Author:

Investors look to Istanbul

Posted on by

 Founded in 1997, Esin Law Firm has over the past 14 years grown to become one of the premier corporate law firms in Istanbul. Esin Law Firm’s main practice areas are M&A, corporate law, dispute resolution, competition law and real estate, and the firm works with prominent counsels and advisors in other areas of activity. The firm is creative, dynamic and solution-orientated and uniquely combines solid legal knowledge with its capacity for understanding business matters to serve its clients in the most effective manner. The firm has a passion for excellence in legal services and strives to create added value for its clients.

 In 2010, among others, the firm received awards from the Financial Times, Mergermarket and this magazine, recognising it as the best M&A law firm in Turkey. As well as dealing with domestic clients, it acts as a local partner for international law firms carrying out transactions in Turkey thanks to its fully independant and long-standing relationships with those law firms. Consequently, it is ideally positioned to assist clients in cross-border transactions.

Before establishing Esin Law Firm, Dr Esin studied law at the University of Istanbul, before undertaking his LL.M degree at Tubingen University Law Faculty, Germany. He subsequently returned to Istanbul as a teaching assistant at the university, where he remained for four and a half years. He then decided to gain a PhD, where the focus of his research was the liability of the seller in mergers and acquisitions. With this expertise he returned to Turkey in 1997 and established Esin Law Firm with two partners – both of whom remain with the company today. He lectured on Civil Law and Law of Obligations between 1992 and 2004 at the Marmara University Law Faculty and gave graduate lectures on M&A transactions at Galatasaray University in 2005 and 2006. He also lectured at Bilgi University on M&A between 2001 and 2009. Since 2008, he has lectured at Bahcesehir University on financing models at graduate level.

Focus for understanding
Dr Esin makes a point of underlining the fact that Esin Law Firm is not a full service firm. Instead it is concerned entirely with corporate law, with a particular focus on mergers and acquisitions. “60 percent of our income is purely from M&A transactions, with 60 percent of our lawyers handling these cases at any one time,” Dr Esin says. “We take interest in both domestic and international litigation and arbitration in this area, as well as competition law and real estate law. Of course, we sometimes have to deal with related areas too, such as capital markets, acquisition finance and so on, but these are only in relation to M&A.”

This is an important point of differentiation for Esin Law Firm: focusing on this area of speciality has allowed it to develop a deep technical knowledge that surpasses many competitors. Indeed, the knowledge of the firm in this field is so respected that three of the four partners are either currently university lecturers, or have taught at that level in the past. “Thanks to this level of engagement not just at a practical level but also at a theoretical level, we as a firm are able to see and analyse the legal landscape better than many others. This allows us to identify changes, opportunities and potential challenges ahead of a number of our competitors,” explains Dr Esin.

A second point of differentiation that Dr Esin is particularly proud of is the amount of time given over to the training of young lawyers at the firm. “One of the main things we try to avoid and try to discourage in our junior associates is a ‘copy and paste’ mentality, where large sections of old documents are simply imported into a new one,” he says. “We insist that they think before they act and this is the foundation of our training. The phrase ‘but we have always done it that way’ is forbidden here! If you keep that mentality, then accidents and mistakes can end up becoming ‘truths’ that are repeated again and again without thought.”

The mantra of not doing things in a certain way simply because that is how it has always been done and giving attention to detail is also important with regard to due diligence. Of course, this is a crucial part of an M&A transaction, but confounding factors can rise up and derail a deal if everything is not carefully scrutinised. There are basic elements such as laws regarding tax liability and whether it falls to the buyer or the seller to pay this duty. There is also a problem in Turkey with companies not necessarily maintaining their documentation and tax records in the way that they should be – pieces may be missing, or it may not be up to date. “In these situations, it can be a real headache trying to get a meaningful due diligence done. This is the first challenge we face at the initiation of an M&A transaction,” explains Dr Esin.

Devil in the detail
While this is a challenge and an inconvenience, there are even greater issues that can arise. Occasionally, a company may be in the position where it has more than one share ledger, with each one listing different shareholders. “The question in this situation is, well, which share ledger is the buyer purchasing? Which of these three or so ledgers has the correct share listing? You do not want to be in a position where, a few months down the line, a third party appears saying ‘Ah no, my friend – according to this ledger I am the majority shareholder and it is I who owns the company, not you.’ So attention to detail is vital.”

Because of these possible issues, Dr Esin also emphasises the importance of co-operation and communication between the takeover negotiators and the firm carrying out the due diligence: “If there is no link between these two sets of people, it can cause real problems.”

While the firm is very well versed in its business, the recent introduction of two new legal codes will have an effect, to a greater or lesser extent, on M&A transactions. “The Turkish Code of Obligations will not really have a big impact on us, as it is mostly concerned with banking elements. It is also not dissimilar to the existing regulations,” says Dr Esin. “The Turkish Commercial Code, however, does represent a real change in the legal landscape. It will have a significant impact especially on the shareholder agreement structures.”

This particular code drastically changes the rules governing company structure, operations and corporate governance. As a result, all Turkish lawyers have had to go back and ‘re-learn’ their own laws as this code is a complete revolution on what came before. “Within Esin Law Firm, we have developed some training programmes for our lawyers with the atendance of professors of the highest calibre,” says Dr Esin. “We have also hired some counsels who worked on the drafting of this code to help ensure all our staff are up to speed. Basically, we are ensuring that we are well prepared for when these two codes come into effect next year.”

And what does the future hold for a law firm that is internationally recognised as one of the best in its field? Well, growth is on the cards, but not at any cost. “We have always maintained that we would rather have to turn down work than ruin our reputation. In this business, reputation is everything and that is what will bring clients to your door, even if you have to turn them away sometimes due to our workload. While everyone working at Esin Law Firm is expected to work very hard, we take care not to overload ourselves, as that is when mistakes happen. Esin Law Firm’s quality orientated approach with respect to rendering legal services distinguishes the Firm from its tiers. In order to ensure such quality, partners lead every transaction in detail and are involved in every meeting, conference call and thus fully focus on each and every detail of the projects.”

Nevertheless, the firm is expecting a 43 percent increase in the number of deals it closes by the end of the year. “In 2010 we closed a total of 14 deals. This year we have already completed eight transactions and expect that number to rise to at least 20 by the end of the year.”

Over the next five years, Dr Esin is expecting an increasing number of big international law firms to set up offices in Istanbul – but he’s not worried. “In terms of competition, even if 10 or 15 global firms enter into the Turkish market, there will still be at least another 20 without a local office who will want assistance from someone like us on a transaction. The most important thing is for us to ensure that we are in a strong position with excellent staff and a reputation for outstanding service every time. You can never look too far into the future, but with that as our foundation we are confident of our success.”

Inbursa: Growth with profitability

Posted on by

The bank has a very strong balance with a 20.5 percent tier one capital ratio, and its loan loss reserves cover 5.4 times the non performing loans. The strength is reflected in the BBB rating that Standard & Poor’s has given Inbursa – the highest rating in Mexico.

Low operating costs is a key principle for Inbursa with an efficiency ratio of 40 percent – comparing positively to a market average of 74 percent – which translates into higher profitability, flexibility and more competitive products to its more than eight million clients.

Inbursa’s management structure is very lean in order to be as close as possible to its clients, allowing the institution to have a very fast decision process. The main benefits for its clients are the quality of service and the quick response to their needs.

Business services
Commercial lending has been a core business for Inbursa, providing financing solutions to large corporations as well as to small and medium enterprises. The loan portfolio has grown consistently during the last 16 years at a yearly compound average growth rate of 33 percent, reaching the equivalent of $15bn in 2010.

This gives Inbursa a 14 percent market share in Mexico. The majority of its portfolio is denominated in Mexican pesos, and 26 percent is denominated in US dollars; 18 percent of the total portfolio has been lent outside of Mexico.

Inbursa’s loan portfolio is highly diversified with exposure in some of the most dynamic sectors of the Mexican economy, including infrastructure and real estate related projects that demand long term competitive funding, both in pesos and in dollars.

Retail banking
Inbursa’s clients find a tailor-made solution to their financial needs, as Inbursa is able to provide them with loans ranging from very short term working capital needs up to complex, long term structured deals, as well as all a range of products related to cash management, foreign exchange, treasury, investments, leasing and hedging, among others.

Innovation is always in Inbursa’s strategy. A good example has been the development of a deposits product that provides all the transactional capabilities of a chequing account, while at the same time paying a competitive interest rate that compares more to competitors’ fixed income funds than chequing accounts.

Retail banking represents an important growth opportunity for Inbursa, so in 2008 a strategic alliance was reached with Criteria, a subsidiary of La Caixa de Barcelona, which acquired 20 percent of GFI shares through an equity increase. La Caixa is the largest retail bank in Spain, with more than 5,500 branches and close to 11 million clients. Their expertise in the retail business has contributed to accelerate the growth of Inbursa in this market.

In terms of branches, Inbursa has grown from the 98 it operated at the end of 2008 to 271 at the end of 2010 – 173 new openings in two years. With branches in major cities throughout Mexico, Inbursa has a strong presence for supporting the transactional banking needs of its more than eight million clients around the country.

In terms of lending, Inbursa developed a parametric product for selected SMEs that has benefited more than 32,600 companies as of the end of 2010, providing financing where liquidity and availability of funds had previously been very restricted.

Diversification
In June 2010, Banco Inbursa concluded the acquisition of an auto loan portfolio of approximately $500m with around 62,000 clients, from Chrysler Financial Services Mexico (CFSM). With this transaction Inbursa also acquired 100 percent of CFSM shares. With this acquisition Inbursa strengthens its participation in the automobile sector in Mexico – both in credit and insurance – and has a solid platform for future growth in the retail sector.

Since 1965, Inbursa has been an active participant in the financial markets through its different subsidiaries, reaching a portfolio of $92.3bn assets under management.

Among the funds managed by Inbursa, Fondo Inbursa, an equity mutual fund, has generated a compound annual average growth rate of 20.44 percent in dollars, over the last 30 years (up to March 2011).

Through its continued growth and consolidation, Inbursa is one of the most solid financial institutions in the world. It is now in an outstanding position to meet the current challenges, having taken advantage of opportunities to continue growing in operating efficiency and profitability. Today it offers an attractive alternative for its customers and while simultaneously contributing to the impressive economic development of Mexico.

New growth frontier for Islamic finance

Posted on by

In Islamic banking, traditionally banks do not invest in interest bearing instruments like treasuries or bonds, which means all deposits collected are transferred to the real economy as “murabaha” loans. Besides supporting real businesses and production, it protects the borrower from financial shocks in crisis situations.

Furthermore, in the Islamic system, banks cannot call back the loans or change the pre-agreed rates – thus Islamic banking stabilises the financing conditions for debtor firms.

Realising the virtues of these practices, Bank Asya was established in 1996 in Turkey in accordance with the principles of interest-free banking. Since then this young and energetic bank has become the leading player of this sector in Turkey, and ranks 13th in assets among the 48 nationally operating banks.

