Year: 2014

Official data shows that the United Arab Emirates’ economy has turned around after years of low growth, financing issues and restructuring post-2009. Now, the Emirates is seeing a strong rebound in profitability and growth as it continues to benefit from its perceived safe-haven status amid regional instability.

The economic recovery has been solid, supported by the tourism and hospitality sectors, and a rebounding real estate sector in particular. What’s more, infrastructure and growing wealth has fostered a growing financial industry in key hubs such as Dubai and Abu Dhabi. Public projects in Abu Dhabi and buoyant growth in Dubai’s service sectors have continued to underpin growth, which reached 5.2 percent in 2013. Now, the macroeconomic outlook from the IMF, expects a 4.8 percent growth in 2014 and approximately 4.5 percent in coming years, supported by a number of government-led mega projects and the successful bid for the World Expo 2020.

Crucially, the UAE growth is increasingly supported by non-oil activity, which remains a robust source of income as the local economies wait for oil production to stabilise. In particular, construction and retail trade will continue to drive economic activity, supported by high levels of public infrastructure spending and strong private sector credit. In addition, oil production is expected to rise owing to strengthening global demand, challenges in restoring oil production in non-UAE countries such as Libya, and a decline in global oil inventories. Recent analysis from the IMF also revealed projections for the production of 2.8 million barrels of oil per day in the UAE during 2014 (see Fig. 1). This positive outlook for the current economic state in the UAE has bolstered financial services in the region, which have picked up significantly following the drop in markets post-crisis and after the Arab Spring, which drove down bond prices.

Now, major players such as Emirates NBD Asset Management (ENDB) are looking positively on the investment landscape in the region.

“We’ve seen a re-rating that’s attracted investors’ interest; a lot of international investors are now interested in the region. For me the game changer was of course the upgrade from Frontier to MSCI status of the UAE and Qatar this year. This really forced international investors from just being interested, to making significant allocations,” says David Marshall, Senior Executive Officer at ENDB.

“On the fixed income side, we’ve seen a real improvement in spreads. Borrowers were somewhat shut out of traditional lending sources – namely banks in the Middle East. So since then they’ve tapped the capital markets. We have seen really interesting issuers looking to raise money at attractive yields, and again there’s been a re-rating there. So we’ve seen, since the crisis, CDS levels coming from around the 940/950 levels down to 150 today.”

Financial services boost
The UAE officially transitioned from being considered a frontier market to emerging on a key MSCI market index in June 2014, which marked a new era of both greater opportunity and closer scrutiny for the financial markets. Since the announcement in 2013, stocks across the UAE have 89 percent over the last year as of June, while capital markets in Dubai are starting to draw more attention from foreign investors.

Being listed on the emerging markets index, UAE companies are joining firms from Brazil, China and more than 20 other markets across the globe. In particular, several Dubai-listed financial firms have benefited from this and seen their stocks soar as a result. In this respect, investments in financial services are a growing trend in the UAE as the economy continues to recover. Like most parts of the world, banks were under strain after 2008-2009 and balance sheets were largely impaired, with loan-to-deposit ratios in some cases of up to 130 percent and thereby inhibiting loan growth. When some of these loans defaulted, local firms endured provisioning and impairments, but having moved past this part of the economic cycles, players like ENBD are seeing very strong underlying profits and a renewed faith in the Arab region.

Foreign interests
“Geographically I think there are some interesting trends. Countries like Egypt, which obviously has been under political and social strain, now looks attractive from an economic point of view, with elections having just taken place. We think that’s going to put confidence back into the region, and we expect foreign direct investment to improve, which will spur capital expenditure and investment,” says Marshall.

“Last year, we started making investments there defensively: utilities, and telecom companies. Now we are moving to play the cyclical story, so construction, real estate, and more investment banking themes. The big game changer will be Saudi Arabia though. That’s the untapped market, the one that all investors want to get into. It’s still expensive; you can only do it through derivatives or indirect access. The recent announcement that the market will open up to foreigners will have a huge impact once this happens, with likely strong foreign investor participation and possible inclusion to various indices.” In this respect, the IMF projected that foreign direct investment will reach almost AED44bn (approximately $12bn) in 2014.

A key part of this growth will be driven by an expansion in non-oil sectors namely manufacturing, construction, tourism, trade, transport, and logistics. Conversely, the Middle East has traditionally been an exporter of capital of the world, however, now the financial industry is seeing a growing interest in MENA investments from international clients. This follows a period of bearish investments, after the market peaked three years ago along with the depression on regional stock prices. Since then, flows dropped as investors considered the risk. But now, 2014 has been a bullish MENA year.

