Year: 2014

Lekki Free Zone set to transform Nigeria’s fortunes

Posted on by Ashton Wenborn

With an abundance of resources and a growing trade economy, Africa needs ports, planes and infrastructure. Countries like Nigeria, the continent’s tiger-economy – leaping forward thanks to its manufacturing and oil and gas industries – are fighting hard to capitalise on their growth but are being hindered by a lack of basic logistical investment. Now, Nigeria’s leaders and foreign investors are changing all of that – one free trade zone at a time. The model, based on China’s success story, has seen the formation of free trade zones across the country, with the biggest and most crucial one located adjacently to the country’s commercial capital, Lagos.

The Lekki Free Zone is an ambitious project with the potential to transform Nigeria’s economy, but it is still very much in development. The key focus now is to make the zone viable for business and more importantly, to set up an unprecedented suite of infrastructure that will make any logistics veteran giddy. Potentially, Lekki’s deep-sea port will be one of the most advanced in the world, and the area’s sheer size will provide for warehouses storing millions and millions of trade wares. This is all in addition to a nearby refinery, which will ensure that the zone also becomes a hub for energy exports. All this is part of a national programme. The Nigerian Enterprises Promotional Agency has set out to create a slew of free trade zones all over the country, in the hopes that Nigeria can repeat China’s story, and become the leading economy of its region. The Chinese model – which first came into force in 1988 – saw the creation of several special economic zones that employed more flexible economic policies and government measures, in order to foster growth and foreign direct investment within those areas.

Nigeria statistics

Consumer price index

147.4

July 2013

158.6

July 2014

This later led to the expansive growth of economic hubs such as Shenzhen, Shanghai and Guangzhou, which have greatly contributed to China’s double-digit surges in GDP on an annual basis. With Nigeria’s GDP stumbling at five to six percent growth in recent years (see Fig. 1), its authorities are eager to move forward and light a fire under the country’s industries.

Incentives in West Africa
As such, Nigeria’s free trade zones are set to start industrial development, improve the local economy and generate employment and technological knowledge, through incentives such as a 100 percent tax holiday, custom duties and levies, foreign ownership of investments, no restrictions on the hire of foreign employees and a complete waiver on import and export licences. Lekki specifically will have four areas covering 16,500 hectares, with each phase dedicated to specific industries and types of business. Crucially, the overarching and all-encompassing focus and basis of the zone is facilitating logistics, says Chairman Olusegun Jawando of the Lekki Free Zone Development Company in an exclusive interview with World Finance.

“We are currently in the initial stages of development, with phase one’s roads and infrastructure already in place; the refinery in phase two up and running; and we’ve started construction on the deep sea port. The next step is to develop an infrastructure throughout Lekki. Electricity in Nigeria is very epileptic and we cannot allow that to happen in the zone, which is why we are developing an independent power supply. We’ll be working on ensuring the supply of water, telecommunications and increasing the road network in and around Lekki, because all industries coming here will require these things,” explains Jawando.

Lekki deep sea port

Facts and figures:

  • The port can handle the largest vessels in the world, including Majestic Maersk, which at 396 metres long is the world’s largest ship
  • The approach channel will be 16.5 metres deep, making it the deepest in West Africa
  • It will cover an area of 90 hectares with room for expansion in future
  • It will be capable of holding three container berths and one dry bulk berth
  • It can handle four million tonnes of cargo
  • It will create over 162,000 jobs in the area

The hope is that this will foster a strong trade, manufacturing and logistics sector, driven by the local light industries and energy exports. This is why the development company has established a massive land area for warehouses that can house the millions of goods set to come in and out of Lekki through its deep-sea port and the new international airport built within the zone.

In particular, Lekki’s deep-sea port has been dubbed the port of West Africa, being the deepest and one of the largest harbours on the continent. The project itself comes at a pricy $1.35bn, funded by the federal government, state government, and private investors (see Fig. 2). But in return, the port will create over 162,000 jobs and help to facilitate decongestion at Nigeria’s other ports, built initially to handle 60,000 tonnes, but which are now handling over 100,000 tonnes of cargo.

According to the Lekki Port LFTZ Enterprise, the port is designed to accommodate the largest vessels in the world and is expected to cover an area of 90 hectares with room for expansion, making it able to handle four million tonnes of cargo. Within 45 years, the government plans to see a $345bn payoff on the port, making it highly profitable. As part of the bargain, authorities have agreed to invest in significant road improvements to and from the zone. “We expect that about 25 percent of Lekki’s revenue stream will come from logistics,” says Jawando. “Nigeria is pivotal in West Africa and other countries are dependent on our industries and exports (see Fig. 3). Lekki will facilitate this and strengthen our links within the region”.

Creating new development
The hope is that Lekki will become a nerve centre for distribution for the Lagos area and nearby sub-regions. The current international airport in Lagos is extremely congested, and for many travellers, it’s common knowledge that the trip to and from the city can easily take three hours on muddy, chaotic roads. By establishing an airport in Lekki, the current hassle related to Lagos will be eliminated and by firstly focusing on the transport of cargo, Lekki will effectively become a major manufacturing and development zone.

Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates
Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates

“Logistics are important for the light industries in and around the Lagos area”, says Jawando. “There’s a lot of electronic manufacturers for household equipment such as washing machines and air conditioners, as well as manufacturers of leather goods. Lekki is also going to be a centre for oil and gas as we establish tank farms [oil depots] throughout zone two – this is crucial because there are currently only two other tank farms in Nigeria and they are seriously overrun, so there is high demand for these kinds of facilities. We know that with the sheer scale of the deep sea port, the development of another airport and the massive infrastructure within zone, we’ll be able to generate exports and improve the local economic base”.

