.
“The country’s National Bank in its role as regulator of the financial market increases the solvency requirements of insurance companies with the aim to transfer to the implementing measures of a Solvency II level. As a result the Kazakhstani market is considered one of the most transparent markets within CIS for investors. We think that rising requirements of the National Bank of Kazakhstan will make other insurance companies follow the way of integration of the assets,” Lavrentiev says.
The company’s strategic goals had to adjust after its recent joint venture. Those new objectives come with responsibilities and higher risks but the company is aware of them and has prepared. Its assets have risen and surpassed KZT26bn, while equity rose to KZT22.5bn, now placing it third by size among its competitors. That fact gives additional potential for impetuous growth and development.
“Indeed, BTA Insurance has changed its strategic targets primarily as a result of the reorganisation. Since the fusion we have become one of the largest insurance companies in the country with representative offices in 22 regions. The asset and equity increase allows us to keep going with confidence while we compete with the other leading companies within the Kazakhstani insurance market. I believe it is fair to say that gives us additional potential for impetuous growth and development,” Lavrentiev notes.
Although perceived as a relatively tough challenge, the company strives to enter into competition with the top seven insurance companies of the Republic of Kazakhstan in terms of premiums collection. BTA Insurance is unwavering when it comes to its recognised service quality for insurers, however, and is adamant that quality will remain constant. It plans to create a simple, convenient environment with flawless techniques for insurance agreements. According to its chairman these will be go hand-in-hand with the development of new, watertight products for all insurance classes, among which medical insurance will present competitive advantages.
The market is constantly changing and the company is adapting to the needs of clients relentlessly. For instance Kazakhstan experienced a bout of heavy rains over the past months which caused house owners to at last consider insurance. According to reports it increased by as much as 10 percent over the summer. On average an insurance policy for a house of around 100sq. m could cost anything from $20 to $22 but momentarily, insurance of flats with a mortgage is obligatory while houses are not. The company knows that this is a small price to pay compared with the loss that could occur. BTA Insurance works with clients to ensure the best option is chosen depending on the individual needs, but it never loses sight of being open and honest with consumers.
The chairman states: “Our priority is to create a transparent universal insurance company which offers an elevated added value. In addition, we are ready to demonstrate our capability in the area of reinsurance, both in Kazakhstan and within the international insurance market. The plan is to achieve an international rating and to become an established insurance company with highly professional personnel.”
BTA Insurance prides itself in being able to consistently uphold the company’s key mission to protect the financial prosperity of people and companies it serves. The undertaking to keep its promise is largely achieved through accessible and satisfactory requirements to delivered services in the property and liability insurance field. This manifests itself particularly in the insurance premiums that have been paid out in the first half of 2011. The company ensured that payouts were accurate and timely, yet in strict compliance with the legislation of the Republic of Kazakhstan. So far the insurer has paid out $4.9m in total, including $1.09m for medical insurance, $1.7m in vehicle owner liability insurance, $1.6m in employee accident insurance, and $300,000 for motor transport insurance.
There is not much that can now stand in its path as progress continues, and the unification has run smoothly for BTA Insurance. The insurer has now reached a stage which requires it to look beyond its comfort zone. It is planning to obtain international ratings to confirm the financial sustainability and solvency of the company. “From our point of view such ratings, especially if received from an international rating agency and coupled with a high level of capitalisation will support our company in accessing the international reinsurance market. We realise that we take significant risks but we join the international insurance pool only to cover the risks that are taken abroad and handed over to us,” Lavrentiev says.
Social responsibility and community support play an important part within BTA Insurance and it tries hard to continually take an active part in the public and social life of Kazakhstan. The insurer gets involved in events within various communal organisations and unions. Most recently BTA Insurance worked alongside the Sport Climbing Association which unites children and adults by insuring them on all sports competitions. The company has also insured a range of other state organisation including the Library for Blind and Visually Impaired. Moreover, BTA Insurance integrates CSR into its relationship with the government and even competing insurance companies.
Lavrentiev notes: “We maintain close relationships with the authorities and other insurance companies. These particularly relate to the creation and development of mechanism on insured risks regarding consequences from natural and technologically caused catastrophes as they are socially significant to the entire population. It is important to us to offer a broad range of options to our clients.”
Are you cut out to be an investment banker?
Working in the field of investment banking can be a great career, provided that the individual is willing to undergo the training and endure what can sometimes be a stringent process for finding, applying and ultimately securing the desired position with an investment bank. Considered one of the most difficult types of financial employment to enter, applicants must be able to prove they have the necessary educational credentials as well as the innate skills to function within the culture of the bank. At times this may mean taking on a less than desirable position in the hope of later gaining promotion within the corporate structure.