“To be frank they weren’t ready; we were too early. I think there was too much investment risk for them, there was too much business risk and I think possibly at the individual level, too much personal risk. So they weren’t ready to allocate then, but I think they are very much ready to allocate now. We are also seeing sovereign wealth fund interest in coming to the region,” explains Marshall.

“I think on a macro-level there are also reasons why investors are interested in the region. If you look at recent trends, emerging markets have really been in the doldrums for the last couple of years, driven by currency weakness, weak fiscal and current accounts on the side of the governments, and really slow growth. We don’t have any of those problems in the Middle East. We have largely dollar-pegged assets. We have strong growth driven by a high oil price. And that is really going to make a nice diversification play for those emerging market managers.”

Islamic investments
Another key driver for ENBD’s marked growth, is the increasing popularity of sharia-compliant investing, which has become a prominent part of global portfolios. For ENBD, one of the UAE’s largest asset managers, Islamic banking has always been a major focus for the business, with about 30 percent of assets run on a sharia-compliant basis. This amounts to more than $700m of the firms total $2.6bn in assets, invested in Islamic products.

“We’re seeing people starting to tap into sharia-compliant investing. Even the UK government is looking into issuing a sukuk, in order to tap into that investor base. For me, it’s all about investor demand. We’re in the Middle East – if you want to attract assets from say Saudi, UAE, Oman – even further afield like Malaysia or Brunei – we have sharia-compliant products and services that are a key part of that. What we’re seeing is a lot of interest in sukuk – a very attractive asset class, which can sit on the balance sheets and clip out income, thus helping to optimise balance sheets. In addition there is strong demand for sharia-compliant real estate solutions as well as money market products,” says Marshall.

On that basis, ENBD has grown its assets by approximately 100 percent in the last two years. A key driver in this has been the diversification of its product range, which Marshall insists is a trend that will continue along with a reduction in the dependence on cyclical issues.

“I want to achieve a diversified product set, so we can offer products from real estate to fixed-income to liquid equities. Also, I want to broaden our investor base. The wholesale market is very strong and I see a lot of growth in institutional investors,” he explains.

Finally, the firm is working hard at gaining an international flavour, which can diversify its business portfolio even further. Having recently launched a platform in Luxembourg for its fund range, ENBD Asset Management is looking to expand aggressively and is betting on strong growth in Europe and Asia that can sustain further asset increases in the years to come.

Sri Lanka’s recent economic performance has been better than expected. Its seven percent annual growth in recent years has boosted the economy out of the doldrums, prompted by a credit crisis, which followed the country’s civil war in the mid-2000s. Now the economy is booming, with one of the highest growth rates in Asia, despite headwinds from market turbulence in the emerging sector, as well as climatic shocks.

As such, Sri Lanka’s bank credit is estimated to grow 14 percent in 2014 and the outlook for the local banking sector is stable. This is due to strong fiscal policy and a recent surge in banks’ loan books and customer numbers. A particularly strong performer is People’s Bank, a state-owned commercial bank headquartered in Colombo, Sri Lanka’s capital.

Sri Lanka’s bank credit is estimated to grow 14 percent in 2014 and the outlook for the local banking sector is stable

With 738 branches and service centres located across the island and more than 10,000 employees, People’s Bank is one of the largest institutions in the country. With more than 13 million customers – the largest customer base of any commercial banking entity in Sri Lanka – it has grown exponentially. The bank has continued to enhance its banking activities and grow its business portfolio in response to the country’s economic growth.

A key part of this growth has been the bank’s focus on accommodating a broad base of the Sri Lankan public, which speaks several different languages and has varying levels of wealth. To this end, the firm has launched accounts that suit various needs, such as ‘Sisu Udana’ for students, ‘Yes’ for the youth, ‘Vanitha Wasana’ for ladies, ‘Parinatha’ for senior citizens, ‘Ethera Isura’ for foreign employees, ‘Aswenna’ for agri professionals and an investment savings account. Of particular note, People’s Bank has launched various loan schemes in addition to its advisory services that can help stimulate local wealth and the development of businesses.

Loan growth
This personalised service has been popular in recent years as the economy has improved and prompted ratings agencies to give a positive outlook for Sri Lankan loans. Moody’s looked at how creditworthiness will evolve over the next 12-18 months and said that it viewed the operating environment, asset quality, capital, funding, liquidity, profitability, efficiency and systemic support as stable.