Bank Asya gained its respected position in the banking and financial services sector thanks to its growing capital, strong profitability, solid funding and high quality service. The bank’s most important goal has been adoptting a customer-focused approach, offering its clients the best service possible along with the most advanced technology available, hence being able to bring interest-free banking to the masses.

International confidence
In this process, Bank Asya became the first participation bank in Turkey to go public and has been listed on the Istanbul Stock Exchange  with the ticker ASYAB. At 2010 year-end, the free float reached 53 percent of its capital; today 59 percent of ASYAB shares are hold by international institutional investors.

In March 2011 Bank Asya received over $300m in a murabaha syndicated loan from 26 international financial institutions, marking the largest such loan ever extended to a Turkish bank. This is the third loan Bank Asya has received of this kind, which proves the international markets’ trust in Bank Asya. Last year, the bank secured another $255m in a murabaha syndicated loan from international creditors.

International activity
With more than 1,300 correspondent banks all over the world, Bank Asya can facilitate business over 100 countries. Bank Asya is the first participation bank in Turkey to be assigned to act as an intermediary bank for the GSM 102 and GSM 103 programmes of the Commodity Credit Corporation of the US Department of Agriculture. Furthermore, Bank Asya is authorised to conduct international trade activities under Export Credit Agency (ECA) coverage such as US-Exim, Hermes, SERV, Finnvera and ONDD. The outstanding risk of Bank Asya at different ECAs is around $300m.

Extending interest-free banking abroad has been Bank Asya’s vision since the beginning. In 2009, Bank Asya acquired a 40 percent stake in Senegal-based Tamweel Africa Holding SA. Tamweel Africa Holding was owned by the Islamic Corporation for the Development of the Private Sector, a subsidiary of the Islamic Development Bank. The holding either fully owns or has controlling shares in the Islamic Bank of Niger, the Islamic Bank of Senegal and the Islamic Bank of Guinea. The holding has plans to acquire the Islamic Bank of Mauritania soon. Besides investments in Africa, Bank Asya is planning to open a branch in Erbil, Iraq, and a representative office in Mumbai, India, to reach Middle Eastern and Far Eastern markets.

Retail banking
Bank Asya provides its individual, small business and corporate clients with services to meet all their banking needs, while meeting and exceeding their expectations. Besides the traditional in-branch access channels, Bank Asya provides internet banking, ALO ASYA telephone banking, mobile banking, ATMs and POS terminals. All methods are fast and effective with no interruption.

With 1.7 million issued credit cards, Bank Asya is the leading participation bank in Turkey in retail banking. Its contactless credit card AsyaCard DIT has received three awards: the Retail Banking award from the sixth Active Academy International Finance Summit; Best Cash Displacement Initiative in the Visa Europe Member Awards; and Best New Credit Card Product Launch in the Cards and Payments Europe Awards. Following the success of AsyaCard DIT, Bank Asya launched DIT Pratik, Turkey’s first pre-paid contactless card.

Innovation
Bank Asya has a pioneering role in innovative financial services as well. Considering the rapid growth in the mobile phone sector, Bank Asya is generating its latest product: DIT Mobile.

With DIT Mobile technology it will be possible to purchase a hamburger with your mobile phone. Making payments (as well as utilising other financial applications) using mobile phones is inevitable, and Bank Asya is always planning for future generations, with continuous effort to provide award-winning innovative products and services to its customers.

SME banking
Since its establishment, Bank Asya assists the Turkish real economy with more than 100 percent loan to deposit ratios and providing $13bn of cash and non-cash loans to SMEs and corporates in 2010. Bank Asya aims to target its various products especially to SMEs, helping them grow and expand from local markets to national and international ones. Bank Asya provides them consultancy services as well to help them become a brand name. The “Coban Yıldızı” project, named after the Turkish word for lodestar (traditionally a star which allows lost travellers to find their direction), aims to give direction to SMEs in their search to become bigger and better companies.

 Bank Asya is actively financing projects on both the international and domestic level. It has issued guarantees for many of the largest projects in Turkey and has clients that are involved in development projects throughout the world. In project financing Bank Asya offers various services to the parties involved in the project. In the case of a real estate project for instance, Bank Asya provides services to the owner, construction company, contractors and individual homebuyers – through purchasing the land, accomplishing the construction, and assisting with final sale and purchase – from the beginning to the end of the project.

Brand name
With $229m of brand value, Bank Asya ranks among the top 500 banks in the world, according to London-based brand valuation company Brand Finance – and it is climbing the ladder every year. Besides the superlative services it provides, Bank Asya invests its brand value through social responsibility programmes and sub-brand names, such as Bank Asya 1.Lig, Coban Yıldızı and DIT Card.

Bank Asya 1.Lig is the secondary Turkish football league, which Bank Asya has sponsored for the last four years. This sponsorship is very well suited for the bank, as the secondary football league hosts the Anatolian football teams – and Anatolia hosts the SMEs to which Bank Asya provides $13bn loans.

Coban Yıldızı is Bank Asya’s corporate project, where its top management reaches out to inner cities of Turkey, listens to the questions and comments of local SMEs and provides advisory services to them. DIT Card is Bank Asya’s award-winning contactless card with 1.7 million subscribers. The name DIT has become the brand name for all contactless cards.

Lebanon bank adopts ‘green’ model

Posted on by

Headquartered in Beirut, BankMed is one of the top five banks in Lebanon. Established in 1944, its market share − measured by total assets − has grown over the years to comprise more than nine percent of Lebanon’s banking system. BankMed, through its 54 branches spread throughout Lebanon, and one in Cyprus, offers a wide range of innovative products and quality services tailored to individuals and corporations needs. In Q1 2011 BankMed’s total assets stood at around $12.1bn; customers’ deposits totaled approximately $9.8bn and total loans reached $4.3bn. BankMed has a client-portfolio currently exceeding 130,000 customers.

In 2007, BankMed’s regional presence expanded to Turkey following the purchase of MNG Bank jointly with Arab Bank and was consequently renamed Turkland Bank or T-Bank; a subsidiary commercial bank. T-Bank has implemented an ambitious growth strategy over the last few years seeing its assets increase from $549m in 2007 to $978m in 2010, deposits from $286m to $740m, loans increased from $361m to $661m, branches from 16 to 27 and staff from 390 to 510 employees. T-Bank is currently focused on the Small and Medium Enterprise (SME) sector, and is hence acting more like a niche bank. The group of the bank’s shareholders also has a large presence in Turkey through a controlling stake in the country’s biggest company, Turk Telecom, thus making the group the largest foreign investor in Turkey. The expansion was realised based on our firm belief in the growth potential of the Turkish economy; one that materialised given that Turkey is the fastest growing economy in Europe, and ranks as the 16th largest economy in the world. With the stronger economic integration between Turkey, Syria, Lebanon and Jordan, BankMed’s early entry into Turkey gives it a strong advantage in comparison to other regional banks that are now seriously considering the Turkish market. 

Strategically, BankMed has opted to expand only in selected markets, where it could add value. BankMed’s private bank in Switzerland, BankMed Suisse, is engaged in asset-management and advisory banking services. BankMed (Suisse) is reinforcing its private banking product offering across different markets, encompassing traditional banking services as well as innovative products, such as its own funds (BankMed Cedar Funds) as well as internally engineered structured products.

In addition to private banking in Switzerland, commercial banking in Lebanon, Cyprus and Turkey, BankMed has expanded its activities to investment banking. In 2008, the SaudiMed Investment Company was launched in Riyadh, providing investment and corporate advisory services to a growing base of customers in the Kingdom of Saudi Arabia (KSA) and elsewhere in Middle East. The Group has substantial presence in the KSA through Saudi Oger, one of the largest conglomerates in the region with interests ranging from contracting and maintenance, to telecoms and printing. The presence in the KSA allows for great synergy opportunities in the largest economy of the Arab world, which constitutes roughly 50 percent of total Arab GDP. The ambitious public works and infrastructure investments outlined by the government of the KSA in response to the global crisis provide great opportunities for growth and financing activity in this key Arab market.

Diversified banking
BankMed has been built around transparent business practices, responsible lending policies and careful investment strategies, all of which have allowed the formation of a clear and effective risk governance structure at the board and management levels. Our systems, codes of conduct and internal controls are designed to meet the requirements of the stringent international standards and adapt to the new Basel III regulations. BankMed is exposed to a broad range of risks in the normal course of its business. The policies are designed to identify and quantify these risks, set appropriate limits in line with the defined risk appetite, ensuring control and monitoring adherence to the limits. BankMed maintains an adequate capital base to cover risks inherent in its business operations. The adequacy of capital is actively managed and monitored using, among other measures, the rules and ratios established under the Basel Accord, as adopted by the Central Bank of Lebanon. The primary objective of BankMed’s capital management is to ensure that the bank maintains a sufficient level of capital to exceed all regulatory requirements and to achieve a strong credit rating, while optimising shareholder’s value.

BankMed has always had a distinguished presence in the corporate banking business, where it has a well-established franchise, providing funding and other services to most of the top corporate names in Lebanon. BankMed has also strengthened its SME unit, and its portfolio has significantly increased in this crucial market for what we consider to be a necessary “balanced” growth of the Lebanese economy. In addition to corporate finance, brokerage services − available 24 hours a day – have been boosted through MedSecurities, the brokerage arm of the bank which was established five years ago.

Trade Finance at BankMed is one of the key revenue generating businesses. BankMed continues to demonstrate excellence in the trade finance area, by providing distinctive and customised services to its clientele. With the growing needs of Lebanese corporates to expand their businesses locally as well as overseas, BankMed has been a reliable provider of trade finance solutions; one that corporate customers can count on. Despite the financial crisis during the past few years, and despite the challenging moments that Lebanon and the region have experienced, BankMed was able to grow its trade finance business, and to expand its regional and international Financial Institutions network of more than 70 prime correspondent banks in 55 countries. This has enabled the Bank to cater, in a timely and professional manner, to its clientele’s trade finance needs in virtually every corner of the world. BankMed’s main trade finance products include: letters of credit, letters of guarantee, documentary collections, standby letters of credit, etc. BankMed was also able to successfully work on trade finance opportunities, such as the risk participation and forfeiting areas. This has enabled the bank to increase its trade finance business and enhance its capabilities. More specifically, BankMed’s main capabilities in the Trade Finance area are as follows:

– Letters of Credit: On the import side and through its wide network of correspondents, BankMed is one of the main players of LC issuance for imports into Lebanon. With more than 90 percent of the local corporates dealing with our bank, our trade volumes have significantly increased over the past few years and we have been able to conclude a number of large trade ticket transactions for prime customers and in challenging geographies (Africa, South American, Latin America, MENA). On the export side, BankMed has been involved in a number of export finance transactions involving the discount of export LCs and the handling of door-to-door transactions tailored specifically for some of our large corporate customers. This has enabled our customers to hedge the various risks associated with the export activity.

