As European banks increase their interest in the GCC market, GTR Mena‘s editorial board discuss how this will shape the future of banking in the region.
Baghdadi: The UAE economy is starting to see renewed growth. Do you see this continuing? How do you see this benefiting the wider Mena region?
Bhandari: From the business side of it, we have seen a very strong surge in demand over the last six months. It has not been surprising. Is it sustainable in the long term? I do not know. It depends on the economies of the neighbours and what is going to occur as far as they are concerned. Looking at the local UAE economy, I see a strong growth of about 5 – 10% in the next 12 to 18 months for sure. Our business has been absolutely great. I cannot complain about what is happening.
Jennings: The non-oil sector is certainly growing extremely well, notably in terms of trade, tourism and logistics. I think the whole region is at quite a critical point. My personal view is that we will see that expansion in Dubai, provided of course we have a stable political environment.
Evans: I think the UAE can really benefit from any increase in economic activity in the GCC. One just needs to look at who they are surrounded by. Saudi Arabia is definitely going for a financial expansion programme and the government investment plans are significant and can potentially be maintained over the immediate future especially if you consider that the cost of getting oil out of the ground is around US$11 per barrel, while the market price for oil is projected at US$99-105 for the next 12 months. However the same is unfortunately not true for those countries in the region that do not have oil. Egypt is likely to remain in a strained position in the short term as it resolves its political issues. You have Jordan and Lebanon which are adversely impacted by the situation in Syria.
The ultimate question then is whether the pick-up in economic activity we are seeing is sustainable into the medium term. I know a lot of the benefits to the UAE economy have come from the tourist arrivals that used to go to Bahrain, Lebanon and Egypt. Will that continue? If you look at where the real growth is in the economy, it has tended to be in retail, hospitality and tourism. In addition we are starting to see Abu Dhabi actually move forward with some of its capital expenditure on projects. However, is it really sustainable at these rates going forward? The big question is what happens geopolitically in the region, coupled with what happens with the global economy.
Robinson: For us looking after Emea, the UAE has been the shining light because of all the problems we have had in the European economies, where we have seen limited growth if any. We have seen a steady growth every year of between 10 and 15% in the UAE. We have quite a small client base, so we are not expanding it at all, but that client base produces good, steady returns for the bank every year.
So for us, the growth here is good but it is not robust. It is gradual and has been every year since we have been here. We are quite happy.
Wall Morris: From a non-banking perspective, I sat in this room a year ago and was extolling the numbers of new companies that were setting up in the JLT free zone. In 2011, there were over 1,300 companies. We have actually since then seen a 50% growth year-on-year in company registrations; in 2012, it was over 2,000 companies. Today there are over 6,000 companies operating from the free zone and growing.
Some would say that it is mostly people who need to move from one market to another because of the financial crisis or because Dubai’s geographical position enables businesses to access developed and developing markets.
The increase in numbers of businesses choosing to operate from the free zone is a clear indicator of what I often describe as a distinct move of businesses and resources from north to south and from west to east. Dubai is perfectly positioned at the crossroads of this shift we are witnessing.
Baghdadi: The UAE has become a major trade hub. Everybody recognises the strength of its logistics and its capacity for trade. We see Emirates flying to more than 110 cities across the globe and Dubai Ports becoming the world’s fourth-largest ports operator. However, do you believe that this is sustainable in the medium term given, for example, that there are geopolitical challenges in the surrounding areas?
Maayergi: If you look at the main trade areas that have been growing now, it has been non-oil, exports, re-exports and imports from the other side. This shows sustainability of the trade growth. It is not contracting-dependent. As some of the regulations get changed, more and more business will be attracted and it will create more sustainability. How can we get business and lock it in, it will not be only by the virtue of tax-free environment but also by adding more and more business-enabling regulations. It looks interesting the way it is growing back on a more sustainable basis now, away from the contracting, constructing and building sectors.