Strengthening the economy

This comes down to the authorities investing in a pipeline of infrastructure projects, which are expected to boost economic growth, together with an accommodative monetary policy. Fitch ratings suggested that such an environment would prompt loan growth to rebound and asset quality to stabilise.

Essentially, this is why People’s Bank has seen a growing interest in loan products (see Fig. 1) and its scheme offerings for SMEs. This ties in perfectly with the firm’s overarching goal to be the bank “for the aspiring people in Sri Lanka, empowering people to become value creating, competitive and self-reliant”.

Having one of the largest ATM networks in Sri Lanka, along with offering mobile and e-banking, has helped grow People’s Bank’s customer base and seen it retain profit growth in a challenging economic environment. To this end, People’s Bank has contributed greatly to the country’s financial development, as it endeavours to continue in setting high socioeconomic goals that will make Sri Lanka a financial hub by 2016.

During periods of conflict, crisis and upheaval, the investment environment is seemingly bleak. This is aggravated by the absence of security, an unstable macroeconomic environment, failure to comply with the rule of law, weak infrastructure and a dysfunctional labour market and educational system. By contrast, in post-conflict periods, investment activity picks up as an investment-enabling environment takes hold. Security is restored, the macro economy stabilises, the rule of law is upheld, and banks evolve, allocating capital to the economy and providing the private sector with much-needed access to credit.

Iraq is a country that holds much economic potential, underpinned by untapped oil resources and strong demand for infrastructure, goods and services, due to 30-plus years of underinvestment as a result of wars, sanctions and neglect. Since the downfall of the Baath regime in 2003, Iraq has tripled its oil production from approximately one million barrels per day to three million, making it one of the leading producers of oil in the world (see Fig. 1). In this time it has also posted strong GDP growth rates (see Fig. 2) and saw the market capitalisation of its stock market reach $10bn by the end of 2013, up from only $3bn in 2010. With oil production expected to triple yet again, reaching a reported nine million barrels per day by 2020, the scale of economic growth is expected to mirror the economic transformation of Saudi Arabia in the 1960s and 1970s and Russia in the 1990s. For investors, success in a country like Iraq could reap significant returns.

Making the transition
Yet, Iraq today has not completed its transition from a conflict economy to a post-conflict environment. In considering the country as an investment destination, recent political developments and instability are troubling. As a result, investors, especially foreign investors, are adopting a ‘wait and see’ approach, remaining on the sidelines due to what they perceive to be a country in conflict.

The Capital Bank Group, consisting of the Capital Bank of Jordan and its majority-owned subsidiary, the National Bank of Iraq (NBI), is no stranger to this environment. Only two years after the fall of the Baath regime in 2003, when Iraq was embroiled in widespread turmoil and sectarian strife, Capital Bank became one of the first foreign banks to enter the Iraqi market when it acquired a controlling stake in NBI. Since then, the group has gradually, but consistently, built momentum in the Iraqi market. Capital has increased from approximately $20m in 2004 to approximately $215m today, and successfully building a profitable business with NBI posting net income of $12.6m in 2013.

Overcoming conflict
With an approximate 10-year presence in Iraq, the Capital Bank Group has grown accustomed to operating in an environment that may not necessarily adhere to familiar norms. When foreign investors look at Iraq today, they see a conflict zone. However, as a bank operating in the country, we see a different picture. Despite recent developments, Baghdad today is a large business hub. The capital, which is Iraq’s largest city by population, has constantly seen new industries being developed and investors coming in. Business continues to thrive there, with a very robust trade finance activity.

Iraq’s northern Kurdistan region has long enjoyed political tranquillity, offering lucrative business opportunities. Southern Iraq, containing 65 percent of the country’s oil wealth, is also emerging as a relatively stable region insulated from the political and security challenges seen in the central and western regions.

Moreover, throughout the turmoil, the economy still boasts foreign reserves in excess of $80bn. Meanwhile, the Iraqi dinar has been relatively stable against the US dollar since 2009. In general, we have not seen a drop in commercial activity. The Iraqi economy is expected to post a 5.9 percent growth rate in 2014, according to the latest IMF projections. These indicators are very important for the banking and investment sectors providing them with a different perspective. The Capital Bank Group is committed to the Iraqi market and has expanded its range of services appropriate for the realities of the business environment in each region.