– Letters of Guarantee: Given the nature of the contracting business and the fact that we bank with most of the large contractors in Lebanon including names with regional/international reach, we have been approached for the financing of large contracting projects overseas. This involves the issuance of large tickets and long term LGs (such as performance bonds, advance payment bonds, etc.), which would not have been possible without our wide network of FI relationships and the confidence that our correspondents had in BankMed.

– Risk Participation and Forfeiting: As part of our business development initiative, we have grown the bank’s revenues by developing our trade finance/sales desk capabilities. In addition to our standard channels of trade finance, we have created our own network of correspondents for dealing in primary/secondary market trade finance assets. A number of successful transactions have been closed and we expect to close more in the future.

This activity requires specifically tailored programmes and structures for investing in both import and export activities. This includes risk participation, risk sharing, LC discounting, promissory note discounting, acceptance discounting, purchasing of notes which are all associated to trade finance activities. This has enabled the bank to increase its trade finance business as well as its sophisticated capabilities, and to diversify its portfolio by investing in different transactions and geographies. 

With the significant growth of retail banking in Lebanon, BankMed developed further its retail banking services, and introduced unique retail products to continuously meet growing client demand. New branches have also been added, providing presence in the most remote areas of Lebanon.

A sustainable banking model
Sustainability for BankMed is a 360 degree vision. To start with, BankMed has always believed that a thriving Lebanese economy is the best possible environment for a successful bank. Indeed, BankMed’s role in financing commercial, industrial, and contracting activities has contributed to the growth of these sectors and the resurgence of the Lebanese economy since the early 90s. In addition, we believe that an institution should continuously reassess and reinvent itself in order to meet the needs of a fast changing world. As such, BankMed went through a major reorganisation campaign between 2006 and 2008, consolidating the three banks within its banking group into one universal bank: BankMed. This has created great efficiency gains in terms of operations and customer service. BankMed thrives to assure the best quality banking service.

Sustainability prompts the bank to always adopt the latest in technology by constantly upgrading its systems to keep up with the fast pace of technological innovation. Since the completion of the reorganisation and rebranding phase, profits have been steadily increasing.  

BankMed has been unaffected by the global financial crisis, mostly due to its conservative banking culture which keeps leverage down and implements all the stringent regulations of the Central Bank. In addition, the practice of internal self-regulation and highly reliable risk management policies, have further shielded the bank. The liability side of BankMed is dominated by deposits which have been a stable source of funding.
On the asset side, BankMed keeps high liquidity ratio with loans to deposits ratio among the lowest in emerging markets. BankMed realises that its most valuable asset is its human resources, and thus the emphasis on human resources training and development.

In addition, BankMed’s belief in sustainable development and green banking has prompted the institution to launch a very effective environmental initiative, or the Happy Planet campaign, to raise awareness about issues pertaining to the environment. This project includes funding of specific environmental programmes. BankMed has undertaken various projects in collaboration with government departments and ministries, NGOs and educational organisations, to preserve Lebanon’s natural environment.  BankMed launched its Happy Planet website in an attempt to educate the community about preserving the environment. It also launched, for the second consecutive year in a row, its Green School and Student Competition to raise environmental awareness among Lebanese youth.

BankMed has taken another major step to ensure a better world for tomorrow’s generation by being the first Lebanese bank to have taken concrete steps to assess, measure, and offset its Corporate Headquarters’ carbon footprint. The bank assigned Sustainable Environmental Solutions (S.E.S.) to audit and offset the Bank’s direct and indirect emissions of greenhouse gases in 2009. By becoming carbon neutral, BankMed solidifies its position as a leader in Lebanon in taking environmentally friendly initiatives.

Ideas-based trading

Posted on by

Forex gained the confidence of active people investigating avenues of generating additional income long ago. Distance methods of earning are the most popular ones and attract the attention of the majority. Their unquestionable advantage is that they do not require any initial expenditure and time for transfers – trading on forex meets these requirements.

At present hundreds of brokers offer their services on the foreign exchange markets, including both small- and large-scale international brokerage companies offering a whole range of services. One such company offering a comprehensive service is InstaForex, a broker actively acquiring cutting-edge technologies.

A relatively new company, it has been operating on the market since 2007 and is now entering the constellation of leading brokers of the foreign exchange market. As of spring 2011, the company’s number of the clients ran to more than 350,000 people from 60 countries, with nearly 100 offices for the company all over the world. World Finance magazine has recognised InstaForex with the award for Best Forex Broker in Asia twice – impressive results for a four year old company.

Investment ideology
What are the prerequisites to such success? Definitely, the high quality of services rendered, considerable initial investments and a highly qualified team are all aspects of this successful business. Yet, all these factors are secondary; the primary one is the ideas. And for InstaForex, this is the foundation to a successful business.
The idea at the heart of InstaForex is to offer the most convenient, clear and safe trading in the world. These are the three pillars supporting positive relationships between a prosperous broker and a content client. If the trader is confident in their brokerage company, the brokerage company will be able to expand its clientele, strengthen its position and offer its traders more and increasingly innovative technologies.

Today, apart from a wide range of trading instruments, InstaForex provides its clients with many market opportunities which are not offered by other full-service brokers. First, every InstaForex client receives a 30 percent bonus to deposits to their trading account, regardless of the volume of funds invested or that client’s success record. No other broker offers such substantial bonuses.

Second, every InstaForex trader has access to up-to-date trading technologies such as PAMM system, One Click Trading, InstaWallet, Option trading and InstaForex Mastercard system. All client trading operations and funds are protected by a multi-level security system analogous to that of large international banks. In order to ensure its customers high quality and rapid trading, the company launched seven trading servers and 25 data centres in various points of the globe, with the number of servers increasing to match customer numbers and maintain excellent service.

All this ensures convenient, transparent and secure trading on forex, with traders provided with all the conditions necessary for successful working. They don’t need to think about security of their funds or execution times, or be concerned about keeping pace with new technologies appearing on the market.

The fun in forex
InstaForex cares for those who consider trading to be fun, not mere work. In 2009, the company started a series of campaigns within the framework offering automobiles as prizes. So far two cars have been raffled to the company’s customers: a Hummer H3 and a Lotus Elise. Two more car draws are coming soon.

The Miss Insta Asia beauty contest, a second social campaign, proved to a very popular and successful event. The second season of the beauty contest is now being held with over 400 women from across the globe getting involved.

Additionally, InstaForex has organised many other events and competitions, with an annual prize pool totaling over $500,000.

In 2010 the company created an InstaForex VIP trading community. Called InstaForex Club, its members enjoy more opportunities and preferences, including more favourable terms of participation in automobile draws, supplementary bonuses on every deposit, analytical support, consulting on trading issues and much more.
As evidenced, there is a never-ceasing flow of fresh ideas that drives InstaForex forward. This is what makes it one of the leaders in forex and a reliable partner for hundreds of thousands of traders all over the world.

InstaForex in numbers
– over 350, 000 clients around the globe
– over 150 representative offices in the world
– over $500, 000 annual prize pool in contests
– over 200 new clients daily
– over 10 awards in the financial sector

Downgraded dollar is well deserved

Posted on by

Uncle Sam’s credit isn’t what it was. When Standard & Poor’s put a question mark over the medium-term future of the dollar by placing it on negative watch, it meant the greenback could lose its historic triple A status if the US economy isn’t restored to rude health within two years. In practical terms that means a convincing reduction in America’s chronic deficits.

Unfortunately, recent history isn’t on America’s side in this. Washington’s record on deficit reduction varies from the woeful to the half-hearted, while its stewardship of the greenback’s role as the world’s reserve currency has usually been neglectful or indifferent.

The essential problem is that the dollar’s triple A rating requires a matching sense of obligation in its management. After all, about $4.5trn is held outside America and a downgrading would hurt investors badly.

The fix for a return to a clean triple A isn’t a mystery, but the roots of the problem go back a long way.

President Eisenhower was the last incumbent of the White House to apologise for running a deficit, even though it was a statistically insignificant $3bn.

President Kennedy changed all that with his $10bn tax cut, signed into law by LBJ after JFK’s assassination in 1963. It was the biggest single tax cut in American history and it set a profligate pattern. By the time Ronald Reagan took office in 1981, the economy was running out of control and it took Paul Volcker, the new chairman of the US Fed, to rein in the money supply in the teeth of the furious protests from the business community that always seem to accompany a bout of fiscal discipline in America.

The economy was corrected by the middle of Reagan’s first presidency, but then he spoilt it all by opting for towering deficits again (economics bored the former actor to tears).

When George Bush became president in 1989, he kept up the bad work, running annual deficits of an average $150bn-plus and forcing treasury to plug the gap by raising loans at great cost to the general economy.
Populist politicians with an eye on local votes must take a lot of the blame. When the Fed tightened rates in 1994 during Bill Clinton’s first term, one leading senator got a few headlines by likening this highly responsible action to “a bomber coming along and striking a farmhouse.”

The common denominator in most Americans’ economic views, such as they are, is myopia and insularity. As former Fed chairman Alan Greenspan notes in his fascinating and highly revealing book The Age of Turbulence, “Americans have always resisted the idea that a foreign country’s problems can have major consequences for the United States.”

Rare among presidents, Clinton was a champion of fiscal discipline. By his second term the surpluses were so huge that debt was down to zero. Sure enough, Republican congressmen demanded $800bn in tax cuts over 10 years. Clinton vetoed the bill.

Then George W Bush undid all the good work, declaring “Tax cuts, so help me God,” when he took office in 2000. Within six months federal spending was rampant and the US economy was in the red.

Today, the net result is painfully visible in America’s current account deficit – in effect the reflection of its dollar dealings with the rest of the world. In 1991, the measure stood at zero. By 2006, it was 6.5 percent. This year it will be 10.8 percent, by the IMF’s reckoning.

Here’s a number to ponder. Boosted by massive bouts of economy-pumping quantitative easing, America’s net government debt now stands at 70 percent of gross domestic product, higher than some of the most troubled European economies. It’s little wonder that the BRICS, complaining of “the deficiencies of the current international monetary system,” launched in April a structure for bilateral trading in their own currencies rather than in the dollar.

A crack has been opened in the greenback’s global role, and it can only widen.

Adapt and thrive

Posted on by

Kuwait Investment Company (KIC) is a public shareholding company, incorporated under the laws of the State of Kuwait on 25 November 1961 and listed on the Kuwait Stock Exchange. The company has been a leading player in the investment industry in Kuwait and the GCC over its 50 years of operation, passing through numerous economic cycles and lasting through a host of crises.

For example, the 1982 Al-Manakh crisis brought the national economy to a standstill and helped to push the whole region into recession; while the 1990 Iraqi invasion had a similarly disastrous and long-term effect. Despite these local seismic economic shifts – and global trends such as the 2007 crisis – KIC’s sustainable management and innovative strategies have ensured its position as a sustainable leader in the investment sector.