With Nigeria’s growth dropping to an above average of five to six percent in recent years and Lagos’ population growing increasingly dense, development projects that can boost growth and supply the Lagos region with various products are much needed. In this respect, the Lekki Free Zone would help support the 15 to 20 million population in Lagos and its surroundings. At the moment, Nigeria’s industry is dominated by elementary industries, and not the manufacturing and secondary industries that typically foster long-term growth in developed countries.

Despite a surge in resource exports, Nigeria’s government restrictions on foreign investment as well as sabotage in oil fields such as the Niger Delta, has scared off several major corporations like Chevron and Royal Dutch Shell, which are currently divesting their Nigerian assets.

What’s more, broad-based issues with lacking infrastructure and security in the country, has made it hard to attract foreign corporations to set up shop in Nigeria. A key problem is the lack of a stable electrical supply in the country, as well as the road and rail networks being sparse and poor. All these things make it extremely challenging for production and manufacturing firms to establish their businesses in the country, as such industries are typically very dependent on the supply of energy and a strong infrastructure that can secure the import and export of necessary parts and products.

Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates
Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates

After the initial opening up of Nigeria’s economy in the mid-2000s, these are the key problems that have somewhat stunted its growth, not to mention the constant concerns of growing extremism in the country.

Essentially, this is why special economic zones such as Lekki are being established in the hopes that they will radically transform the economy. There are, however, also concerns that Chinese involvement in the project may leave the zone too dependent on volatile foreign income, and in particular, force Nigerian actors to only deal with China and not the broad spectre of markets. In this respect, attracting FDI is crucial, says Jawando, but not all.

“It is necessary to have a balance between domestic and foreign investment in the zone, because we can’t rely entirely on foreign money,” says Jawando, referring to the surge and ebb of investment flows that other developing economies have thrived on and later suffered from. “Domestic firms are used to the local challenges, but are also restricted by them, which makes them less competitive when compared to foreign actors. So it’s important that we also foster a sustainable domestic development that can support the economy”.

A Chinese connection
Nevertheless, the Lekki Free Zone Development Company has been marketing the zone and its business potential aggressively. In particular, the area has garnered interest from Chinese and Turkish players – the former undoubtedly thanks to the billion-dollar joint venture with the Chinese, which is partly backing the development company and any works within the zone. In this respect, Nigeria, like so many other African countries, is receiving a growing amount of FDI from China, which has been bolstering its hold on African economies and their resources.

China’s government has long been keen on fostering strong relations with Nigeria, as its dependency on oil continues to grow and pushes the demand for new sources. To this end, partnerships between the two countries on a business or governmental scale are considered mutually beneficial with Nigeria’s 177 million population, providing a ready market for Chinese goods and firm’s gaining access to the Bida basin in Niger State for oil and gas exploration.

Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates
Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates

This has, however, also prompted concern that China’s interests in Nigeria could develop into regular land grabbing, as has been a growing problem in East African states such as Angola. China’s hold on the growing economy of Nigeria was recently cemented when Beijing issued a $1.1bn low-interest loan to the Nigerian government in order to build much-needed infrastructure across the country. As is, Chinese companies are already building roads across Nigeria in contracts worth $1.7bn.

Such improvements to infrastructure and the growing interest from particularly Chinese actors, has begun a ripple effect among potential Lekki investors. According to Jawando, feedback on the Lekki project has been strong and having attended a slew of trade shows and exhibitions, the zone has managed to attract several manufacturing and logistics players who are eager to set up shop in Lekki. Whether it will be a success and live up to the Chinese experiences, remains to be seen, but crucially, the zone could be a major Nigerian breadwinner in just three years, when its infrastructure and self-sufficient power plant is set to be up to par.

Diversify to succeed: Bank of the West promotes international investment

Posted on by Ashton Wenborn

In a broad-based and growing global economy, investors often miss out on the opportunity to realise the advantages of global diversification within their portfolios. This is in part due to the perception that a domestic-focused approach provides less risk. In fact, the opposite is often true. Historical analysis reveals that when compared to a domestic-only strategy, portfolios with global holdings have typically, over time, earned higher returns for the same level of risk or produced less risk for the same level of return.

Although past performance does not guarantee future results, this may suggest that investors should assess their diversification strategies and, where appropriate, adjust their allocations to achieve an optimum level of non-domiciled holdings while looking for investments that will provide low correlations with their domestic holdings.

Since 2000, more than half of global GDP growth was driven by emerging markets, led by the BRIC nations, producing double-digit growth rates. Investors who were positioned in these emerging countries – as well as other countries – were rewarded over those who were exclusively in US equities or only invested in advanced countries. In a study by investment managers Gerstein Fisher (see Fig. 1) covering 1999 to 2013, a globally diversified portfolio outperformed a US-only portfolio in 96 percent of rolling three-year periods, with a total outperformance of 35 percentage points over 13 years.

Since 2000, more than half of global GDP growth was driven by emerging markets, led by the BRIC nations, producing double-digit growth rates

Aligning a global economy
Although growth in the BRICs has slowed, many emerging and developing countries are poised for growth rates that may surpass advanced economies. According to the IMF in April 2014, global growth is projected to be 3.6 percent in 2014 and 3.9 percent in 2015, with China projected to grow at more than seven percent and India more than five percent. Several developing countries are poised for growth above the average. Through global diversification, investors may best capture value across the entire economy and may realise better risk-adjusted returns.

While the data provides a sound rationale for global diversification, investors have been reluctant to adopt strategies that align portfolio allocation with market capitalisation. Currently, US equities comprise approximately 49 percent of the global market, so investors may consider having 49 percent of their portfolio in US equities and 51 percent in non-US equities.

However, studies show that few investors would be comfortable with those allocations due to a range of factors, including a preference for domestic equities, familiarity with local issues driving market performance, and access to information on global investments, as well as regulatory constraints.