We remain active in the area of trade financing in all parts of Iraq, as this is a much-needed service for our clients with large trade volumes. On a monthly basis, the average volume of letters of credit and letters of guarantee issued by us has increased 47 percent and 28 percent respectively, from 2013 to 2014. Other services we provide include cross-border cash management and transfers. We are also extending credit facilities to our corporate clients, and car loans in the north. Through our investment banking subsidiary, Capital Investments, we are providing corporate finance services to investors in projects in the north and the south, arranging debt and equity financing and advising foreign investors seeking to gain exposure to lucrative investments.

Stability and success
Despite the recent developments, we see great potential for the future in Iraq. Therefore, we continue to focus on the market and on putting in place strategies and making investments that will position us for further success when the situation stabilises. We are currently present in all major cities in Iraq and are planning to double our branch network over the next two years. We are introducing ATMs in the fourth quarter of this year and offering credit cards to our clients in Iraq. We are also investing in our brokerage business, Wahat Al Nakhil, upgrading IT systems and applying for a custodian license to allow us to better service foreign investors seeking to invest in the Iraq Stock Exchange. What’s more, we are developing investment products for our existing and new clients who are seeking to capitalise on promising investment opportunities in Basra. At Capital Bank Group we are in the business of turning challenges into opportunities and we strive to better serve our clients and the entire region. Throughout the crisis, we are remaining closely engaged with our clients.

The Capital Bank Group is present in Iraq and Jordan. Given the geographic proximity between the two countries, close historic ties, and the fact that more than half a million Iraqis call Jordan their home, it is a natural hub for investing in and doing business with Iraq. The Capital Bank Group is in a unique position and we have a distinctive vantage point that allows us to effectively capitalise on opportunities that are present in each of the regions, and to assist our clients in accessing these opportunities.

Iraq today is a country in a process of state building and serious reconstruction, a process that is unfolding, with different dynamics, in various parts of the country. Over the course of the next three to five years, we believe the situation in Iraq will stabilise, an enabling environment for investment will develop, and immense potential will be unlocked. We see the development of a more positive future. The change will be gradual but consistent, and we believe investors who enter early will be rewarded.

France has been highlighted by some sources as the weak link of all the major European economies, as the country struggles to negotiate the worst of its national debt crisis and keep pace with the rate of recovery in Europe. Nonetheless, for now the nation remains the second-largest economy on the continent, and boasts a number of key industries still in impressive shape.

One area that is still very much in its heyday is the financial services industry, which has expanded quite considerably over the years, regardless of sometimes-disappointing showings for the French economy as a whole. The industry’s sterling performance has been underpinned, above all, by a number of enterprising players, whose contributions to financial services and to the French economy as a whole have been second-to-none.

The country’s innovative streak can perhaps best be seen in the case of Confédération Nationale du Crédit Mutuel, a leading and long established bank and insurance group and a key constituent of the French financial services industry. “The Crédit Mutuel group played an active role in financing the economy in 2013, both at the national and regional levels,” Confédération Nationale du Crédit Mutuel Chairman Michel Lucas told World Finance.

A leading lender
Taking into account the entirety of the Crédit Mutuel network, the bank employs upwards of 100,000 employees, 78,482 staff members and 24,000 elected voluntary directors, and delivers its expert products and services to a customer base of 30 million, 28 million of which are individuals. What’s more, backed by a long history of local experience, Crédit Mutuel continues to reaffirm its status as a leading lender for individual customers, as well as small, medium and intermediate-sized business (PME/PMI), for which it is the third-largest lender in the industry.

“With a focus on quality of service – the key to its trust-based relationships – the group is expanding all of its banking, insurance and service businesses by constantly making its offering more comprehensive, better adapted and more competitive,” says Lucas.

As evidenced by its sizeable contribution to the French economy in years passed, Crédit Mutuel is indicative of the financial services industry’s ability to look beyond otherwise unimpressive results and deliver outstanding financial solutions that rival even the most competent global names. The group’s chairman speaks at length about the bank’s progress, ratings (see Fig. 1) and how exactly Crédit Mutuel has managed to succeed where so many have struggled.

“Underpinned by the strong business growth of its networks, notably in retail banking, it has buttressed its fundamentals while combining growth and efficiency,” says Lucas. “The Group maintained its focus on service quality and succeeded in growing across all its segments – banking, insurance, services – with an increasingly adapted and diversified product line.”