High diversification
KIC’s processes and focus on training have been key to its success – not least of which has been the company’s ability to strategically restructure and rehabilitate itself to cope with the continuously changing and developing national economy.

The company has ensured that its performance and profits are market-proof, relying on real profits that result from operations and effective performance, as opposed to speculations and market fluctuations. This means variations in stock prices and market volatility do not affect the company’s performance or rating.

This is accomplished through the sheer power of diversification. KIC carries out a wide range of investment and financial activities, providing a diversified package of local and international investment and financial products to a local and international customer base.

KIC introduces this unique blend of best-in-class financial and investment products and services via a specialist network of cross-discipline professionals. These highly skilled and motivated teams are committed to building on the company’s historic success – by producing the best investment suite in the region and therefore the best operating results for the company’s shareholders and customers.

The company has focused its activities in the past year on restructuring its investment portfolio and developing an appropriate strategy to cope with the changing market. Under its new ‘training, rehabilitation and development‘ framework, the company is geared up to take advantage of the global economic instability while looking for safe global investment opportunities. This strategy has given KIC a remarkable flexibility, readiness to market and the acumen to nimbly adapt to any situation.

Institutional recognition
It was this strategy and KIC’s long term leadership position in the investment sector that caused Capital Standards Credit Rating to award KIC a long-term rating of BBB and a regional rating of Akw. This in addition to Moody’s Credit Rating Agency awarding KIC BAA3, reflecting the company’s credit worthiness relative to its peers and competitors.

As of 31 December 2010, the company’s total assets were valued at KD 257m ($771m) and its net assets stood at KD 119m ($357m). The company’s total assets under management were a substantial KD 2.518bn ($7.55bn).

The funds managed by KIC both locally and internationally have consistently achieved positive results and beaten market performance. During 2010, for its local funds and portfolios, KIC’s investment strategy yielded results outperforming most other funds and the market in general.

All KIC’s funds performed exceedingly well, with many surpassing the performance of the index of the Kuwait Stock Exchange. This was largely due to the proprietary formula – based on price momentum and earnings – that was adopted by KIC, and which has yielded many rich dividends and outperformed the market.

The Al-Raed Fund, for instance, achieved 14.88 percent, and the Al-Atheer Telecommunication Fund beat most Arab markets in the region, at 11.50 percent. As for KIC’s international funds, the Global Bond Fund achieved a return of 6.20 percent, while the Pacific Equity Fund aggregated a return of 17.78 percent. The Diversified Fund posted net returns of 9.95 percent, the North American Equity Fund yielded returns of 12.66 percent, and the European Equity Fund gave a return of 10.30 percent. As a group, all of KIC’s funds were rated above average and generated above average returns for the period in question.

Following the global financial crisis, KIC implemented a large-scale operation to renew the organisational structure of the company, restructuring the workforce to enhance its performance. This new strategy focuses on harvesting the strength of the company to achieve enduring success.

Enabling sustainability
KIC has been one of the pioneers in the industry, establishing a risk management office to help create a culture of sustainability. The risk management office was set up primarily to enable the company to sustain its performance, manage growth, and shield the company from risks in the economy. KIC aims to focus on growth by managing risk prudently and thus provide value to its shareholders and clients.

Another striking feature of KIC’s success is its CSR activity. This has been one of the company’s main focus areas throughout its 50 years of operation. The company carries out its CSR activities through a multichannel, multipronged approach. At a national level, it caters to the funding needs of societies such as the Kuwait Handicap Society and several hospitals; while at an international level it extends financial aid in response to natural disasters, such as the flooding in Pakistan. KIC dedicates $150,000 annually to CSR-related activities.

Receiving the World Finance award for Best GCC Fund Management Company 2011, a spokesperson for KIC said, “None of the company’s achievements would have been possible without the trust and steadfastness that its clients and shareholders have bestowed upon it. We would therefore like to express our gratitude to our board of directors for their guidance, our shareholders for their continued trust and complete confidence in us, our customers for their support and loyalty, and our employees for their dedication and tireless efforts in making us what we are – not only in Kuwait but in the whole region.”

For more information: www.kic.com.kw

A dynamic evolution

Posted on by

First Bank of Nigeria Plc (FirstBank), established in 1894, is a premier bank in West Africa and the leading financial services solutions provider in Nigeria. The bank was founded by Sir Alfred Jones, a shipping magnate from Liverpool, UK. With its head office originally in Liverpool, the bank commenced business on a modest scale in Lagos under the name Bank of British West Africa.

In 1912 the bank acquired its first competitor, the Bank of Nigeria, which had been established in 1899 (as the Anglo-African Bank) by the Royal Niger Company. In 1957 the bank changed its name from Bank of British West Africa to Bank of West Africa. In 1966, following its merger with Standard Bank, UK, the bank adopted the name Standard Bank of West Africa Limited and, in 1969, it was incorporated locally as the Standard Bank of Nigeria Limited in line with the Companies Decree of 1968. Changes in the name of the bank also occurred in 1979 and 1991 to First Bank of Nigeria Limited and First Bank of Nigeria Plc, respectively.

FirstBank has international presence through its subsidiary, FBN Bank (UK) Limited in London with a branch in Paris, and its representative offices in Johannesburg and Beijing. With 1.3 million shareholders globally, FirstBank is the second most capitalised stock on the Nigerian Stock Exchange. The bank also has an unlisted Global Depository Receipt programme.

Leveraging experience that spans over a century of dependable service, FirstBank has continued to build relationships and alliances with key sectors of the economy that have been strategic to the wellbeing, growth and development of the country. With its huge asset base and expansive branch network, as well as continuous re-invention, FirstBank is one of Nigeria’s strongest banking franchises, and remains a market leader in the nation’s financial services industry.

Strong returns,  superior value
The ongoing consolidation in the Nigerian financial services sector, which started in 2005, has shown FirstBank to be one of Nigeria’s strongest and most profitable financial services groups.

In repositioning the bank for both domestic and global competition, it had recourse to raise additional capital. FirstBank’s Hybrid Offer, popularly called ‘The Big Offer,’ set an unprecedented landmark with a subscription in excess of 750 percent, and was lauded as the biggest and most successful in the history of public offers in Nigeria. The bank’s epoch-making achievement was again reinforced when it became the first quoted company in Nigeria to achieve the feat of hitting the trillion naira mark in market capitalisation, the clearest evidence of the market’s estimation of its worth.

FirstBank’s strategy is driven by the two critical imperatives of modernisation and growth, both organic and inorganic. The bank’s growth strategy is to leverage windows of opportunity presented by the ongoing reforms in the industry and the global economies, which have allowed it to better position its strengths and value proposition, while raising the industry’s competition stakes.

With over 600 business locations in Nigeria, the bank has one of the largest domestic sales networks in the country, all online and real time. As a market leader in the financial services sector, FirstBank pioneered initiatives in international money transfer and electronic banking in the country, and is arguably Nigeria’s most diversified financial services group, serving more than five million customers.

Progressive globalisation
In its early years, FirstBank worked closely with the colonial governments of British West Africa by performing the traditional functions of a central bank, including the issue and distribution of specie in the West African sub-region. Subsequently, the bank recorded impressive growth, opening its first branch office in Accra, Ghana in 1896, and a second branch in Freetown, Sierra Leone two years later in 1898. By 1963, the bank had 114 branches in West Africa. These marked the beginning of the bank’s international banking operations.

In 2002, FirstBank established FBN Bank (UK) Limited – a wholly owned subsidiary and the first Nigerian-owned bank in the UK regulated by the Financial Services Authority. In 2007, FBN Bank (UK) obtained authorisation to set up its Paris office to serve as a marketing base to service francophone West Africa. FirstBank also has representative offices in Johannesburg, South Africa (established 2004) and Beijing, China (since 2009).

With this global reach FirstBank provides prospective investors wishing to explore the vast business opportunities that abound in Nigeria with an internationally competitive world-class brand and a credible financial partner.

FirstBank has 10 subsidiary companies in Nigeria, which provide a comprehensive range of retail and corporate financial services, including capital market operations, private equity/venture capital, pension fund management, registrarship, trusteeship, mortgages, insurance brokerage, bureaux de change, life insurance and microfinance. These diverse operations, delivered through widespread service outlets, ensure the foothold of the FirstBank group as a leading financial services provider in Nigeria.

A nation-building model
In the last decade, by playing key roles in the Nigerian government’s privatisation and commercialisation scheme, FirstBank has led the financing of private investment in infrastructure development in the Nigerian economy.

A key element of the bank’s strategy is its continued focus on retail banking/consumer financing, gradually shifting towards a high-yield diversified portfolio by aggressively targeting the middle class consumer market.
The market opportunity is evident from the fact that consumer spending – which is a major driver of domestic demand in developed economies – still constitutes a relatively low percentage of GDP in Nigeria.

The business of FirstBank is operated through branches which serve as comprehensive product engines, overseen by business development offices and regional directorates. These are designed to facilitate and give direction to market activities within the region, and to better serve customers nationwide.

Other channels of service delivery include a modern centralised customer response centre available 24 hours, seven days a week (FirstContact), ATMs, internet banking (FirstOnline) and banking on mobile phones (FirstMobile).

Leading governance standards
FirstBank’s corporate governance practice remains at the industry’s leading-edge. Its continuing commitment to strong corporate governance and improved disclosure levels in the reporting of its financials was reinforced in November 2008 when it won the Nigerian Stock Exchange Quoted Company of the Year Award.

FirstBank is one of the first two quoted companies in Africa to adopt the International Financial Reporting Standard (IFRS). Consistent with its pace-setting good governance principles, the IFRS regime facilitates transparency, understanding, relevance, reliability and comparability of the bank’s qualitative financial statements comparable with global standards.

The bank’s prime status has been reinforced with the recent award of the prestigious ISO/IEC 27001:2005 certification, the world’s highest accreditation for information protection and security from the International Organisation for Standardisation (ISO). By this certification, FirstBank has distinguished itself as the first organisation in Nigeria to achieve ISO 27001, which is an affirmation that the bank has adopted and complied with the highest known standards in information security globally.

Strength in people
As the bank grows its footprints locally and internationally, contributing positively to its customers’ value chains, it hires personnel with the unique skill sets needed to fully leverage its operations. FirstBank is one of the leading private sector employers of graduate-level personnel in the country.

FirstBank’s staff development policy recognises the invaluable contribution that human resources make to growth and development. Consequently, its human capital management initiatives are focused on providing the necessary support for staff, departments and various business drivers to enable the bank to achieve its goals and objectives.