Patel: We could also look at this and the previous question from the angle of contribution of various sectors to the UAE’s GDP. The oil sector, which is driven by oil prices is holding up very well. But what is good for the region is that logistics and international trade now generate more than one third of the UAE’s GDP. Additionally, the tourism and financial sectors also generate a substantial amount of GDP. None of these sectors really saw a sharp slowdown.
No doubt for trade we saw a slowdown in dollar terms, but that was largely reflecting the drop in commodity prices, not necessarily reflecting a true picture of the underlying business flows. The sharp slowdown in the construction sector no doubt created a negative drag on the economy, including casting a shadow on everything else that was positive, because it still generated around 20% of GDP. Now that the construction sector seems to be largely back on track, and that the UAE government is taking various steps to prevent the market from getting overheated, I believe that the UAE, and especially Dubai, does have a very strong business model covering trade, logistics, financial and tourism sectors which will help it continue to prosper for many years to come.
Baghdadi: What are the major changes that you have seen happening in the region?
KK: From a local bank perspective, what we see growing is hospitality, tourism, FMCG sector and we see that growth in Dubai. When it comes to Abu Dhabi, it is more on the infrastructure side. The recent change in ports is an industry of its own coming up around the port. We see a lot of multinational corporations (MNCs) setting up manufacturing or warehouses in the UAE, but it is not the very fast-paced ones that we used to see prior to 2008/09. I would not say that there is a boom time but it is certainly growth. It is not changing overnight as such. So infrastructure in Abu Dhabi; more on the trading, services in Dubai.
Baghdadi: Kamel, can you comment from your perspective?
Alzarka: We are very bullish on Dubai. I agree with some of the things said here. The only place people can go and still have a nice lifestyle and have a kind of stability, whether it is for tourism or for business, is Dubai. All the other places have shut down – Egypt and Syria. Lebanon, and even Bahrain now, which was a very important financial hub, have serious problems. We see Dubai’s position as sustainable because we do not see any other alternative to it at least in the short term. So I am very confident about that. The only cloud I see on the horizon is Iran. That is the big question mark for us. If anyone starts bombing Iran, what would happen? But again, we have seen Dubai turning every crisis to its advantage, but one wonders if this one would have any adverse consequences on Dubai? I do not know. This is the only threat I see on the horizon for the time being.
Patel: On the back of crises in many countries in the region, Dubai has indeed become a safe haven for regional investments. However what is even better is to look at where Dubai is now investing real money. They are planning for the World Expo in 2020 and the Dubai World Central is going to be the largest logistics hub in the world for the next decade or so. Long-term and large-value investments in Dubai are now increasingly being driven with a long-term business goal in mind – to be amongst the largest trading hubs in the world. Furthermore, the positive social environment is attractive for people looking to relocate with their families, which positions Dubai very well as a future global trading power.
Alzarka: I agree entirely with you. I think Dubai is servicing the whole of the Middle East and even beyond that in India and Africa, but the hotspot where we are seeing a lot of opportunities is Saudi Arabia. Those guys are going to be spending a lot of money in the next few years and we are seeing a lot of demand for cross-border financing with corporates trying to position themselves to take advantage of this opportunity.
Wall Morris: Can I just add something? It is a bit more anecdotal, but I believe relevant to the debate. I am very fortunate in that I get exposed to a lot businesses and individuals from the region. An angle that I have picked up is that people from the region are now willing to invest in property in Dubai, rather than investing in places like London for example.
Bhandari: You mentioned a number of companies have been talking to you about setting up. Are they companies moving from elsewhere, or are they setting themselves up here for growth?
Wall Morris: It is a mixture. Many businesses are setting up an additional office here in Dubai. They have a business somewhere else and they want an office here. It is not always a new business, per se. There are of course entrepreneurs who are setting up their business for the first time. We see the full spectrum from your entrepreneur right up to a multinational choosing to operate from the JLT free zone. But it is very much the SMEs and the multinationals that are setting up branches and regional headquarters here to service the region and to access new markets. In fact, I had an interesting conversation with a very senior individual from a large oil company who is based in Singapore. They are thinking of holding their global downstream leadership summit in Dubai because everybody can get here within one flight.