For example, according to a 2012 study US investors maintained an allocation to US stocks that was approximately 1.7 times the weighted market cap of US stocks, while investors in the UK maintained a relative home bias of about 6.25 times the market cap of UK stocks.

It’s important to recognise that market cap is only one consideration for diversification and, historically, investors would have obtained substantial diversification benefits from allocations that varied considerably from current market-proportional portfolio. Specifically, looking at short-term performance in the past decade, there are periods of time where allocating 20 percent of an equity portfolio to non-US stocks would have captured about 85 percent of the maximum possible benefit.

Therefore, our recommendation is that investors carefully consider how global diversification may support their underlying investment strategy and, where suitable, gradually increase the percentage of their portfolio allocated to international equity. If an investor has no international exposure, setting a target of 10 percent may be an appropriate goal. For someone with 15 percent in international, we suggest 20 percent or more where appropriate, while looking specifically to strengthen the risk/return characteristics of the portfolio.

In particular, those countries with a low correlation with the investor’s domestic economy can often be more beneficial in maximising the value of diversification. Countries in the EU for instance, typically have a much higher correlation to the US than most other countries, so the positive effects of diversification may be better achieved with investments in countries like Mexico, Brazil and Taiwan, where the correlation to the US economy is lower.

One common misconception is that investment in multinational companies – particularly US-based multinationals – can provide global diversification coverage. But a closer look at the international footprint of Standard and Poor’s 500 companies shows that the majority of their business remains in developed countries, so correlation remains high.

Finding the right market placement
Once an investor sets an allocation, it can be a challenge to determine which countries, sectors and products to consider. Fortunately, there are many financial products that make global diversification easier than ever. Investors can often achieve their global coverage objectives with just one strategic fund. For example, a single Exchange Traded Fund (ETF) can track a fully diversified international index and provide broad international exposure.

For more focused coverage of the largest, most financially developed countries consider an ETF that tracks a developed-markets ex-US index. Pair this with emerging-markets ETF to broaden international holdings and drive diversification. There are many other options, but the point is that achieving global goals can be relatively simple, low-cost, and targeted.

As investors can select from investments in more than 50 countries, one of the questions I frequently address is how to distinguish the three international market categories: advanced, emerging and frontier markets. Advanced markets include US, the EU and Japan, which tend to provide lower risk and more consistent returns. The emerging market includes countries that are in the process of establishing a more mature marketplace. This sector can encompass greater risk, along with the potential for greater rewards.

Source: Gerstein Fisher
Source: Gerstein Fisher

The frontier market essentially consists of companies and investments in nations that are less developed than emerging market countries, many of which do not have their own stock exchange. As of April 2013, Morgan Stanley has a list of 34 nations that it classifies in this market, including Croatia, Tunisia, Vietnam and Jamaica.

Historically, frontier markets have categorically been the riskiest markets in the world in
which to invest.

In tracking international markets for more than a decade, one of the most significant trends is the wealth of information and data now available to investors, advisors and financial professionals. But I think it’s important for us to distinguish direct reporting and analysis – where sources are on the ground – versus second hand interpretation of data. Much like I would place greater value on information on US markets from US analysts, I rely more heavily on professionals working in the regions or countries we are tracking.

In the Bank of the West Investment Advisory & Management group, we communicate regularly with our portfolio managers and banking partners around the world to compare information and shape strategies. These are often very focused discussions on whether forecasts and projections are aligned with the realities of the local economy and how financial, political and other forces can quickly reshape the economic situation.

One of the key lessons from working in this arena is the importance of actively managing international holdings – as tactical timing can be paramount in finding momentum that may carry specific markets downward, even as global growth accelerates or a regional economy is growing.

For example, as we look at emerging market countries, a real divergence has developed that requires careful attention. Some countries or regions, like China, are growing at or above seven percent while others like Latin America are closer to three percent, and still others like Brazil are facing recessionary pressures. So it can be particularly helpful to develop information sources that provide the level of market detail required to assess performance and recalibrate holdings as needed.

For investors who are interested in creating a globally diverse portfolio as well as those who are expanding their share of international holdings, small adjustments in allocation may produce significant benefits in terms of lower risk and higher returns.

For further information tel: +303.202.5428, or email: wade.balliet@bankofhtewest.com

Bank of the West heightens cyber security measures to protect clients

Posted on by Ashton Wenborn

Cyber criminals are becoming increasingly creative and have diversified their attack strategies significantly in recent years. For more than a decade, complex and sophisticated cybercrime organisations have focused on infiltrating the online platforms of financial institutions. When those organisations responded by implementing stronger authentication controls, cyber criminals broadened their hunting ground and began attacking corporations across all industries. Companies that have antiquated or insufficient cyber security controls have been left exposed.

Small businesses are particularly vulnerable; a 2013 study by Symantec revealed that half of all targeted online attacks were aimed at businesses with fewer than 2,500 employees. But large, multinational corporations face equally serious risks and cannot afford to be complacent. The customer data breach experienced by Target last December affected up to 110 million people and resulted in significant reputational damage, profit loss, and high-profile resignations.

Following the breach, Target’s profits were down 46 percent from the same period a year earlier. Factoring in the costs of reimbursement, reissuing millions of cards, legal fees and credit monitoring for customers, one estimate totalled Target’s losses as up to $420m. The episode serves as important proof point that sophisticated criminals are able to infiltrate systems and wreak havoc in some of the world’s largest corporations.

Counting the costs
This marks an important change. In the past, security breaches didn’t necessarily have a significant or even fatal impact on a company’s reputation or bottom line. Today, there is increasing recognition by C-suite executives that cyber security is a major corporate risk they can’t afford to downplay. Cybercrime costs businesses an estimated $445bn yearly – almost one percent of global income – according to the Center for Strategic and International Studies, a Washington think tank.