Industry support
In further evidence of the bank’s strength, Standard and Poor’s and Fitch, have rated the bank highly. Standard and Poor’s assigned the bank a long term rating of BB- and a short term rating of B, mirroring the country’s long term BB and short term B ratings by the same agency. S&P notes that “the ratings on FirstBank are supported by the bank’s good market position, adequate capitalisation and moderated financial performance.”
Fitch assigned the bank ratings of B+ (long term) and B (short term), while also affirming the bank’s A+ and F1 (nga) national long-term and short-term respective ratings for the past seven years up to 2009.

Global Credit Rating Company Limited, a Securities and Exchange Commission licensed rating agency, also assigned the bank national long-term and short-term ratings of A and A1+ respectively, with positive outlook, for three successive years.

FirstBank has indeed reinforced its role as a leader in the financial services sector in Nigeria and sub-Saharan Africa with activities and interventions to depict the brand pillars of Leadership, Enterprise, Safety and Security, and Service Excellence.

And the bank has received recognition for its achievements. FirstBank was first listed on the Nigerian Stock Exchange in March 1971 and has since won the exchange’s annual President’s Merit Award for the best financial report in the Nigerian banking industry 13 times. The bank has won the Global Finance magazine awards for Best Bank in Nigeria, Best Trade Finance Bank in Nigeria and Best Foreign Exchange Bank in Nigeria for six consecutive years, as well as EMEA Finance Magazine award for Best Bank in Nigeria in 2009 and 2010.

Grasping the strategic opportunities from Solvency II

Posted on by

It is now 18 months before Solvency II, the new solvency regime for European insurers and reinsurers, is due to come into force. Insurers have been preparing for a long time, in some instances many years, to implement the regime which will come into effect on 1 January 2013 and which will have far-reaching consequences for those trading in Europe. Financial institutions will also be indirectly affected as they will need to adjust their businesses to meet the changing needs of their insurance clients.

At its heart, Solvency II aims to implement solvency capital requirements that better reflect the risks insurers face, encouraging them to implement appropriate risk management systems and sound internal controls and introduce improved transparency through consistent public disclosure of capital and risk information. It also delivers a supervisory regime that is harmonised across all members of the European Economic Area, providing a consistent level of policyholder protection.

Its impact will also be felt beyond the EEA, as similar models are being implemented or considered elsewhere, such as in Bermuda and South Africa, because of the perceived benefits in having a regime that is equivalent to Solvency II.

The rules are still being finalised and it is likely that a number of Solvency II’s provisions will be phased-in over a number of years to allow an orderly transition into the new regime. But forward planning for capital adequacy and risk management will be vital in order to satisfy the new regime. Investment banks and asset managers should also be considering the strategic opportunities for their businesses to provide products and services that meet the Solvency II requirements of their insurance clients.

A changing strategic landscape
Effective compliance is not the only objective for European insurers: Solvency II has significant strategic implications and presents opportunities for companies to add considerable value to their business. So while companies must not only work to become compliant with the rules, they should also consider the potential long-term impact of the regime, and the strategies necessary to ensure success once Solvency II has gone live. Insurers should therefore, if they are not already doing so, reassess the broader capital and risk implications of Solvency II on their businesses, and plan to harness the opportunities that this new regulatory regime will generate. There are four key dimensions which should be considered.

1 Product portfolio
One area that insurers should be looking at is their portfolio of products. Certain product lines will become more capital intensive under Solvency II, such as annuity business and long-tail liability lines like employers’ liability insurance. In order to become more capital efficient, insurers should consider how they allocate capital between the different product lines in their portfolio and the returns they are generating.

This may mean reducing exposure to the more capital intensive lines, or even exiting some of those lines completely, while increasing the emphasis on products requiring less capital such as personal lines.

Alternatively, for some, it may lead to a conscious decision to engage in more capital intensive lines, where risk-adjusted returns on capital are particularly attractive.

2 Corporate structure and location
Companies may also seek to generate capital efficiencies by changing their corporate structure. Groups with subsidiaries in a number of European countries may find that it is more efficient to restructure from a holding company and subsidiary arrangement to a head office and branch structure, which enables capital to be more easily transferred around the group. This may be of particular relevance where a company has grown through acquisition and capital is tied up in legacy companies.

But such restructuring is complex and can be a lengthy process. Furthermore, a branch structure may be less suited to certain types of business, such as personal lines – where consumers may feel more secure, perhaps influenced by their advisers, with a domestic legal entity. Additionally for life insurers, local regulations (such as on how profits are shared with policyholders) may make the transfer to a branch structure a particularly complex task.

The capital demands of Solvency II may lead international insurers to consider the global allocation of their capital, potentially reducing their emphasis on Europe, and instead turn to markets such as Asia where there is potentially a greater return on capital. Insurers should also be mindful of investors’ objectives, as Solvency II will increase the level of transparency in relation to the performance of the business.

Some companies have talked about re-domiciling to a non-Solvency II jurisdiction in order to avoid the compliance burden, but whether this is a realistic strategy remains to be seen. Other companies are considering mergers and acquisitions in order to improve their capital position. Mutual insurers, which are prevalent in Europe, particularly in France and Germany, may find this an attractive strategy; these companies often find it difficult to raise capital and, as they tend to be smaller, have a disproportionate cost of compliance and lack the benefits of diversification.

3 Capital structure
Companies may have to reconsider their capital structure. Solvency II introduces a tier-structure model to rate the quality of capital instruments and align this to capital requirements; some existing hybrid debt, for example, will not be eligible as Tier 1 (highest quality) capital and will have to be replaced by new Solvency II-compliant instruments.

4 Investment strategy
Solvency II also has implications for insurers’ investment strategies and will lead to a much greater dialogue between an insurer and its investment management function.

Solvency II requires a higher level of capital to be held against certain investment types: equities, property and long-dated bonds attract a higher capital charge than short-dated or EU government bonds. This will particularly penalise life insurers, which tend to use equities and longer-dated instruments to hedge against any inflation.

As a result, companies may need to adjust their investment portfolios in order to make them more capital efficient. An increased use of interest rate derivatives to hedge against inflation could be a possible scenario to achieve greater capital efficiency, although it should be noted that there are capital implications of using such instruments which may offset the potential gains.

The volatility of assets and liabilities is an important issue for insurers as this will affect the capital available for determining an insurer’s solvency position.

Solvency II uses a market-consistent ‘economic’ approach to valuation of assets and liabilities, which means that a firm’s available capital can fluctuate as the market value of those assets and liabilities changes.

Life insurers often hold long-term, illiquid assets which can be subject to big swings in value, and in some European countries embedded guarantees within products can lead to increased volatility in an insurer’s liabilities. It will therefore be important for insurers to pay attention to the pricing and management of their assets and liabilities in order to smooth their capital position.

New tools for strategic views
Looking beyond the macro issues, there are also opportunities for insurers to derive significant value from some of the operational elements of Solvency II. One such area is the Own Risk and Solvency Assessment (ORSA), which firms are required to undertake as part of their enterprise risk management process. The ORSA is the mechanism by which the board satisfies itself that it has a process to manage, in line with its risk appetite, the current risks to the business and the future risks arising from the business strategy, and that this process works in practice. It is the firm’s economic view of the capital required to run the business, irrespective of the capital requirement set out by the regulators.

The ORSA can be a powerful tool when linked to the strategic planning process, as it provides a forward-looking view of how the risks to the business will evolve. To take full advantage of it as a strategic tool, it is important that the board and senior managers understand it so that they can use it in decision-making. It must also be simple enough to provide answers within a short enough timescale to assist management in their analysis, and it must have the capacity to evolve in response to changes in the company’s strategy.

Synergies with IFRS 4 Phase II
A further area where benefits can be achieved is through aligning the reporting requirements of Solvency II with those of the new international reporting standards for insurance contracts (IFRS 4 Phase II). IFRS 4 Phase II is likely to be implemented in January 2015, although this has yet to be confirmed.

The two structures are predicated on a similar model, whereby valuations are based on the present value of expected cash flows and a risk margin liability. Solvency II focuses on capital, while IFRS 4 Phase II focuses on profit.

Both regimes increase the level of reporting transparency, which should make it easier to understand the risks on the balance sheet. This has benefits in that it could help insurers raise capital as investors can more easily understand the company’s performance, something which investors have historically struggled to do.

By developing a single, integrated reporting model for Solvency II and IFRS 4 Phase II, insurers can extract significant synergies in data management, modelling and investor relations. For those firms that do not have the resources or expertise to do this, then a model based on Solvency II but validated in light of IFRS 4 Phase II requirements would provide some of the efficiency gains of an integrated model.

Technology as an enabler
There are challenges to delivering a strategic solution to Solvency II and IFRS. The Solvency II programme must be seen as an integral part of the business and be underpinned by an appropriate operating model, which should include technology design, delivery and a maintenance framework. The programme requires a clearly defined and targeted approach, with architecture that can be delivered in segments.

Technology has a key role to play in delivering business compliance with Solvency II and for most organisations this will mean implementing significant IT, process and organisation change. This is an opportunity to invest in a strategic solution that can add wider value to the business beyond that which could be achieved through a tactical response. These benefits can include improved risk-based business planning, more active product governance and superior customer management.

A further challenge in implementing Solvency II is the need to bring together actuaries, finance, risk, business stakeholders and IT teams. There is a tendency for these groups to operate independently, which can make implementation difficult and limit the benefits that can be achieved. To realise real benefits these departments must work together effectively.

Beyond insurance
While Solvency II may be an insurance regime, it has implications for financial institutions that provide services to insurers, as they will need to respond to the changing needs of their clients. Solvency II presents firms such as investment banks and assets managers with the opportunity to provide tailored Solvency II solutions.

With the changing capital requirements, asset managers will be able to develop products that are more closely aligned with insurers’ needs. They should also be looking at the forthcoming data and reporting needs of their insurer clients and should make the necessary changes to ensure their systems can deliver the required information. If major IT changes are required then the work needs to begin now.

There will also be opportunities for investment banks to provide services to insurers in areas such as M&A and capital restructuring that may arise as a result of Solvency II.

Preparing for 2013
So what should insurers be doing now to maximise the value from the Solvency II regime and the investment they are making to comply?

It should go without saying that companies should be doing everything required of them to achieve compliance with the new regime, such as building their internal models and embedding risk management in the organisation. Despite some uncertainties, the rules are known well enough for detailed preparations to be made, but a close watch should be kept on how the regulations are developing, particularly in those areas where clarification is needed.

Insurers should also be assessing how Solvency II will affect their product lines and investment portfolio. Where there are areas of uncertainty in the rules, scenario planning should be undertaken so that the potential outcomes have been considered and decisions can be made quickly once the rules are finalised.

There is a risk that a herd mentality will ensue once the rules are clear, so it is desirable to have planned a course of action to avoid being caught up in a stampede in or out of certain product lines or asset classes.
Solvency II programmes tend to be led by the finance, actuarial or risk teams, so it is important that the commercial side of the business gets involved so it can understand the implications on the organisation.