Baghdadi: That is a very good point. In the eurozone we have historically seen all the developments – factories, industries and trading centres – being built in continental Europe. However nowadays I am seeing more and more businesses coming to the UAE; as you said Malcolm, a lot of people are looking at the UAE not just because of the strong economic potential, but also as a preferred location in which to be based.
I fully agree with you that there is a mixture of some businesses expanding and others choosing to relocate some of their trading centres; because of the tax environment, because of the economy, because of the opportunities in Saudi Arabia – as Kamel said – and because of the potential in Qatar. One of the questions I ask myself is whether the shift of European companies moving to Dubai will impact the global banking industry? What are the impacts that we already see as bankers?
Jennings: As I see it, world trade has changed over the last five years. If you talk to the average manufacturing company in Europe, the destination of their exports was previously 80% Europe and North America. Now they have had to completely change their business models and focus on emerging and developing markets such as the BRIC economies and the other developing markets. Their business has shifted and Dubai is playing a role in this for obvious logistical reasons. I have one regional sales manager for a major manufacturer who basically could never get any priority in terms of the emerging markets since Europe and North American market were always given priority for stock and production. Suddenly there was stock available to him to help him grow his business and the shift is about 60/40 in emerging markets. That trend is continuing and for many companies. I think overall trade has changed dramatically in recent years and Dubai has a regional role to play in this.
Baghdadi: Do you anticipate a change in the future needs of your customers as a result of the shift of business from Europe and the US into the region?
Jennings: The challenge for banks is keeping pace with trade and its impact on the banking industry. It is very difficult for the banking industry to adapt to the changes quickly, particularly here in Dubai, which is fairly fledgling in terms of banking expertise. At the end of the day, I am a little bit biased because I sit in London, as does Louis, but I think the expertise for trade is still predominantly driven from the London market.
Robinson: In terms of the growth here, particularly in the UAE, we are under more pressure from risk appetite. One of the ways we are trying to combat that is using credit insurance; it is one of the things that I always ask when I speak to a broker here in Dubai and they say they can manage a lot of this from here. When I speak to some corporates, they say they are struggling because they have to go back through their office in London to try to get some credit insurance cover in place. From our point of view as a bank, whether it is here or in London, we are set up to do either, but one of the things that I am seeing is where we need to cover more risk for our clients. We are using credit insurance more now as risk mitigation.
Maayergi: I think if you look at this move, the question is will those companies from Europe and other places view this place as a regional or global treasury centre? I think this is the whole game-changer.
There is the fact that people would like to live here, that it is a tax-friendly area, and that you are in the middle of the time zones and can get Asia and America operating at the same time, but they still demand more banking services and related regulations for the company to consider the Middle East as a strong replacement to their London or Singapore treasury centres. They will come as Dubai advertises this place as a regional treasury hub for companies specially those who want to manage Africa and the Middle East out of here. Simply, those treasurers need the place with the right international regulations and international expertise around them. Also they need the financial service providers that will get them also the function on a Friday as they cannot afford to be full day out of the market.
Evans: I think the original question was ‘do you see a shift in needs for your customers and what does that mean to providers of financial services?’ Clearly, companies are coming to the UAE for all of the reasons people have cited around the table. What does that mean for the financial services sector? First of all, we have to facilitate that. We, as a bank that operates both in Europe and in the Middle East, have to help our customers with that migration. The other aspect is the products that we offer. A lot of the products that corporates have become accustomed to in Europe, the banking sector here does not really offer to the same level as they have in other markets. It is incumbent on the banks to raise their games so that corporates moving to the UAE get the same level of product sophistication that they get elsewhere.