Before ever applying for a job at an investment bank, achieving a high standard of both formal education and practical experience is essential. Securing a degree in finance that will translate well into investment banking and perhaps taking on a part time job at a commercial bank, for the sake of experience, might be advantageous. The combination of educational expertise plus a background of working within a financial institution can make a prospective employer think twice before moving on to the next candidate.
Taking some time to learn more about the employer will often go a long way toward paving the way for landing that desired position. This is true when seeking to secure work with a locally owned investment bank in Nepal or Canada or with larger companies such as Jeffries or UBS Investment Bank. Including a sentence or two that indicates at least some degree of familiarity with the bank concerned in the cover letter with the application, as well as speaking knowledgeably about the bank’s mission statement or its suite of services during the interview will indicate that the applicant is interested in being a part of the organisation and making a difference, not merely securing a regular source of income.
Considering what type of investment banking job may be the best fit for the applicant’s skill set is also crucial. Not everyone is cut out to be an investment banker. Some applicants may be better suited to ancillary roles, such as providing support with merges and acquisitions, working with clients interested in capital markets, information technology or even rating related to the different types of investment markets. All these positions, as well as many others, are crucial to the life of the investment bank and the support of its clientele.
It should always be borne in mind that, along with traditional investment banks, the ability to secure remote work with an online investment bank may be a possibility. This means someone living in China may be able to successfully work for a European investment bank, particularly if that individual is well versed in current technology as well as banking and investment laws and regulations.
Above all, landing a job at an investment bank requires demonstrating a degree of personal decorum, the ability to think clearly in the event of a crisis and deal with stress on a daily basis. Life in an investment bank is often fast-paced and not for the squeamish. By being able to convey to prospective employers that they have these qualities, applicants are much more likely to successfully complete the interview process and secure the type of job they are looking for.
Key risk elements in post-crisis finance
The crisis that has enveloped the world for the last three or so years has resulted in dwindling margins, a lack of alternative investment strategies, and an uncertainty surrounding organisational survival. All of these have resulted in a closer scrutiny of risk management practices, a more comprehensive evaluation of the various risks underpinning a transaction, and the way these need to be managed.
Capital adequacy regulations are supposed to give the average investor and depositor the confidence that the financial institution is immune from risk, particularly systemic risk; but recent events have exposed the flaws in this notion. Eight days before it was nationalised, Northern Rock had a total capital adequacy ratio of 14.4 percent, nearly double the eight percent required by the Financial Services Authority, in line with Basel II guidelines. HBOS, as of December 31 2007 had a total capital adequacy ratio of 7.7 percent.
Why then, did these two organisations not show any immunity to the worsening crisis seen in 2007-8? Simply, capital adequacy directives, and indeed anything that central banks have outlined as positive governance, have not been subject to either robust stress tests, nor tested in crisis situations. This is not a criticism of the capital adequacy framework but an admission that this framework could not withstand the financial pressure when the crisis set in.
The consequences of liquidity risk
It is now clear that sustainable business growth cannot be managed from within, and expansion into unchartered territories is of the essence. This adds to the risk elements that need to be considered, as cross-border considerations, cultural adjustments, and transfer risk need to be managed – in addition to the other financial risks that are inherent in any transaction. This adds to the burden on weakening margins, and has increased pressure on business unit heads and risk managers.
The pressures that caused the demise of most financial institutions did not relate to capital, and in the case of most banks that went under in the UK, not subprime-related lending either. It was a result of liquidity mismanagement. This is what wiped out their positive cashflow structures within a two- to three-month period, resulting in a deterioration of cash operations.
Liquidity, up until 2007, was rarely mentioned in regulatory circles: it was accorded step-motherly treatment by almost all regulatory regimes, it was the ‘forgotten risk,’ an ‘Asian problem,’ a ‘Russian problem,’ or not an issue at all since it is guaranteed by the central banks.
Liquidity risk was regarded by many as inconsequential, since liquidity was always guaranteed by the central bank. However, recent events have clearly demonstrated that most central banks did not step into the role of ‘lender of last resort,’ as evidenced by the spectacular collapses of Northern Rock and Lehman Brothers. It is now certain that the culmination of all risk pressure points is a liquidity shortfall, and while the regulators have tried to shut the proverbial stable door, the horse has long since bolted. It is imperative that the HSBC financial institution leadership understand the inter-relationships between the various risk elements and liquidity and start to understand the dynamics of liquidity risk.