The extent to which certain aspects of the rules will be phased in adds an additional layer of uncertainty. It is still not clear which areas will benefit from a transitional period and how long each of these periods will be. This uncertainty may not be resolved until Q1 2012, so insurers should consider how the various possible outcomes will affect their decision-making.

It should also be remembered that Solvency II is being developed against a political backdrop, so the rules in certain areas may not be finalised until late in the process. Insurers should take this into account in their contingency planning.

Ultimately, the full implications of Solvency II may take time to manifest. If the economy and the insurance market are healthy in 2013 then capital levels will not be of concern. But if the markets are troubled then capital will be more of an issue. The transitional measures, which could delay elements by as much as 10 years, will also draw out the impact.

Insurers should consider now the strategic opportunities that can be gained from Solvency II, assessing the potential implications on their business model and how best to capitalise on the new regime as its detail becomes clearer.

While it is important to maintain focus on the important operational elements, there are potentially major gains to be had for those firms that take a strategic approach to Solvency II.

Michel de La Belliere is Deloitte’s EMEA Solvency II Lead Partner. Rick Lester is Deloitte’s UK Solvency II Lead Partner.

For more information: mdelabelliere@deloitte.fr; +33 1 40 88 29 95 rlester@deloitte.co.uk; +44 20 7303 2927

Other available media:
Michel de La Belliere and Rick Lester discuss Solvency II with World Finance’s Nick Laurance (7m 47s, mp3, 7MB)
Francesco Nagari explains the similarities between Solvency II and the IFRS changes (3m 26s, mp3, 3MB)

Sinosteel halts Australian $2.1bn iron ore project


Posted on by

Chinese iron ore trading developer Sinosteel Midwest suspended work on its $2.1bn Australia-based Weld Range iron ore mining project due to uncertainty surrounding the proposed Oakajee port and rail project.


The $5.2bn joint venture between Mitsubishi and Murchison Metals has been inundated by delays recently and Sinosteel, one of the largest investors by a Chinese company in Australian mining, said it will halt the project until certainty surrounding the port development is resolved.
Continuous delays saw the completion date for the port move from its forecast in 2012 to 2015 and have cost an estimated $100m a year, Sinosteel said.


The COO of Sinosteel, Julian Mizera, said: “We are certainly not closing the door on Weld Range, however we must make the right business decisions in order to protect our assets and ensure a realistic future for our organisation.”

‘Pillars’ strategy pays dividends

Posted on by

As a leader in the Mexican market in investment banking, government banking and infrastructure project finance, Banco Interacciones has provided its clients with tailor made solutions for the last 17 years.

Banco Interacciones is celebrating its first 17 years as a part of the Mexican financial landscape, a period characterised by continual growth, perseverance and learning. The bank is the fourth largest creditor to the Mexican governments (be it federal, state or municipal), and these types of markets have payment sources with the lowest credit risk which allows the bank to maintain a healthy balance and a high degree of payment certainty for its loan portfolio.

The bank is a major player in the niches it has carefully selected; these niches demand a high degree of specialisation in designing flexible financing mechanisms. Banco Interacciones is dedicated to those niches where its experience and high quality services can create the most value to its clients.

Having a very well defined strategy and adhering to it in a strict way, the bank has consistently recorded new highs in Credit Loan Portfolio, Total Assets, Total Revenue and Net Income year after year.

Measured by profitability, Banco Interacciones has ranked among the top three banks in Mexico for the most part of the last five years, having had a Return on Equity (ROE) of over 20 percent annually over that period, being 26.11, 29.00 and 22.94 percent for 2008, 2009 and 2010 respectively.

Despite the great results the bank has achieved, Banco Interacciones is aware of the constant challenges that a global economy possess and is always on the lookout for new opportunities that emerge in the financial markets. That is why by the end of 2010 the bank started a new strategic plan called “V4, transforming for transcendence and sustainability,” a four year plan aimed at strengthening the key aspects for building a better bank. Focused on Corporate Governance, Internal Control, Information Technology and Processes Reengineering, “V4” will lay the foundations upon which the bank will operate in the future.

This plan is built around three main pillars: process reengineering, funding and growth and results optimisation. These pillars are divided in 17 strategies (or circuits) which are designed to bring greater stability to processes, services and products.

After the first six months of the plan, the bank has started to be ruled by processes, to increase its liquidity and to expand its presence all across the Mexican territory.

Through Process Reengineering, the management is creating a mindset that is leading the bank to greater efficiency. Making a complete assessment of the things as they function right now, the team’s project works towards the way they should be: business process management.

The second pillar, funding, has managed to broaden the spectrum of financing sources for the bank. In the last few months, Interacciones has had three successful issues for a combined $320m. These issues have produced a slight increase in the funding cost but in exchange, allowed the bank to increase its liquidity to levels well above those expected by this time of the project.

The third pillar, regionalisation, aims to duplicate the strategy implemented in Mexico City all across the country. The main focus is to make available the expertise and confidence that the bank’s team provides to every local government. Through seven region offices, the bank aims to offer one on one attention to every potential client.

Within these strategic guidelines, Banco Interacciones is ready to expand its markets and products and it is ready to explore new opportunities as they present in the ever changing financial markets.

Banco Interacciones owes its solid growth to a clear and well defined strategy based on its deep knowledge of the market, stemming from being a Mexican institution, and it is dedicated to support the development of the country and to raise the quality of life of the Mexican people.

For more information Email: iro@interacciones.com; www.interacciones.com

Change is the only constant

Posted on by

From a humble beginning as a trading house in 1977, Al-Tuwairqi Holding Company (ATH) is now one of the leading businesses in the Kingdom of Saudi Arabia.

The company has shown a phenomenal growth over the last two decades and today is among the top five private sector industrial concerns in the Kingdom.

Dr Hilal Hussain Al Tuwairqi, the chairman of ATH, has developed the company into a well-known name in Saudi Arabia, mainly due to its large-scale steel manufacturing activities – its primary focus being the steel sector – but also in a number of related engineering fields after successfully diversifying the business.

Growth and expansion
The company has grown and expanded vastly since its emergence in 1977, Dr Tuwairqi explains. “Change is the only constant in Al-Tuwairqi Holding,” he says.

“We always remain focused on developing, as far as possible, the know-how in-house, while continuously striving to remain abreast with the latest technologies, in order to remain competitive and overcome the challenges of a cut-throat competition in today’s competitive world.”

Whatever ATH earns, Dr Tuwairqi explains, is primarily re-invested for augmentation in capacity, modernisation, automation and expansion projects.

 “In steel manufacturing, we firmly believe that our value addition chain must be complete, starting from the mining of the basic raw material up to the finished products directly going into the hands of the end users.”

Core values
The company’s core values of honesty, integrity and team work are  reflected in everything ATH is involved with.

“Al-Tuwairqi Holding basically is a pro-people organisation,” Dr Tuwairqi says. “We have this strong faith that human resource is the true asset of any successful organisation, and the human resource develops and nurtures in a work culture of trust.

“As management our job is to provide an ‘enabling environment’ and inspire in our people our core values, leading of course by example,” he says. “Making profits and reasonable profits, we cannot deny, is the motive of any commercial organisation. And the same applies to us. As without it, both survival and expansion is not possible.”

Family values are also very much present within the company and are adhered to as much as their work ethics.
Once the core values are properly adopted as a work style, Dr Tuwairqi says, the people working with Al-Tuwairqi Holding become more than simply employees: they become the family members of Al-Tuwairqi.

“That’s the reason that those who share the vision, mission and the value system of Al-Tuwairqi, are always considered and treated as the members of Al-Tuwairqi family,” he says.

“However, our primary focus always is to carry out a successful venture and money comes as a by-product of a successful business. Our aim and objective always is the well-being of the people working with us, besides their intellectual, technological and career growth.”

Commercial integration
Since the very beginning and the emergence of ATH, the company has always managed to focus on, and contributed to, the commercial integration with GCC and the Middle East, devising a step-by-step strategy to achieve this.

“In the first step, we focused on the Kingdom and then started diversifying to the GCC. Today ATH has gone beyond the boundaries of Saudi Arabia and encompasses areas of the Middle East, South Asia and Europe.”
To be truly commercially integrated, ATH always supported the bilateral trade among GCC and the Middle Eastern countries and extended the same working and growth opportunities for all the citizens of the GCC countries, without any distinction or discrimination. 

“We will continue our efforts for greater integration of business and commercial activities in the GCC, and to promote the benefits of increased efficiency of production, through an optimum utilisation of resources,” says Dr Tuwairqi. “Knowledge always increases through sharing and whatever knowledge we have, we always love to share that with the GCC countries and Middle East as a region. To achieve this, I opted to become Chairman of the Arab Iron and Steel Union.”

Technology advances
ATH has always been very technologically advanced, but of late, the company has experienced a number of communication resource advances.

“All our manufacturing processes are cutting edge and state-of-the-art technology based, comparable to any international steel manufacturing companies.”

ATH has now launched an applied research centre, along with a technology centre and a design and engineering house, all geared to offer these engineering services to other companies in Saudi Arabia, UAE and Pakistan, with plans to expand into other regional countries.

‘Making a difference’
Every company also has its social dimensions, and corporate social responsibility has become an integral part of business today. Having become one of the largest business houses in the Kingdom, Al Tuwairqi Holding has not overlooked the expectations of its stakeholders, and realises its national and moral obligations.

“With a strong sense of corporate social responsibility, we at ATH believe in making a difference in lives – a difference that is able to permeate the very fabric of society towards uplifting the economic well-being of the people wherever they are,” says Dr Tuwairqi.

“We are one of a few companies in Saudi Arabia to start renewable energy projects, such as solar and waste-heat recovery from our process-gases. We are also working to capture carbon-dioxide from our sponge-iron factory to contribute positively for the reduction of carbon-dioxide gas.”

Innovative social responsibility
When it comes to CSR, ATH takes a number of measures to ensure it acts responsibly.

Dedicated to achieve service and technical excellence, the group envisages an image that constitutes its core strength and basis for a growing base of satisfied customers. ATH is one such major business enterprise that has taken a passionate and innovative approach to social responsibility.

“We don’t compromise on the environment aspect of the technologies in use; we set up business units by investing heavily in developing countries like Pakistan, participate heavily in philanthropist activities and proactively contribute to job creation in the MENA region,” says Dr Tuwairqi.

“Our long-term vision is to create a better cost-effective community and reduced wastage of human capital, which reflects our determination in building an economically and socially balanced society.”

Sustainability goals
The phenomenal growth of Al Tuwairqi Holdings is based on the principles of sustainable development with high-technology value-added engineering industries. While keen on further consolidating its position in Saudi Arabia, the company is focused on geographical and commercial diversification of ATH. Accordingly, ATH has developed strategic alliances with the world’s leading industrial and trading houses.

“ATH is internally consistent and externally a credible name in the business circles and therefore we foresee similar growth and expansion in future,” says Dr Tuwairqi.