Direct losses are only one component of this staggering number. Companies must pay substantial recovery and opportunity costs following a cyber attack, potentially losing customers and facing the possibility of lawsuits over lack of controls or due diligence.

The forecast isn’t getting any brighter, with both the likelihood and financial toll of cyber attacks continuing to mount. PwC ’s Global State of Information Security Survey – polling 9,600 senior executives across 115 countries in 2013 – cited the number of detected information security incidents increasing 25 percent in the past 12 months. The same respondents claimed the financial costs of those incidents rose 18 percent, with large liabilities increasing faster than smaller losses.

Six steps to preventing cybercrime

Behaviour monitoring tools:
A bank’s back office behaviour monitoring controls are not always visible to customers but help protect businesses from loss on a daily basis.

Fraud prevention products:
A comprehensive suite of fraud prevention products and features is essential to safeguarding against payments fraud. For example, Bank of the West’s Positive Pay solution uses payee line matching to protect client accounts against check fraud.

Fraud education:
Education and training are essential to generating awareness and compliance with fraud-preventing measures across all levels of an organisation.

Malware protection:
Installing a dedicated, actively managed firewall and setting up robust detection tools is critical to preventing fraud.

Dual Control:
Requiring a second approver for large financial transactions or sensitive administrative functions is critical. Using out-of-band authentication via a different network adds a layer of security to ensure transactions are legitimate.

Employee protection:
Cash vault and armoured car services can mitigate exposure to employees handling and transporting large amounts of cash unprotected.

The good news is that more companies are paying attention to these escalating risks. In June, The Wall Street Journal reported that 1,517 companies that traded on the NYSE or Nasdaq “listed some version of the words cyber security, hacking, hackers, cyber attacks or data breach as a business risk in securities filings… That is up from 1,288 in all of 2013 and 879 in 2012.” In turn, the PwC security survey reported information security budgets rising 51 percent in 2013 to an average of $4.3m.

What exactly are businesses today guarding against? What tactics are cyber criminals using to initiate fraud? Once upon a time, business was conducted and deals were closed with handshakes. Today, with the majority of business and financial transactions taking place online and by email, cyber criminals are focusing on business email and communication systems, compromising them when robust processes are not in place to verify the legitimacy of transactions.

Specific industries – including agriculture, municipalities, aviation, and more – are being targeted one at a time by what we call masquerading. This social engineering tactic can involve cyber criminals cloning company email systems and using social media channels to learn about internal relationships and the activities of company executives so they can make fraudulent requests look legitimate to unsuspecting company employees. We are also seeing cyber criminals pretending to be vendors so they can fraudulently obtain funds, or setting up email addresses that closely resemble customers’ to make requests look authentic.

Widespread attacks
We have also seen a significant evolution in malware. Historically, it was used to attack banking websites, but now we are seeing fit-for-purpose malware attacking specific point-of-sale systems and software used in a particular vertical. Criminals scan the internet for software they know is vulnerable and stage attacks on companies of all sizes across an entire industry. Recent targets have included restaurants, taxi services, and construction, to name a few. The sophistication of malware continues to increase. In addition to stealing user names and passwords, the malware is sometimes able to assume control of a company’s computer system in order to execute fraudulent transactions from a company’s own computers.

Ransomware and distributed denial-of-service (DDoS) attacks are additional tools criminals use to encrypt company data or flood sites with traffic and extort a payment. Ransomware attacks skyrocketed 500 percent in 2013, and criminals are increasingly using DDoS attacks to distract companies’ IT staff while stealing funds or intellectual property. This can take a severe toll on a company’s operations, leading to compromised customer service, reputational damage, and lost revenues.

Unfortunately there is no silver bullet to preventing fraud. As the internet continues to evolve and expand, the attack space available to criminals is only getting bigger. The presence of additional devices allows more options for perpetrating fraud. Above all, businesses need to stay aware of cybercrime trends and existing scams, and put in place robust business processes, approvals and controls to verify the legitimacy of all transactions. Financial institutions in particular need to partner with their customers to help educate on the increasing threat of cyber attacks and the prevention strategies they should implement.

As a relationship-focused bank, Bank of the West takes a holistic approach to fraud prevention, partnering with commercial clients to help educate and safeguard them against fraud. Obtaining information as quickly as possible for clients is paramount in this effort.

By maintaining open lines of communication with law enforcement organisations, we have effective information sharing mechanisms in place so we can stay aware of known risks, alert our customers, and modify our processes as needed.

We use direct communications and social media to keep our clients informed about the latest security-related news and fraud prevention best practices, including updates on the Heartbleed virus and wire fraud prevention strategies in recent months. Speaking with our clients about security also hands us important feedback that we have used to modify and strengthen our products and back office controls.

Our goal is to keep our clients strong and financially viable so we can growth alongside them over the long term. In today’s business landscape, where technology and the cybercrime tactics continue to evolve at lightning speeds, we view fraud prevention as critical to every company’s competitiveness – and its survival.

Brazil struggles in its quest to become energy powerhouse

Posted on by Ashton Wenborn

In 2007 Brazil made a remarkable discovery. An estimated 50 billion barrels of oil trapped under a thick layer of salt was found 300 miles off the coast of Rio de Janeiro. The oil had been there since Africa and South America started drifting apart 100 million years ago, and confirmed years of agonising research by Brazilian authorities. The president at the time, Luiz Inácio Lula da Silva, described the find as a “winning lottery ticket” and thanked God for the bounty of oil that he believed would transform the country into an energy superpower.

