In this section I look at the UAE banking system and come to some startling conclusions. It seems that banks are grabbing market share in a market with deteriorating margins and increased risks.
Last week I took a look at Union National Bank’s Q2 financial results. The focus was to look beyond the headline numbers and try to understand the underlying fundamentals and what the core trend might be. This led to the idea of core revenue and expenses, ie interest income from direct lending and debt securities and interest expense of deposits and debt securities. UNB also provides Islamic financing so I added those in as well. This tells us what is happening at the basic banking level and then I look at any out-of-the-ordinary movements in other parts of the business.
Mashreq recently reported Q2 results and announced an increase in profit of 3.4 per cent over Q2 2016. But looking at basic banking, core revenue rose 9.97 per cent whilst core expenses rose 19 per cent. This is not a good sign since if it continues, sooner or later, net core income will become negative. Operating expenses are flat at about 1 per cent so had little impact on changes to net profit.
However, non-core income from investments, fees and commissions and other income dropped Dh61 million and Dh47m, respectively. This was mostly offset by a reduction in impairments of Dh132m. The impairment drop is large relative to 2016 but the total amount is in line with 2015, which means it does not raise a red flag. Without further analysis the only real flag here is the 13.6 per cent drop in fee and commission income, income which is considered high quality.
Overall not a bad result with some caveats and performance indicators to keep an eye on. At this point I have looked at two banks and, although there are certain issues one needs to keep an eye on, it seems that the bank numbers are not consistent with anecdotal feedback from businesses that they are finding it harder to borrow since the oil price dropped in mid 2014.
A quick look at the UAE Central Bank’s statistical bulletin shows that domestic credit grew 14.55 per cent from the end of 2014 to the end of 2016 so the idea that banks are lending less to the private sector is not supported by this statistic.
To get a further understanding one would have to look at a number of bank financials. I will continue to use Mashreq, but keep in mind I use them as an example to shed light on the sector as a whole and for no other reason.
Read more from Sabah al-Binali: How Chelsea FC is a financial innovator
Mashreq has some nice graphs in its 2016 report to help us figure things out. The first is loans and advances, which from 2012 to 2014 grew 40 per cent but from 2014 to 2016 grew only 5.2 per cent. In other words Mashreq kept lending but slowed down the pace of growth, an extremely prudent move. This points to one explanation for the idea that banks are lending less: perhaps the banks are not lending less, they are just stricter about their lending and they are growing loans at a pace commensurate with the current economic environment. In fact, the stricter lending is probably doing businesses a favour by making them more aware of the risks and stopping them from over leveraging.
Return on equity (ROE) grows steadily for Mashreq from 10.29 per cent in 2012, peaking at 15.59 per cent in 2014 before steadily falling to 10.55 per cent in 2016. At first this is a little bit of a puzzler if we combine the information that the bank has increased lending and the feedback that interest rates are the same or higher. One explanation could be a decrease in leverage, but for Mashreq this is not the case. Another could be that operating expenses are up but as measured by the cost/income ration this also is not the case for the bank. The answer comes from the return on assets (ROA), which mirrors the ROE’s rise and fall. This is understandable given the oil price drop, but it leads to a strategic contradiction.
If ROA’s are dropping and perceived risk has increased then why would a bank increase its lending? More generally, why would a company seek greater market share when its product/service is yielding lower margins and the market as a whole is becoming more challenging.
It is worthwhile to reiterate that I am using Mashreq’s results as an example for the market as a whole. So if the market as a whole is increasing profits whilst ROA is decreasing, and they are doing this by grabbing market share then the whole market is going to end up with bigger balance sheets of riskier assets but lower ROEs. As the competition heats up those ROEs will go even lower. I will remind you that there are 23 operating banks and leave it at that.
So what can the banks do? Merging will, at best, cut some costs. The concept of synergy is one peddled by consultants and advisors but it does not exist in reality. So a merged bank will simply have a bigger asset base, which increases the problem and it does not decrease it.
So what else can a bank do? There are three possibilities. Banks can shrink their domestic balance sheets by moving assets abroad. Banks can shrink their balance sheets by reducing their capital, which would force shedding of assets to maintain the necessary capital ratios. Or the banks can take more risk. Or any combination of the three.
An important point: I would argue that mergers will harm the banking sector as banks who manage their liquidity well are forced to merge with peers who were more adventurous. I want to be clear, this is about liquidity, not credit quality. A bank with poor credit quality but good liquidity is fine. A bank with an advances/deposits ratio, a measure of liquidity, of 115 per cent is not so fine. Mergers are not the solution, they are a race to the bottom.
The likelihood of banks reducing capital is next to zero. That means that our banks need to start to export lending.
Top tips to avoid cyber fraud
Microsoft’s ‘hacker-in-chief’ David Weston, creator of the tech company’s Windows Red Team, advises simple steps to help people avoid falling victim to cyber fraud:
1. Always get the latest operating system on your smartphone or desktop, as it will have the latest innovations. An outdated OS can erode away all investments made in securing your device or system.
2. After installing the latest OS version, keep it patched; this means repairing system vulnerabilities which are discovered after the infrastructure components are released in the market. The vast majority of attacks are based on out of date components – there are missing patches.
3. Multi-factor authentication is required. Move away from passwords as fast as possible, particularly for anything financial. Cybercriminals are targeting money through compromising the users’ identity – his username and password. So, get on the next level of security using fingertips or facial recognition.