“Our latest approach is to develop competent young, qualified entrepreneurs, with seven to 10 years experience, within the group, giving them management and financial support and training them to manage medium-size local manufacturing companies.

“Through this concept, we hope to provide sustainable employment opportunities to the maximum number of the local people and help in developing middle class based societies in each country we operate in.”

Environmental practice
Sustainable enterprise means combining economic success with environmental protection and social responsibility, according to Dr Tuwairqi, thus contributing to a future worth living for coming generations.

“ATH is fully committed to the environment friendly practices related to material handling, production and waste disposal methodologies.

“Major steps taken in this direction by us include the availability of detailed and clearly understood guidelines on the Environmental Performance Indicators related to particular matters; integration of various units in the steel production chain to form an integrated steel complex – thus reducing the atmospheric emissions and wastes – and a focus on alternative methods, technologies, designs and procedures to minimise the adverse environmental effects associated with steel complexes. 

Loyalty, success and prosperity
So why is ATH so successful in its field? Dr Tuwairqi explains that he is inspired by religion and his company’s success is ultimately down to having faith in people.

“Al-Tuwairqi primarily is a pro-people organisation, and as our business is mainly focused on steel, we derive strength from a verse in the Quran, which says ‘There is strength and benefits in Hadeed [steel] for mankind.’

“We have a firm belief that we can only accrue the benefits of Hadeed, if we remain faithful to our people, who endanger their lives and work right over the places where molten metal and red hot iron is being handled,” he says.

“Our loyalty with these people in fact is a loyalty with the steel, and the loyalty with the steel automatically brings success and prosperity to the company.

“This success means monetary benefits have to be shared by all. That’s what we believe, and that’s what we do, by adequately sharing our profits with the members of the ATH people. This is the key to our success.

“Together we have, together we are, and together we will continue making the difference.”

Oil demand rewards MENA economies

Posted on by

If 2009 was the ‘Year of Hope,’ then 2010 will be remembered as the rather less pithy, ‘Year of Continued Recovery.’

Investors across the globe were seen eagerly reading and reacting to the various economic swings in various financial hubs while hoping that governments would properly prepare to tackle the many issues highlighted by the credit crisis.

Hopes of improving trade in terms of surging exports from emerging economies, better earning realisation by global companies and a continued pattern of new job creation has allayed fears of a global double-dip recession as the world economy experienced recovery in 2010.

However, the world is not immune to the plague of financial crisis, as each economic zone has faced inter-related economic problems. The western markets from the US to Europe have been focused on housing, debt and unemployment issues; in Asia, there has been concern around the massive influx of foreign institutional investors into the markets, pushing many of them up to new post-crisis highs. However, the quick market surge imported accelerating asset prices – causing a new potential real estate bubble and burgeoning inflation.

The Middle East was also affected by the depressed state of real estate prices: over-supply of commercial property, debt-restructuring by investment companies and cheering oil prices in the context of a weak dollar remained the year’s key concerns.

The Kuwait Stock Exchange in 2010
The Kuwaiti market witnessed quick-fire sessions and its weighted index cruised successfully on a critical level of 400 during the early part of 2010. The surge was largely driven by stable oil prices, better corporate announcements and the success of the valuable Kuwaiti-Corporate deal of selling the African assets of Kuwaiti telecommunications company Zain to the Indian firm Bharti Airtel. However, during Q210, the euro debt crisis emerged in Greece, prompting fears of possible debt defaults by the eurozone and taking its toll on the regional markets as well as the Kuwait market.

Battered by European debt uncertainties and a liquidity flight, the GCC markets were further shaken by looming concerns over proper debt restructuring procedure by local companies and adverse ratings by S&P and Moody’s on local Kuwaiti banks.

However, the Kuwait market reversed its direction in July, mainly sourced through better corporate earnings for H1 2010 and positive economic news – especially the government’s decision to invest KWD30bn in a new mega-infrastructure plan. This came as a major relief to the market and particularly to the banks, which learned that they would be funding the development.

Other positive business news that boosted investor confidence included rumours of an Emirati investor expressing an interest in a stake of National Bank of Kuwait, the country’s largest bank; recovery in property sales; the purchase of 39.2 percent of Gulf Insurance Co to Canadian company Fairfax Financials Holding; and Emirati telecom giant Etisalat offering $10.5bn for a 46 percent stake in Zain.

Steered by all these positive developments, the market recouped its earlier losses and the index peaked at 487.25 on December 27. The weighted index finished the year with impressive gains of 25.51 percent, making it the top performer in the GCC.

However, the KSE Price Index, the exchange’s main index, ended the year almost flat, losing 0.71 percent of its previous year closing due to weak performance of small and mid cap stocks. Meanwhile the Islamic Index (the Muthanna Kuwait Total Return Weighted Islamic Index, or MUDX) outperformed its conventional partner, witnessing a smart growth of 7.75 percent to close at 637.99 – a decent gain of 45.86 points over 2009.
Sector-wise, the banking sector topped the performers list, finishing the year at 11,893.50 – 3,547 points (42.5 percent) over 2009. Conversely the real estate sector continued to face discrimination and lost confidence from investors, ending the year down 436.5 points (15.63 percent) at 2,355.70. Islamic sectors followed the same trends as the conventional market, with just three sectors ending the year with positive growth.

Market capitalisation
A downtrend in market capitalisation was finally reversed after two years of decline, primarily due to strong performance of large market cap stocks as reflected through the performance of the KSE Weighted Index. But despite solid gains and new listings, the market is still 36.82 percent below its 2007 peak of KWD 57.59bn. The gain in market cap was largely driven by the banking and services sectors, which grew by 45.5 percent and 27.4 percent respectively during 2010.

Kuwaiti Economy
Kuwait’s key income stream – oil – enjoyed an uptrend from March 2009 and ended the year at $80/bbl, forcing economic houses to reassess their growth forecasts for Kuwait and other oil exporting countries. This trend continued through 2010, and the per-barrel price breached the significant psychological level of $90 by December – a boon for the real GDP growth of small but oil-rich Kuwait. The IMF projected Kuwait would post 2.3 percent GDP growth for 2010, but it is likely to grow by around 3.5 percent due to the higher oil prices (oil contributes 94.5 percent of total exports and around 60 percent of GDP) for FY2010.

Despite the healthy economic outlook, Kuwait needs to work hard to develop its non-oil sectors if it is to sustain economic growth. Its dependence on the energy sector means that any significant global developments will have a deep impact on the region’s economy. The recent World Energy Outlook summarises how emerging markets are exerting tremendous efforts to pursue green energy instead of relying on oil. Moreover, the outlook for 2011 also depends on the status of Europe, the GCC region’s biggest trading partner. The weakening US Dollar (due to mounting debt and quantitative easing) also carries significant risk to local currency’s purchasing power and this may put further pressure on the Central Bank to use existing reserves, in a bid to keep away fluctuations in currency exchange regime.

Economic lifeline
Fluctuations in the Kuwaiti stock exchange – and indeed in markets throughout the GCC – tend to follow the variations in the price of oil. Saying so, Oil can be termed as “lifeline” of the Kuwaiti economy, which performed better than expectations, in 2010. The commodity moved into a higher range of $80 by Q110, but the eurozone debt crisis restricted oil rising further and brought the level price down to $64.75 in May.

However, healthy GDP numbers from the emerging economies and strong manufacturing data from China, a major crude oil importer aided the product to traverse a level of $90 later during December 2010.

By the end of 2010 oil had clocked a robust gain of 202 percent from its all-time nadir ($30.28 in December 2008) – but was still around 37 percent lower than its historic peak (at $145.31), in the height of the financial crisis. From an angle of pure commodity investment this gap leaves the door wide open for further gains because most of the compared assets in equities – emerging markets – have either hit their multi-year peaks or about to do so.

2011 outlook
Going forward, 2011 carries a mixed bag of hopes and fears amid an array of continental developments. As the economic situation worldwide continues to improve, oil demand will rise – especially in emerging markets, which are expected to contribute 75 percent of total global economic growth in 2011.

Surging oil prices will contribute a surplus to Kuwait’s trading account, driving its economy to register healthy growth for the second consecutive year. And in such a favourable scenario, we expect the government to divert the oil-dollar windfall towards infrastructure projects, as approved under the first Five-Year Development Plan (and its successor, announced this year) – thus diversifying away from oil and safeguarding a sustainable future.

Shoyeb Ali is VP of the Investment Research Department at Muthanna Investment Co.

The unwavering value of precious metals

Posted on by

Gold and silver have undoubtedly been the focus of investors over the recent months. The price of gold increased by more than 27 percent in a year, and silver has gone from less than $20 an ounce in September 2010 to more than $49 in April 2011, an increase of over 140 percent. Investors, policy makers and business leaders are all intrigued by the factors that have contributed to this rally. In this review, I explore some factors that have historically impacted the prices of gold and silver and look at their current combination.

The noble metal
The increasing demand for precious metals is certainly a factor, but the demand for gold is largely driven by changes in investment. Use in jewellery, medicine and technology account for just a small portion of market demand. Like most other precious metals and unlike other commodities like oil, gold is not destroyed when used and can be recycled without losing its value.

However, producers determining the supply side of the market have limited ability to adjust output levels. Proven gold reserves are scarce, and the sector is capital intensive, requiring sizable investments in technologically complex extraction methods as well as time. It is common to prepare a goldfield for years before a mine can be exploited. When producers are unable to meet the increased demand, prices surge to offset the demand level. Although supply can be affected by sales of existing gold reserves by central banks and institutional investors, production determines the market growth in terms of volume.

The demand for precious metals as an inflation-protected store of value and a perceived safe asset has driven gold prices. India has traditionally been the largest importer of gold, with 624 metric tons in 2010 – interestingly not for industrial purposes, but for cultural and religious reasons. China has more recently become a major importer of gold, while being the world’s largest producer – its imports increased fivefold in one year to reach 209 metric tons in 2010. The World Gold Council now expects China to overtake India as the largest importer of gold in 2011.

This increased appetite for the precious metal is driven not only by inflation fears, but also by the increasing wealth of the population. The demand for gold as an inflation-protected store of value and a perceived safe asset has an impact on gold prices.

The Chinese now have access to investment funds permitted to invest in gold on the international market. Private investors can also hold instruments based on the value of gold. Although gold investment is not openly encouraged by the government, it is available to proactive private investors. This trend will contribute to a shift in demand for gold on a global scale in the coming years.

A core asset
The world demand for gold is also driven by the overall shift to precious metals as an asset class in investment portfolios of Western individual and institutional investors. According to the World Gold Council, investment demand for gold stands at 31 percent as of 2010. Cost effective investment instruments, such as ETFs issuing securities backed by physical stock, make ownership of gold and silver easier. ETFs are traded like normal stocks during trading sessions, allowing flexibility and making exposure to precious metals possible for a large group of investors. The largest gold ETF, SPDR Gold, now holds 1,229 tons of gold compared to 1,143 last  year, and 1,104 tons in 2009.