Da Silva was not alone in thinking this as the find sent shockwaves through the energy industry. It was a discovery that many believed could transform Brazil into a major oil exporter like Saudi Arabia or Venezuela. Industry analysts said the find was the third biggest in the world and the Correio Braziliense newspaper ran with the front page headline ‘God is Brazilian’. The discovery of pre-salt oil, so called because it lies deep beneath the sea under a layer of salt, was made by Petrobras. Executives of the half state-owned company boasted that their massive find could help them surpass Apple as the world’s most profitable publically traded company.

The discovery was followed by an arms race. Giants in the energy sector clamoured to secure exploration rights from the government; international companies all wanted to plunge hydraulic drills into the ocean and tap into the massive oil reserves that had, until then, eluded Brazil.

Value of brazilian oil exports

$3.649bn

2009

$3.991bn

2010

$5.442bn

2011

$5.946bn

2012

$5.878bn

2013

$5.563bn

2014

$5.563bn

2015

$5.724bn

2016

$6.005bn

2017

Source: International Monetary Fund

Open for business
In the 1960s Petrobras had a monopoly in the Campos and Santos basins – areas in the South Atlantic Ocean believed to hold vast oil reserves. Despite being the only company there, Petrobras managed to produce just 600,000 barrels per day (bpd). This monopoly came to an end in 1997. Brazil passed an amendment on energy regulation that year which opened the region to foreign competition for the first time. Over 50 companies including Royal Dutch Shell, Chevron, Repsol, BP and El Paso have since joined the race to start drilling in the region. But the ‘monstrous’ discovery in 2007 has so far failed to transform Brazil. Oil production that went from negligible to 2.7 million bpd in 30 years has stagnated. The potential of the find is yet to be exploited and it remains nothing more than ‘potential’.

Petrobras told World Finance it has “no doubt that the future of oil and gas in Brazil is promising”, but other firms disagree. Foreign companies have started to look elsewhere as government control, regulatory uncertainty and sky-high production costs pour cold water on Brazil’s dream of becoming an energy super state. Maersk is one of the first big companies to reduce its interest in the region. On July 8 the Danish conglomerate wrote off a $1.7bn investment in the Campos basin. The part-withdrawal from the area was evidence that the hype of oil in Brazil had failed to live up to expectations. Maersk reduced its ownership in the Polvo oil field – located in the Campos basin – by 40 percent after citing “adverse impacts”.

Soaring development costs and a plummeting oil value were also pressing issues that culminated in their huge write off. CEO Nils Anderson described his company’s “unsatisfactory” flip-flop in a statement: “The investment was made at a time when the outlook for the oil industry and oil prices were more positive than today and we had growth ambitions for our Brazilian oil business. We have now adapted our strategy to the situation we see today, but it is of course clearly unsatisfactory.”

Maersk bought stakes in the Campos basin for $2.4bn from SK Energy of South Korea in 2011. The move cleared the path for the company to become a dominant player tapping into Brazil’s deep-sea bounty. But analysts were bearish on the price of oil and, as there was considerable exploratory work to do, making worthwhile profits became untenable. Maersk says it will now invest in other global energy sites, but the move is the tip of the iceberg in the protracted saga of Brazilian oil. International companies are seriously considering cutting their losses in the Campos and Santos regions and retreating to economically viable areas like Manitoba, Canada.

Deep-sea exploration
The pressing question is if whether other companies like BP, Anadarko and India’s IBV will follow suit and explore energy pastures new. Developing pre-salt wells costs billions and no one has found a new basin since 2008, but BP isn’t put off. They have committed long-term to the area that could take up to 40 years to be profitable, a BP spokesman told World Finance. Deep-sea drilling takes “20 to 40 years to come into fruition”, said the spokesman who stressed there are “macroeconomic uncertainties” to manage as well.

The potential financial losses at stake are high and BP is reliant on complex geophysical imaging to map the subsurface of the ocean. This process is used to build an image of rock formations under the seabed so an accurate picture of the drilling area can be obtained. “Cutting-edge seismic imaging is part of what we’re good at,” added the spokesman who conceded there is “no certainty” in making profits.

With oil increasingly hard to extract, Petrobras has fallen on hard times and is the most indebted oil producer in the world. This is partly down to politically sensitive legislation that allows Brazil to keep fuel prices low to balance its high inflation rate. The government has interfered in the price of fuel, say The Wall Street Journal, and this has stopped Petrobras from scaling heights it initially thought were a mere formality. In 2007 it was worth $287bn – more than Microsoft at the time. Now its market cap is a third of what it used to be. Oil production, once expected to surge, has stagnated and the sense of euphoria has turned to disappointment.

Brazil needs the oil in the Campos and Santos areas. Not just for the capital it pumps into the economy but because it’s the third largest energy consumer in the Americas. Oil reserves remain largely untapped which has forced Brazil to import more than it exports.

Gasoline and diesel now sell at 25 percent below import costs that has hurt Petrobras’ ability to supply demand. Brazil has increased its energy production, particularly in the procurement of oil and ethanol, and now ranks among the top 10 biggest energy producers in the world.

But it needs to crack the pre-salt layer on its continental shelf. Around 90 percent of its petroleum is offshore in ultra deep waters and drilling through the 2,000m pre-salt layer is expensive and hazardous due to the high risk of an oil spill. This year Petrobras announced an ambitious corporate spending venture to invest $221bn over four years to produce four billion bpd between 2020 and 2030.

It’s a gargantuan sum to invest in an area that has hitherto yielded little in the way of returns. The reserves they want to drill into have at least 50 billion barrels worth of crude oil, some analysts say it could be closer to 100 billion.

Volume aside, it remains to be seen if Brazil’s lottery ticket is a winner. If it is, it could go down as the most expensive lottery ticket in the world, but the allure of becoming South America’s next energy superpower is too tempting to pass up.