Receivables finance, for example, in the past meant having post-dated cheques discounted, but how many banks in the market really offer the more sophisticated balance sheet and risk management aspects of the product like non-recourse, limited recourse receivable finance discounting here?
We have seen strong demand from large corporates operating in the region. Commodity and structured trade capabilities have traditionally been done out of Geneva and Paris and it has not really been done in any meaningful way in the local the market. If companies are coming here, financial institutions in this region need to ensure that they keep pace with the sophistication of their customers and are able to offer them the product suite that they were used to getting in their own countries.
Baghdadi: You have touched a really key point here Tim. I think that the development of receivables finance is one of the central changes that is happening in the banking industry in the UAE at the moment. As a European bank we are used to doing receivables finance within a very strong legal environment, in addition to which we can look to use insurance as a risk mitigation tool.
Looking now at the UAE, we want to be able to offer receivables finance in the market and as financial institutions we want to adapt to the needs of our mainly European customers that are coming here, but how much risk are we taking as financial institutions by doing non-recourse receivables finance in the current regulatory environment?
What are your perspectives on this? Is the legal and regulatory framework strong enough to support the non-recourse receivables finance that European companies ask for?
KK: There is certainly a lot growth that we have seen in the market in terms of receivables financing. In terms of corporates, from a local bank perspective, we see a lot of European and MNC entities now directly banking with us that used to be directed towards international banks earlier. We used to receive counter guarantees or performance guarantees from another location but these days it is a direct relationship with local banks. We now see corporates directly banking with us, so we do not have any indirect contact with them. A lot of corporates do not really have a proper manufacturing base out of here but they do business in the Middle East either through distribution network or re-invoicing and these are directly coming into local banks.
In terms of the sophistication of products, there are very limited players in the market to actually do a non-recourse receivables financing. A lot of credit insurance companies have grown in the UAE. The structures of deals that we see are very different from what the market was used to before. In the commodity space, we have a lot of global commodity houses in the UAE setting up bases. You name the large commodity houses: they have their offices here, structuring deals out of the UAE.
Patel: Drawing on your experiences in HSBC and Standard Chartered, who were both active in receivables financing, did you have experience of dealing with the local legal system to secure your interests when things went wrong?
KK: I think the larger question is the assignment aspect from a legal perspective in UAE: there is certainly no proper legal framework supporting it but bigger corporations here say it does work practically. That is why I said we have very limited players right now in terms
of expertise.
Patel: And do you use DMCC’s platform for your commodity financing that you are talking about?
KK: From an ADCB perspective no, we do not use it, but there are structures in place in more in a bilateral way with involvement of collateral management entities.
Maayergi: Between assignments for receivables and warehouse receipts, I think these are two areas that will unlock a lot more working capital for companies working in the country. Perfecting the work around warehouse receipts, getting the assignments right, all balance sheets will be unlocked to a great extent. This will help as most of the banks are more focused on helping customer with invoice financing and some of the recourse receivables.
Wall Morris: While I would agree with that point, a key part of the issue is enforceability and the perception of enforceability. Of course we are working closely with the lawmakers both in Dubai and federally to ensure that the initiatives we launch have the appropriate legislative support. However, we believe that no matter how strong your regulatory framework, you cannot capture all of the available business as companies will continue to use the various trading centres for various operational and legal reasons. That is why centres like Dubai, Singapore and Hong Kong can be complementary as we serve different geographies and markets.
Patel: This whole shift from Europe to the Middle East also applies to banks. We have seen an increasing number of financial institutions now deploying capital and liquidity in this region, which they are unable to profitably deploy back home. So while on one side there are opportunities, on the other we also have increased competition with pricing moving down.