In developed markets, investors have traditionally used precious metals exposure as a safe asset in times of financial crisis or constricting economies. Increasingly though, institutional investors consider gold as a long term capital growth asset. The lack of dividends or any other cash flows have kept gold out of the core assets of institutional investors’ portfolios. The consistent appreciation of the metal – most notably over the last decade – is turning the balance. Pension funds, such as the Teacher Retirement System of Texas, have started expanding their gold assets to a core holding in order to benefit from its long term appreciation and to reduce portfolio volatility. The traditional use of gold in a portfolio to hedge against inflation and as a low-risk asset has now changed to that of a core asset class.

Once again, gold became a safe haven for investors as revolutions swept through the Middle East, similar to the time of the Arab-Israeli war. Between 1970 and 1972, the price of gold reached a local maximum of about $200 per ounce, up from $34 an ounce. In 1979, the political unrest in Iran contributed to the dramatic increase in gold price to over $800 an ounce, the highest ever price in real terms. The fact is that one cannot ignore the impact of political events on asset prices and our ability to assess the dynamics of the precious metals market.

Political impact
The relationship between gold prices and the US dollar has been consistently inverse. At times of a weak US dollar, gold and other precious metals have consistently shown an upward trend. Gold, as a commodity with strictly limited supply, is priced in terms of a currency, which is subject to monetary policy manipulations.

The monetary and fiscal stimulus programmes that governments all over the world introduced in response to the global recession have increased liquidity and monetary aggregates. Most notably, the quantitative easing programme of the Federal Reserve made capital available and cheap at a near zero interest rate level. In an environment of low interest rates, the opportunity cost of holding gold, which does not bear dividends or interest, is relatively low. The ensuing inflationary pressure is an inevitable by-product of this policy, as it targets a renewal of economic growth.

A traditional function of gold has been as a hedge against inflation within a diversified portfolio. Increasing fears of inflation pushed more investors to expand their holdings of gold, causing a powerful shift on demand for gold. The rally of gold price over the past two years was to a great extent due to the fear of and protection against inflation.

Silver rush
Within the precious metals group, silver outshined gold. Over a time horizon of just nine months, the price of silver has risen from $20 an ounce range to nearly $50, a growth of over 140 percent compared to just 20 percent for gold. Silver has been considered a more affordable store of value, thus accessible to a larger group of people. This, combined with the abundance of investment vehicles that made holding silver as an asset relatively easy, drove the demand for the metal more aggressively.

Another factor contributing to this trend was the industrial application of the metal. While just 13 percent of demand for gold comes from medical and industrial application, silver is widely used in optics, for its reflecting properties, and electronics, for its exceptional conductivity. These two sectors accounted for more than 60 percent of silver demand in 2010, according to the Silver Institute in Washington DC. Silver benefits substantially from being a store of value as well as an industrial commodity – many investors have recognized this advantage and are betting on continued short and medium term appreciation of silver prices.

Market outlook
The fundamental factors that have been driving the rally in precious metals are still present and are likely to remain active in the short and medium term. Fears of market instability originating from the Middle East remain high, with the crisis in Libya in a deadlock. The potential impact of political instability in the region, which provides a sizable part of the world’s supply of oil, is daunting. Escalation of the crisis can slow the pace of global recovery and reinforce the fears of investors as they consider adjusting their portfolios by moving away from gold to equity.

The near zero interest rate policy of the Federal Reserve is likely to continue in the foreseeable future as the US recovery is slow, not irreversible, and with a persistent high unemployment. The recent downgrade of economic outlook in the US by S&P further deepened the lack of confidence in the US dollar. This will also drive investors further to the safety of the ‘ultimate currency’ – precious metals.

Furthermore, we should not forget the fears caused by the sovereign debt crisis in Europe. The government bonds, which were previously perceived as near zero risk instruments, now carry high risk premiums causing capital flight to the safety of precious metals.

Re-establishing stability requires time. Meanwhile investors are likely to keep their preference with the precious metals. Growing imports by China and India, increased acquisition of precious metals by central banks, and pension funds will be a key factor determining the dynamics of the gold price in the medium and long term. Considering the economic forces in play and fears fuelled by political instability, the growth of precious metals is far from over. Unlike the past, this time we may even witness a long term shift in the perceived role of gold as an asset in private and institutional portfolios. After all, gold has retained its purchasing power for centuries. Few currencies can compete with this.

Svetoslav Georgiev is Chief Market Analyst for Hantec Markets

A safety net with options

Posted on by

The management of institutional portfolios is becoming more and more complex: on the one hand investors increasingly seek broader diversification for their investments, while on the other they are confronted with a growing range of highly specialised asset management services. Since the financial crisis, markets have been much more volatile, which has made allocation decisions more uncertain. Investors need to work on every front in order to both achieve their long-term return goals and limit the risk of short-term losses. This is exactly where overlay management can help. Just a few years ago this instrument was barely used, but it is now firmly established.

Overlay management itself is in fact interpreted in different ways throughout the market. Generally speaking, it describes a centralised approach that enables an investor’s individual risk factors and return goals to be managed systematically across the entire portfolio. A variety of overlay strategies can be employed, depending on which investment goals are the most important: risk overlays, the most widespread type, offer protection in crisis scenarios. Interest rate risks can be neutralised with overlays as part of active duration management (a duration overlay), as can inflation risks (inflation overlay) or the specific credit spread risks of a pension fund.

In addition to this hedging function, overlay management can also be used to address opportunities and to open up additional sources of income as a tactical overlay. All these variants are not mutually exclusive, but can be used flexibly on a modular basis.

Disciplined risk reduction
The overlay concept has proven to be particularly suitable for hedging market risks. Dynamic risk overlay, the version of the risk overlay concept developed by DB Advisors, provides centralised risk management for a broadly diversified portfolio, which exploits all correlation effects and therefore the risk budget as efficiently as possible. The aim is to secure a certain level of value for the portfolio: for instance a threshold of 95 percent means a risk budget of five percent. The task of the overlay manager is to ensure the total investment risk always remains below this individually determined limit. Only when the equilibrium is lost does the manager dynamically hedge the entire portfolio – mostly using simple, exchange-traded derivatives. This requires both individual risks and the risk budget to be measured on continually and managed within a purely rule-based process.

This disciplined method of direct risk reduction passed the acid test during the financial crisis, saving many investors from extreme setbacks. In “normal” markets, however, investors still participate in market upswings where continuous, market-based risk measurement allows exposure to be built up again gradually. The positive market performance in 2009 was at least partly and 2010 performance almost fully reflected in portfolios that had been completely hedged just a short time before. The important thing to note is that the fine-tuning of portfolio risks that takes place in the course of overlay management does not encroach on investors’ long-term strategic orientation or their decisions on allocation of individual asset classes.

So does risk overlay management really mean the disciplined execution of highly refined algorithms? Certainly not! Based on their knowledge of the state of the entire portfolio, the overlay manager fulfils the role of a fiduciary, who should always be consulted in matters of portfolio construction. Risk budgeting plays a key role in this regard and should be adapted to the choice of asset classes so that the overlay does not dominate the strategic allocation. For a portfolio consisting of 30 percent equities and 70 fixed-income for example, it would not make sense to allow a risk budget of just one or two per cent. Furthermore, the overlay manager can also use his or her knowledge of the entire portfolio to advise on the form the investments should take. Even though certain asset classes may appear extremely attractive at times, it is only by considering the entire portfolio that a judgement can be made on whether their purported benefits are consistent with the individual appetite for risk. Sometimes it may even make sense to reduce or increase the risk budget anti-cyclically. In this case a larger risk budget is not necessarily achieved through contributing additional funding, but can also be provided indirectly by temporarily increasing the loss tolerance. Investors who were willing to raise their risk budget in summer 2009 – when the first signs of a market recovery became apparent – were in some cases able to avoid high opportunity costs.

Looking ahead, the advisory process will continue to constitute a core element of risk overlay management. The duration of economic cycles in the 21st century will be much more condensed, and their swings will be more volatile. Risk management must continue to find an appropriate balance between protecting the investment and seizing opportunities.

Avoid losses, seize opportunities
Overlay management need not serve solely to avoid losses. A “tactical asset allocation overlay” can tap additional yield and supplement a pure risk overlay. With this approach, the asset manager uses the free risk budget and deliberately departs from the strategic allocation in order to turn short-term market opportunities into additional returns. Fundamental research can identify sources of alpha in sideways or booming markets with the lowest degree of correlation with the overall portfolio. Being able to respond rapidly and efficiently to these signals is then key to realising additional returns. Effects on the individual portfolio risk are measured directly, enabling the free risk budget to be optimally deployed.

This strategy is particularly attractive in periods of economic growth of course. In critical market phases, however, pure risk management always trumps tactical positioning in order to defend the defined risk limits consistently – as long as both value hedging and income generation are in the same hands.

Acknowledging climate change
 If overlay management represents a basic toolbox, including instruments for “beta protection” and “alpha potential”, then one might ask what other possibilities it has to offer. And though the Greek alphabet has plenty more letters, the danger of over-engineering is imminent. Rather than go for additional “engineering options”, the key is to examine other, new sources of risk and return in order to determine the extent to which they can be managed.

Environmental risks, for instance, are increasingly moving into investors’ field of focus, and modern strategic risk management needs to acknowledge the consequences of climate change. Indeed, there is a direct connection between these risks and asset management and therefore with portfolio construction.

For example, one of the EU’s most important instruments for meeting the targets of the Kyoto Protocol and cutting carbon emissions is to establish a market for trading emissions certificates. If a company emits more CO2 than it is entitled to, it must buy certificates. If the carbon market (which has now attained a significant trading volume) prices rise, the result is a direct cost for the company concerned as well as for the value of these assets within a portfolio. In addition, there are also indirect costs to be considered, such as the expense of building more efficient production facilities, higher environmental taxes, etc. Therefore, carbon markets and CO2 as a new asset class affect investment decisions, company valuations and a new way of looking at an overall portfolio. What is known as a “carbon overlay” can offset both the economic and the ecological effect by acting as a vehicle for purchasing the necessary CO2 certificates and, ceteris paribus, incentivising companies to reduce their CO2 emissions. Investors can protect themselves against the adverse consequences of climate change and contribute to protecting the environment with their investments at the same time, whether purely financial or “green” investment goals take precedence.

Alexander Preininger is Head of Overlay Management at DB Advisors

DB Advisors is the fiduciary institutional investment management business of Deutsche Bank´s Asset Management division. We offer a broad range of investment strategies – spanning the whole risk/return spectrum – to our institutional clients around the globe, including corporate, pension funds, foundations, insurance companies, central banks and supranationals. Our global network of integrated resources in combination with our product lineup provides a powerful platform, delivering superior pension solutions and consistent competitive results under all market conditions.

At DB Advisors, our institutional clients benefit not only from our own global preference, but from that of our parent firm, the Deutsche Bank group.