SGBL: Lebanese banking sector has remained strong in the face of adversity

Posted on by Ashton Wenborn

Lebanon’s economy has shown a remarkable degree of resilience through a two-year period of political and social upheaval, demonstrating throughout that the banking sector is well equipped to overcome widespread complications and compete on a global basis. The challenge for the country’s banking industry today, however, is to expand upon what qualities it has already, boost the country’s lacklustre economy and assert its place in the global market for financial services.

“We, as Lebanese bankers, are quite proud of the resilience that the Lebanese banking sector has proven to have over the last 10 years – throughout which we’ve actually witnessed a series of domestic, regional and international shocks,” says Antoun Sehnaoui, Chairman and CEO of one of Lebanon’s leading banks, SGBL. World Finance spoke to Sehnaoui about the various ways in which the economy has changed of late, and what opportunities and challenges there are for those in the Lebanese banking sector.

Lebanon’s economy
Although the banking sector has withstood a number of challenges in recent times, the social and political unrest in the region has not come without consequence for Lebanon’s economy. For example, the services sector, of which tourism constitutes the biggest part, has suffered as a result and weighed heavily on the country’s economic wellbeing.

28%

increase in bank deposits in Lebanon in the last three years

The real estate sector, which represents something of a driving force for Lebanon, has also suffered for the same reasons. And whereas historically, residential demand among expats and investors has been strong, momentum has slowed over the past two years or so against a backdrop of regional turmoil. Still, real estate prices have remained more or less stable, and although there is evidence of some market correction, the country’s capital boasts some of the highest real estate prices in the region, both on a residential and commercial basis (see Fig. 1). To again underline the resilience of Lebanon’s housing sector, some recent statistics even go so far as to show that the sector as a whole is actually picking up.

The conflict in Syria has seen a huge number of refugees cross the border into neighbouring Lebanon – 1.2 million at last count – which has caused a spike in demand for public services and infrastructure. The surge has weighed heavily on Lebanon’s economy, stretching the country’s public expenditure thin and raising its fiscal deficit. One study conducted by World Bank in September 2013 estimated Lebanon’s economic losses as a result of the Syria conflict would come to somewhere in the region of $8bn over the three-year period stemming 2012 through 2014.

On the other side of the coin, Lebanon has welcomed a number of wealthy Syrian households who have invested in housing and offices, thus boosting the national economy. “Aggregate demand was also driven by an uplift in consumption as the country’s population grew significantly,” says Sehnaoui. Still, the influx of Syrian workers into the labour market has dragged average wages down and boosted the unemployment rate among some Lebanese citizens.

Lebanese exports have also suffered at the hands of the Syria conflict, given that traditionally exports transit by land through Syria to Jordan, Iraq and the GCC – Lebanon’s primary export destination. As a result of the conflict, insurance costs and substitute routes via air or shipping have forced costs upwards and compromised Lebanon’s global competitiveness.

Policy preparations
“Unfortunately, little has been done to robustly support the Lebanese economy and pave the way for recovery. Given the size of the needs generated by Lebanon’s open border policy and the influx of refugees, international aid earmarked for Lebanon to date has not been sufficient to bring appropriate support, whether to the refugee populations or to the hosting country,” says Sehnaoui. “From a security viewpoint, the Lebanese authorities have been putting in huge efforts to maintain security across the country in order to maintain confidence, reassure tourists and mitigate investors’ concerns.”

Not content with the steps taken so far by policymakers, Sehnaoui believes there are a number of areas still in need of improvement. “The overall business environment in Lebanon requires more robust strategies as well as bold public initiatives and programmes to strengthen public finances and structural reforms to rationalise expenses and boost revenues through fiscal adjustments. In the medium term, the country should be looking ahead and aiming for sustainability, both at the level of growth and of fiscal balance.” The election of a new president should bolster the government’s reform programme however, setting the groundwork for improved governance, overturning the public deficit and rising debt, and restoring state finances back to a healthy complexion.

Source: Ramco
Source: Ramco

“On a positive note, at the banking sector level though, the Lebanese Central Bank has proven very judicious and efficient in setting up mechanisms, in cooperation with banks, to stimulate the economy by fuelling loans,” says Sehnaoui. “These initiatives have been encouraging investment in productive sectors and supporting consumption.”

Although some aspects of the economy have been hit hard by recent crises in the region, the Lebanese banking sector has come through relatively unscathed, regardless of a challenging economic environment. “Banque du Liban, Lebanon’s Central bank, has played a major role in monitoring the situation closely and setting the prudential mechanisms to keep the banking sector afloat and relatively immune,” says Sehnaoui. “International sanctions have been rigorously implemented and stringent AML regulations have been enforced across the sector. We believe that the Lebanese banking sector is not anymore exposed to Syrian risk, as all of the relevant risks have been adequately provisioned.”

Bank equity has been reinforced in line with Basel III requirements, although the local target ratio has been set at 12 percent by the end of 2015, as compared with the eight percent international standard. It is this strict enforcement of an ambitious regulatory framework that has garnered the attention of local and international depositors and investors. And indicative of the regime’s effectiveness is that in only the last three years bank deposits in Lebanon have increased by 28 percent.

Elsewhere, MENA markets still offer opportunities for those in the banking sector in that much of the population is unbanked or underserved, therefore leaving a lot of room for enterprising players to occupy a precious share of the market. In addition, there are practically no language barriers for Lebanese banks entering Arab countries or those on the African continent, which gives those in Lebanon a competitive edge ahead of rival players.

A number of further challenges still remain, not least technological advancement, which has impacted everything from retail customers to corporates, and demanded that banks invest in IT and R&D if they are to keep pace with the rate of change.

From a commercial and marketing perspective, banks in Lebanon have come up against far greater demands to remain competitive, namely continued innovation and technological progress. The global banking environment has also grown increasingly challenging for banks in that regulatory pressures have grown and issues such as money laundering, cybercrime, security and compliance have forced their way into the spotlight.