4. Move your personal as well as professional data to the cloud, which has advanced threat detection mechanisms and analytics to spot any attempt. Even if you are hit by some ransomware, the chances of restoring the stolen data are higher because everything is backed up.
5. Make the right hardware selection and always refresh it. We are in a time where a number of security improvement processes are reliant on new processors and chip sets that come with embedded security features. Buy a new personal computer with a trusted computing module that has fingerprint or biometric cameras as additional measures of protection.
Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
Meydan race card
6.30pm: Maiden; Dh165,000; (Dirt) 1,200m
7.05pm: Handicap; Dh170,000; (D) 1,200m
7.40pm: Maiden; Dh165,000; (D) 1,900m
8.15pm: Handicap; Dh185,000; (D) 2,000m
8.50pm: Handicap; Dh185,000; (D) 1,600m
9.25pm: Handicap; Dh165,000; (D) 2,000m
MEDIEVIL%20(1998)
%3Cp%3E%3Cstrong%3EDeveloper%3A%3C%2Fstrong%3E%20SCE%20Studio%20Cambridge%3Cbr%3E%3Cstrong%3EPublisher%3A%3C%2Fstrong%3E%20Sony%20Computer%20Entertainment%3Cbr%3E%3Cstrong%3EConsole%3A%3C%2Fstrong%3E%20PlayStation%2C%20PlayStation%204%20and%205%3Cbr%3E%3Cstrong%3ERating%3A%3C%2Fstrong%3E%203.5%2F5%3C%2Fp%3E%0A
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
One in nine do not have enough to eat
Created in 1961, the World Food Programme is pledged to fight hunger worldwide as well as providing emergency food assistance in a crisis.
One of the organisation’s goals is the Zero Hunger Pledge, adopted by the international community in 2015 as one of the 17 Sustainable Goals for Sustainable Development, to end world hunger by 2030.
The WFP, a branch of the United Nations, is funded by voluntary donations from governments, businesses and private donations.
Almost two thirds of its operations currently take place in conflict zones, where it is calculated that people are more than three times likely to suffer from malnutrition than in peaceful countries.
It is currently estimated that one in nine people globally do not have enough to eat.
On any one day, the WFP estimates that it has 5,000 lorries, 20 ships and 70 aircraft on the move.
Outside emergencies, the WFP provides school meals to up to 25 million children in 63 countries, while working with communities to improve nutrition. Where possible, it buys supplies from developing countries to cut down transport cost and boost local economies.
How much do leading UAE’s UK curriculum schools charge for Year 6?
- Nord Anglia International School (Dubai) – Dh85,032
- Kings School Al Barsha (Dubai) – Dh71,905
- Brighton College Abu Dhabi - Dh68,560
- Jumeirah English Speaking School (Dubai) – Dh59,728
- Gems Wellington International School – Dubai Branch – Dh58,488
- The British School Al Khubairat (Abu Dhabi) - Dh54,170
- Dubai English Speaking School – Dh51,269
*Annual tuition fees covering the 2024/2025 academic year
The Africa Institute 101
Housed on the same site as the original Africa Hall, which first hosted an Arab-African Symposium in 1976, the newly renovated building will be home to a think tank and postgraduate studies hub (it will offer master’s and PhD programmes). The centre will focus on both the historical and contemporary links between Africa and the Gulf, and will serve as a meeting place for conferences, symposia, lectures, film screenings, plays, musical performances and more. In fact, today it is hosting a symposium – 5-plus-1: Rethinking Abstraction that will look at the six decades of Frank Bowling’s career, as well as those of his contemporaries that invested social, cultural and personal meaning into abstraction.
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
Specs
Engine: Electric motor generating 54.2kWh (Cooper SE and Aceman SE), 64.6kW (Countryman All4 SE)
Power: 218hp (Cooper and Aceman), 313hp (Countryman)
Torque: 330Nm (Cooper and Aceman), 494Nm (Countryman)
On sale: Now
Price: From Dh158,000 (Cooper), Dh168,000 (Aceman), Dh190,000 (Countryman)
The Great Derangement: Climate Change and the Unthinkable
Amitav Ghosh, University of Chicago Press
Our Time Has Come
Alyssa Ayres, Oxford University Press
THE BIO
Favourite place to go to in the UAE: The desert sand dunes, just after some rain
Who inspires you: Anybody with new and smart ideas, challenging questions, an open mind and a positive attitude
Where would you like to retire: Most probably in my home country, Hungary, but with frequent returns to the UAE
Favorite book: A book by Transilvanian author, Albert Wass, entitled ‘Sword and Reap’ (Kard es Kasza) - not really known internationally
Favourite subjects in school: Mathematics and science
THE BIO
Ms Al Ameri likes the variety of her job, and the daily environmental challenges she is presented with.
Regular contact with wildlife is the most appealing part of her role at the Environment Agency Abu Dhabi.
She loves to explore new destinations and lives by her motto of being a voice in the world, and not an echo.
She is the youngest of three children, and has a brother and sister.
Her favourite book, Moby Dick by Herman Melville helped inspire her towards a career exploring the natural world.
UPI facts
More than 2.2 million Indian tourists arrived in UAE in 2023
More than 3.5 million Indians reside in UAE
Indian tourists can make purchases in UAE using rupee accounts in India through QR-code-based UPI real-time payment systems
Indian residents in UAE can use their non-resident NRO and NRE accounts held in Indian banks linked to a UAE mobile number for UPI transactions
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