A more complex analysis
It is not possible to use standard liquidity ratios for liquidity management for the following reasons:
• the adequacy of a bank’s liquidity will vary;
• in the same bank, at different times, similar liquidity positions may be adequate or inadequate depending on anticipated or unexpected funding needs;
• likewise, a liquidity position adequate for one bank may be inadequate for another;
• what is liquid in one market may not be liquid in another;
• liquidity is completely governed by an organisation’s risk appetite and therefore cannot be prescriptive.
Determining a bank’s liquidity adequacy requires an analysis of the current liquidity position, present and anticipated asset quality, present and future earnings capacity, historical funding requirements, anticipated future funding needs, and options for reducing funding needs or obtaining additional funds.
As federal regulators have noted, the treatment of non-maturity deposits will be, for many banks, the single most important assumption in measuring their exposure to interest rate movement. The regulators continue to rely on a bank’s internal modelling systems to determine the value and interest rate sensitivity of such accounts. This presents all bankers with the difficult task of accurately calculating the market value of deposits and credit card loans, as well as developing effective hedging strategies to protect this value against market rate movements.
Similarly, with the continued consolidation trend in the banking industry, accurate valuation of demand deposits, in particular, becomes critical in determining the value of an institution or a single branch. Acquiring and/or target banks will need to measure the deposit franchise value based on the unique characteristics of an institution’s deposit portfolio.
It has now come home to roost with the Northern Rock debacle – which was not a credit risk problem, but a plain liquidity crisis caused by others’ credit risk woes.
Capital adequacy ratios cannot and will not assist a financial institution in a liquidity crisis simply because the amount of capital held has no relevance to an organisation’s cash position and strengths. Capital is an accounting book entry and is no substitute for short-term positive cashflows. It is therefore time for the regulatory regime to take a long, hard look at its cashflow policies, and embark on a healing journey.
More dynamic risk assessment
There exist key dependencies between market risk factors, macro factors, and idiosyncratic counterparty factors. For instance, oil prices are correlated with interest rates, and these influence together the creditworthiness of all organisations in the hotel and tourism industry segments. It is evident that risk factor correlations have to be studied and understood if margins have to improve, and strong pricing decisions can be taken if such inter-connections are analysed and understood. It is manifest that all risk variables are interconnected, and it is futile to embark on an understanding of interest rates without understanding the macro factors that drive interest rates. Not doing so will result in sub-optimal pricing decisions, and in this era of dwindling margins, this may be a killer blow.
In such an environment, an incorrect assessment of risk will be the death knell for organisations, and so, a more dynamic, proactive, and co-ordinated approach must be adopted in risk assessment within an organisation.
Financial institutions must undertake a more searching examination of their balance sheet structures, and decompose their balance sheet into contractual, and more importantly, behavioural, cashflow buckets. Most retail lending and funding organisations have to contend with customer behaviour as a key rationale for the understanding of mortgages and non-determinant maturity cashflows. Without a good understanding of customer behaviour analytics, any structure of liquidity will be inadequate.
Regulators in most regimes have adopted a knee-jerk reaction to the current crises and have tried to formulate regulations that seek to eliminate systemic risk, but such over-the-top regulation has given rise to regulatory arbitrage, or the use of capital to a firm’s advantage while playing the roulette of capital adequacy. Capital and liquidity are not substitutes for one another but need integrated management and measurement.
Today’s risk leadership must understand that risk cannot be managed in isolation but in conjunction with regulatory compliance, even if such compliance flies in the face of management logic where one sees completely contradictory rules adopted by the central banks and the international accounting standards board on the subject of loan losses.
The future of financial institutions is fraught and in these troubled times, the onus on survival cannot be left to the regulatory watchdog. Instead organisations should be bloodhound-like in actively managing key risk areas, of which liquidity is the most prominent. The days of patting oneself on the back because of higher-than-required capital adequacy are not just numbered: they are a thing of the past, and the only way forward is self-regulation.
Peabody to lead bid as ArcelorMittal pulls out of $5.1bn bid
ArcelorMittal, the globe’s biggest steel producer, late on Tuesday backed out of its Macarthur Coal joint $5.1bn purchase with Peabody Energy, according to the company.
The group originally joined the deal, which will be the second largest coal takeover this year, to help advance its metallurgical coal supplies.
The steel maker has now left partner Peabody Energy to pursue the takeover on its own, saying: “ArcelorMittal has determined that it would no longer be appropriate to allocate substantial capital to the acquisition of a non-controlling, minority business interest.”
Peabody welcomed the news saying the deal will be fully accretive within 12 months, and is to be funded with cash and debt.