“Some of the challenges are stimuli for bringing about change and grabbing new opportunities,” says Sehnaoui. “Regarding Lebanon specifically, we believe that, against all odds, Lebanon is still perceived as a regional banking hub. Lebanese banking has long since gone regional and even global. Major banks have opened subsidiaries and branches in Europe, as well as in Turkey, Iraq, Jordan, the UAE. There is room for Lebanese banks to grow in the MENA region, thanks to their assets and strengths.”

Ripe for growth
Although the Lebanese banking market is ripe for growth, there are some, including Sehnaoui’s SGBL, that are seeking opportunities outside of Lebanon. As one of the country’s largest banks, SGBL boasts a retail network of 69 branches that span the entirety of the country, as well as a proven reputation in the business of SME and corporate finance. “Still, we believe there is room to grow on our primary internal market,” says Sehnaoui. “For instance, we are working on optimising our retail network coverage in Lebanon as new residential and commercial areas develop.”

The bank is currently keeping a watch on growth opportunities in Europe, in particular in the business of private banking and asset management. “We believe that there is room to develop cross-business between European investors and the Arab world, as well as between Arab investors and European markets,” says Sehnaoui. “SGBL’s ambition is to be such a matching platform for opportunities to meet and materialise.”

For the time being, SGBL has sizeable banking subsidiaries in both Jordan and Cyprus, and is currently working on strengthening its position in both markets. Jordan, for instance, is a burgeoning banking market that offers, aside from its domestic market, a way into the promising Iraqi market.

“As our banking business lines cover all of retail, SME and corporate, private banking and investment banking, our strategy is to continuously upgrade our offerings so as to answer the market’s needs, and better yet, create demand,” says Sehnaoui. “This approach underlies our business development initiatives both in Lebanon and abroad. It also encompasses SGBL’s non-banking business lines, one of which is insurance, which we are actively seeking to grow beyond Lebanese borders, in an area of the world that is severely under-insured.”

Nucleus Software’s technological solutions enhance financial services

Posted on by Ashton Wenborn

IT companies have been working closely with financial services to deliver cost-effective and profitable solutions to the connected consumer, which predominantly started in India. World Finance spoke to Ravi Pratap Singh, President and Head of Global Product Management at Nucleus Software Exports Ltd, to discuss how in India, financial-related IT companies are playing an essential role in bringing these services to the masses. “These are exciting and challenging times for the Indian banking industry. India is definitely an important market in the global banking scenario. Customers are redefining the agenda, and excellent customer service has replaced financial stability as the primary reason for maintaining banking relationships.”

Such a monumental shift, however, requires a great deal of adaptability on the part of India’s financial services, and without the backing of capable IT companies, most would not be in the strong position they are today. “The growth trajectory in the Indian banking market has been different from mature markets of the world. A key role is being played by financial inclusion, which is enabled by growing trends of mobility and increasing adaptation of technology,” says Singh. “Nucleus Software’s product development strategy leverages technology as an enabler to enhance business value and operational experience for our customers.”

Spearheading international coverage
The company has been a leading player in the IT products and services sector for nearly three decades, and is internationally renowned for being one of the early pioneers to have cemented India’s high standing in the IT space. “Nucleus Software is committed to providing efficient and cutting edge software solutions for the banking and financial services industry across the globe. For over 27 years, we have been developing path-breaking IT products and solutions for retail and corporate banking, auto finance, Islamic lending, cards and cash management,” says Singh. “We are aware of not just the IT products and software solution requirements, but of the overall expectations of our customers and the changing dynamics of the technology environment.”

The company has been a leading player in the IT products and services sector for nearly three decades

Throughout the firm’s history it has established a network of international offices spanning nine countries, and today boasts an impressive track record of delivering results worldwide. “We are well equipped to serve customers globally through our sales presence across geographies including Europe, US, Asia and the Middle East. The company is an acknowledged market leader in IT products, and we are determined to expand this growth story through our unique people capabilities,” says Singh.

Not content with its already impressive customer base, the company is gearing up to expand to yet more countries in the near future, paying particular attention to those in major and emerging financial hubs. “Always a step ahead in this advancing industry, all our sales and marketing efforts are focused on taking our growth story to the next level through customer centricity, market penetration and new platform initiatives” says Singh.

“We are working continuously with our customers across the globe to understand their diverse needs and provide robust solutions that empower banks to stay ahead of the curve. The company’s robust portfolio of IT products and solutions in the global banking and financial services industry has been delivering value consistently over the last 27 years, and it offers a unique blend of domain and technology expertise to define the future of global banking industry.”

Although the market for financial services is carrying a great deal of momentum in India, the technological transformation is not necessarily specific to any one country, and IT services are proving crucial for firms across the globe. “Instant is the keyword here. Be it responses, decisions, information or options, today’s customers expect it immediately,” says Singh. “Factors such as trust, perceived service quality, perceived customer value, including functional value and emotional value, contribute to generating customer satisfaction.

“In the face of evolving customer behaviour and expectations, it has become imperative for banks to listen and understand the voice of the customer as input in shaping their strategies. Starting with the advent of the ATM, followed by phone, internet and mobile banking, the last couple of decades have been characterised by the emergence of anytime, anywhere banking.”

Cutting against the grain
IT adoption in the BFSI industry has matured by huge margins in recent years, and firms across the globe are now looking to IT solutions in order to differentiate themselves from their competitors. As a result, those in the industry are investing heavily in IT applications to better align business processes and improve internal efficiencies, as a host of key focus areas are driving the adoption of IT in the vertical.