For the year ending December 31, 2013, the group posted a net profit of €2.65bn and a total net profit of €2.71bn, representing an annual increase of little under 23 percent and thereby bolstering its already impressive share of the market. The bank’s core tier 1 capital, throughout that same time, stood at an impressive €30.5bn, marking an annual increase of 6.6 percent and resulting in a core tier 1 ratio of 14.5 percent based on ‘Basel 2.5’ standards, the highest of any French bank and of any European lender. As of the end of 2013, Crédit Mutuel boasted 7.5 million members of its 11.5 million customers, as well as more than 2,000 local branches administered by more than 24,000 representatives and elected members.

The group’s impressive performance has not come without investment, however, and the bank has grown to such an extent that its two main banking networks, Crédit Mutuel and CIC, together with the Targobank and Cofidis networks equate to an overall network of close to 6,000 points of sale. “Fully owned by its members, the Crédit Mutuel Group allocates all of its profits to growth and development, employee training and strengthening capital,” says Lucas.

Remote access
Recognising technological expertise to be a key differentiator in the industry, the group holds this attribute at the heart of its development strategy, not only in France but also throughout the entirety of Europe and beyond. “New innovative services are constantly being added, confirming the group’s position as a leader,” says Lucas.

As a pioneer in the field of remote banking, Crédit Mutuel offers a range of digital services to maintain close ties with its members and customers. Not content with a bricks and mortar branch network alone, customers have the opportunity to indulge in all manner of remote banking products and services, and, in 2013, the group’s remote banking division recorded more than one billion contacts, of which almost half were via the internet.

What’s more, mobile telephony, the group’s third business line, offers yet another means of providing bank insurance and financial services, and represents an alternative payment method to support the group’s position in electronic payments. Finally, to satisfy the needs of individuals as well as professionals, the group created EPS, a residential remote surveillance system that stands as the leader in France with a 35 percent share of the market.

Understanding that customer expectations today are greater ever than they have been, Crédit Mutuel, as with any other successful name in financial services, has taken strides to ensure that it can offer a multi-facteed experience for today’s much-changed banking public.

The group’s insurance subsidiaries are also a major force to be reckoned with in France. Groupe des Assurances du Crédit Mutuel (GACM), Suravenir, Suravenir Assurances and Assurances du Crédit Mutuel Nord (ACMN) together manage a total of 34.4 million policies, up 11.2 percent on the year previous, of which 29.6 million are in risk insurance and 4.8 million in life insurance – on behalf of 12.9 million policyholders.

Total income generated by the insurance business last year reached €14.4bn, representing an increase of 21.2 percent in one year, and in large part driven by life insurance. The group’s results in the insurance segment once again illustrate the strength of the historic bank insurance model, which was created by Crédit Mutuel more than 40 years ago now, and accounts for more than 30 percent of its total net profit.

Growing internationalisation
The group’s international presence is also on the up, and operations aside from those in France accounted for approximately 18.2 percent of total net banking income last year, up from 4.7 percent in 2005. The bank’s expansion into international markets, however, has not come without an appropriate strategy to match, which has seen the bank embark upon a series of carefully chosen partnerships.

In 2013 the group finalised agreements to strengthen its partnership with the Canadian banking group Desjardins and signed an agreement in the insurance segment to mark the creation of Monetico International (SMI), a leader in the global electronic payments market.

Last year also marked the first full-year consolidation of the Belgian division Beobank/OBK and, in the insurance segment, of the Spanish subsidiary Agrupacio. “Crédit Mutuel Group’s goals are aligned with those of its shareholder members and customers on behalf of the economy. The group is continuing its diversification policy in France and abroad, while consolidating its retail banking position outside of France,” says Lucas.

The same values demonstrated by the group in forming these various partnerships can again be seen in the way in which the bank is governed. Cooperation, responsibility and solidarity are the cornerstones of the group, and have been since Crédit Mutuel was first established.

“It belongs to its members, who own its share capital and guide its strategy through a democratic process,” says Lucas. “As a mutual bank, Crédit Mutuel bases all of its actions on the interests of its members. Growth is always guided by the founding values: solidarity, responsibility, equality, proximity and transparency, and these shared values are as strategic as the quality of its services. At the core of Crédit Mutuel’s identity, these values affirm its difference and underpin its growth model.”

Supported by a stronger balance sheet and controlled growth, the group actively contributes to supporting the real economy on a daily basis. Owing predominantly to the day-to-day commitment of its directors and employees, the trust shown by its customers and solid financial fundamentals, Lucas believes the group can focus on growing, adapting and affirming its difference, constantly aiming to better “help and serve” its members and customers. “With these assets, it can confidently meet the economic, technological, competitive and regulatory challenges of today’s world,” he says.