Maayergi: It is a two-way street. On the one hand you have some European banks actually going out of the market and at the same time a lot of local banks and international ones filling their space and considering this as an opportunity to grow. If you look at how industries’ potential have changed in the last two years, there are more opportunities for some banks in the commodities area which was left by some European banks. FMCG is a sustainable business for banks to a high degree. Construction was the one sector which was most affected. There is not much of a single trend but it is interesting to see how the different industries have been behaving in the past two years.
Baghdadi: We have been driving the business in continental Europe towards receivables finance. Today we are the third-largest bank in continental Europe providing receivables finance and are looking to develop our receivables strategy for the UAE. We understand that this means taking risk because, as bankers, we are in the risk management business.
Evans: In receivables financing, we have a large and growing business here, it is not just in the UAE. We have also launched it successfully in Saudi Arabia, Oman, Qatar and Bahrain. Customer receptivity has been strong. We work in conjunction with various entities to come up with a proposition that makes business sense to our customers. For example, we have worked with the accounting professionals to come up with a methodology that effectively allows corporates to undertake a ‘true sale’ of their receivables to the bank and therefore effectively remove it from their balance sheets; the key selling points to the customer being that apart from improving their cash conversion cycle, the product can potentially also improve their balance sheet. It has appealed to larger multinational names because they have experience of similar structures available in the US and continental Europe.
Baghdadi: When you look at Europe you will see that a lot of big corporates are consolidating. In consequence I would say that syndicated transactions for receivables finance are now more frequently seen in the market rather than client just cherry picking one bank. Is this something that we expect will happen in the UAE region soon, with large tickets syndicated across two or three banks?
Evans: I think the critical word used in your question was ‘soon’. We do not think this will happen soon. I do not think the knowledge and comfort base is there to be able to put those structures in place, as this receivables finance proposition is still very new to this market. At present, I believe that receivables finance is a mono-bank solution but with time, I am sure that we will see structures that are prevalent in Europe and North America make their way to the Mena market.
Baghdadi: How do you see banking regulations changing in the next few years?
Jennings: That is difficult to answer except to say they will certainly be more demanding. This is a global phenomenon in terms of more enhanced regulation and compliance. I was talking to one of our operations people the other day, and he estimated on an average LC it takes him 60% more time to complete the transaction (KYC, AML, OFAC etc) than it did three to five years ago. I think it is not restricted to the UAE, it is a global issue and of course that is going to ultimately impact pricing because business becomes less economic for the banks.
Patel: I guess as long as it affects all banks in the market, global and local banks, this will create a new operating level for all participants. There was a time when implementation focus was not necessarily the same across local and international banks, but I feel that this has largely changed. Increased regulations, and higher level of checks and balances across the sector are now becoming standard and this has led to higher cost of doing business that has become uniform across the industry, as opposed to being negative for just one part of the industry.
KK: I think from a local bank perspective we see some regulation changes relating to single party exposure. The central bank tried to do something towards the end of the last year but the local banks liaised with the central bank to amend those. It is still not implemented as such but I think the intention is there, so that might change certain exposures for large local banks in the next few years.
Baghdadi: If regulation changes for the local banks, does that mean that it will put foreign banks in a disadvantaged position or to the contrary?
KK: It will be to the contrary, because the local banks exposed to such large entities need to bring down their exposure and international banks have to participate.Patel: I think that what we have seen globally is now happening locally too – as banks face higher regulation and costs it is opening up opportunities for private organisations like the Falcon Group.
Alzarka: This is music to my ears. I think the lack of sophistication in this part of the world is an opportunity for us as an independent alternative financier to bring value to the table. Add to this the new regulations hitting international banks: I would say yes, as an independent player, the last five years have been a great ride and we look forward to the future.
Baghdadi: Thank you very much. Does anyone else have any ideas that they would like to share with us?
Taha: I just want to comment on the state of affairs of credit insurance. Although last year was a difficult year for credit insurance in the region, losses were not as high as they normally are – in all the markets here in Africa and Middle East. Still, we have paid more claims this year than ever before, but still our loss ratio is below 40%. So there is still some room for making more losses.