“As customers become more sophisticated, globally banks have no choice but to revamp their technology platforms to meet changing demands. This means a surge in technology needs for banks. Right from tracking value based services to analytics, to customised, rationalised, simple and agile systems, to where customers spend their time (phone, tablet, voice) and how they interact. To gain a better contextual understanding of customer preferences for optimising channels based on the nature of the interaction and preference, financial institutions are looking at reaping the benefits of the all-channel experience. Financial institutions need technologies that can enable them to deliver innovative, tailored, touch-point banking services.”

Central to financial services in the digital age is mobile compatibility, which is particularly useful for connecting customers who might otherwise be unable to access a conventional branch network. “The adoption of mobile phones by end users is gaining traction, and banks must be ready to serve this requirement. Mobile devices are ideal channels for empowering sales and servicing teams on the street to deliver an instant service delivery experience to the customer, and banks are no longer looking at mobility as just another delivery channel,” says Singh.

“With a sharp rise in smart phones and increase in capability, mobility has already become a strategic channel for banking services. It is set to take virtual banking to the next level with more customers using the facility for banking services and demanding more from their device. Over the past three to five years, mobility applications are steadily being transformed from tactical applications to enterprise applications. Clearly, mobility is here to stay.”

The immediate challenges for financial firms, according to Nucleus Software, are various, but can be broken down broadly into five major areas. “Financial institutions of all shapes and sizes are going through a period of strategic transformation. These institutions are attending to a wide range of issues simultaneously – some more visible and fast moving, others more fundamental and long-term,” says Singh.

For one, banks will look to decentralise their distribution channels, either by disbanding or restructuring, as a greater proportion of customers take instead to internet or mobile solutions. Banks will become far more flexible in the future, compartmentalising their operating models and supporting them with flexible and configurable architectures, where each component operates independently, or at least loosely connected to industry hubs.

Nucleus Software also expects to see new service orientated architecture emerge in banking, including cloud computing, as firms seek to identify the most effective mechanisms for componentised, service-orientated IT. What’s more, the age of universal banking will soon come to an end, as basic banking activities will be split from riskier corporate and investment counterparts, and no longer share the same funding resources, liquidity and capital base.

Overall, banks will be looking to cut costs wherever possible, primarily by implementing longer-term sustainable cost reduction measures such as straight through processing, first-time resolution and self-service channels. Consequently, banks will be looking to further eliminate paper, automate processes and retire physical infrastructure to streamline their operating environments.

If those in the financial services industry are to enhance operational efficiencies and enable profitable growth, they must first realise the importance of an improved upon IT infrastructure in cutting costs and streamlining processes. It’s clear that IT companies will play a large part in the sector as it marches on into the digital age. The importance of companies much like Nucleus Software, therefore, should not be underestimated.

“Nucleus Software delivers value and end-to-end solutions, enabling its customers to get to the markets faster. We have extremely strong relationships with our customers. Going forward, we will continue working on expanding our base in new and select markets. The company comprises of an extremely passionate and diverse group of people who are working to bring cutting edge financial software products to the market.”

Bank of the West

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US (West)Bank of the WestAs a leading US bank, Bank of the West has long been committed to promoting values of sustainability. It has recently launched a new Commitment to Communities programme that boasts a strong ethos of sustainability and social enterprise. Bank of the West is without doubt ahead of the curve when it comes to best practice.

People’s Bank

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Sri LankaPeople’s BankWith over 53 years of experience in the banking industry, People’s Bank has always been a leading institution in Sri Lanka. Over the years it has also developed a strong CSR initiative, and has been contributing to a number of projects around the country, from disaster relief to launching an exemplary sustainable development banking operation.

Saudi Hollandi Bank

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Saudi ArabiaSaudi Hollandi BankSaudi Hollandi Bank’s approach to banking in its domestic market has been praised for its sustainable approach. It has invested heavily in helping train the country’s workforce, setting up its own training academy in 2009. This now welcomes some of the best university graduates from Saudi Arabia and abroad to build a career in banking.

  • Web Address: shb.com.sa
  • Email: access via website
  • Tel: +966 1 1 4010288

Doha Bank

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QatarDoha BankDoha Bank is not only the largest private bank in Qatar, but a major contributor to the national economy and a force for sustainable growth in the region. The bank goes above and beyond most of its competitors to ensure its employees can work in a healthy working environment and go on to achieve great things.

Falcon Private Bank

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UAEFalcon Private BankAs an Abu Dhabi-owned Swiss private banking boutique with an established presence in Switzerland, the Middle East and Asia, Falcon Private Bank has a strong focus on its long-term client relationships, offering in-depth expertise on emerging markets, as well as a range of customised wealth management solutions.

Nedbank

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South AfricaNedbankNedbank is deeply committed to the notion that in order to build a sustainable society, core banking services need to be sustainable too. As a result, the bank has developed a sophisticated governance structure that ensures sustainability is a pivotal part of all of its activities. In doing so, it has provided a model that many banks would do well to follow.

Sberbank

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RussiaSberbankRussia’s biggest bank by deposits has invested millions in CSR in recent years, aiming to make branch transactions as effective as possible while growing strong talent internally through its Corporate University. Known for its investments in the community, Sberbank focuses on bolstering SMEs through its increasingly popular unsecured loan trust.

Ahlibank Oman

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OmanAhlibank OmanAs well as being a prominent commercial bank, Oman’s Ahlibank is also renowned for its commitment to sustainable banking practices. These include Islamic banking services, as well as other forward-thinking initiatives that are designed to ensure that clients’ money is secure and being invested in a responsible way.

Access Bank

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NigeriaAccess BankOperating in Nigeria since 1989, Access Bank has built a strong reputation for being committed to sustainable banking practices. The bank has been widely praised for focusing on financial inclusion, providing 30,000 children under the age of nine with banking services, as well as female empowerment, diversity and investment in the local Nigerian community.