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Kuwait Price Index up by 19% in Jan 2017

Date : 09/02/2017
Author:  Marmore MENA

According to Marmore’s recently released Monthly Market Review, MENA bourses had a positive start to the year 2017, with nearly all markets ending the first month in green. Kuwaiti Price and Weighted indices led the charge, rising by 18.9% and 12.4%, respectively, followed by Bahrain (6.8%). Saudi Arabia and Oman were the only markets to register a fall in January, falling by 1.5% and 0.1%, respectively. Various reasons are being touted for the 14-day consecutive rally in the Kuwait bourses, but a look at the top five stocks by value traded suggest that main activities are largely in large cap companies. The appointment of the new chairman and a series of market reforms may have led to investors hoping that steps might be taken to boost foreign inflows, following the regional peers UAE, Qatar and Saudi Arabia. Also, with Pakistan upgraded to MSCI Emerging Markets Index, Kuwait and other countries could see increased representation in the MSCI Frontier Markets Index.

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With the fall in oil output, in line with the OPEC agreement, many of the Saudi sectors were affected, with losses posted in Banking, Retail, Hotels & Tourism and Transport sectors. Corporate earnings across all sectors rose by 2% in 2016, but earnings in Banks and Materials companies fell by 5% and 8%, respectively. S&P GCC grew by 1.6% in January, to close the month at 101 points.

MENA markets witnessed an upswing in momentum in January, with volumes rising 53% and value traded 3.7%. All MENA markets, barring Saudi Arabia, witnessed a rise in market liquidity in December, with Kuwait, Bahrain and Abu Dhabi leading the charge. Value traded in Kuwait stood at USD 3.9bn in January, compared to USD 9.5bn for the whole of 2016. In terms of valuation, P/E of Morocco (20.7x), Kuwait (17.9x), and Qatar (15.4x) markets were the premium markets in the MENA region, while the markets of Egypt (7.7x), Dubai (9.9x), and Bahrain (10.0x) were the discount markets.

Blue Chips also had a positive month, with Kuwaiti large caps dominating the best GCC performers in January. Shares of Zain, Kuwait Finance House, National Bank of Kuwait and Kuwait Projects posted double-digit growth, at 20.7%, 14.8%, 12.3% and 12%, respectively. Saudi Telecom (-7.6%) and Emirates Telecom (-4.8%) lagged behind the rest. Kuwait Finance House and National Bank of Kuwait also posted positive growth in 2016 earnings, as revenues grew, while Saudi Telecom witnessed an 8% fall in profits. Q4 profits for SABIC were positive for the first time in ten quarters, which indicated that  the worst might be over for Saudi Arabia's petrochemical sector, since the fall in oil price and government austerity measures raised the cost of gas feedstock. Qatar National Bank has reported a 10% jump year-on-year in net profit to USD 3.4bn for the year ended 2016, helped by stronger core earnings.

New Year Reforms and Bond Issuances
Saudi Stock Exchange is set to introduce settlement of trades within two working days of execution (T+2) during the second quarter of 2017. Tadawul also published draft rules for short-selling, and the borrowing and lending of securities. Presently, trades must be settled on the same day, which has inconvenienced foreign investors in particular, as they must have large amounts of money on hand before trading.

The Saudi cabinet approved an IMF-backed value-added tax (VAT) to be imposed across the Gulf, following the slump in oil prices. A 5% VAT will be levied on certain goods, following an agreement with the GCC in Jun’16. The move is in line with the IMF recommendation for Gulf States, to impose revenue-raising measures including excise and value-added taxes to help adjust to the low oil price environment that has slowed regional growth. The GCC countries have also agreed to implement selective taxes on tobacco, and soft and energy drinks this year.

The government of Oman has approached banks for an international bond issue with tranches of 5- and 10-years as the country plugs a budget deficit caused by lower oil prices. Oman's budget deficit is forecast to be USD 7.8bn in 2017, and the finance ministry has stated that it would cover this year's deficit with USD 5.5bn of international borrowing, USD 1bn of domestic borrowing and the drawdown of USD 1.3bn from financial reserves. Last year, the government raised a USD 1bn international syndicated loan in January, and issued tranches of 5- and 10-years international bonds worth USD 2.5bn in June, followed by another issue of USD 1.5bn in September.

Oil Market Review
Brent crude fell by 2 per cent to close the month at USD 55.7 per barrel, having maintained the price level at above USD 50 per barrel for all of January. OPEC nations Saudi Arabia, Kuwait, Algeria cut production in January more than they had originally committed to, while Russia followed suit and trimmed production faster than was initially agreed. However, rising US rig count and output put a cap on any oil price growth, as the US President had vowed to increase production.

Tags:  Bonds, Capital Markets, GCC, Oil, Stock Market

Ratings:
 Current rating: 0 (3 ratings)

GCC debt deluge: big-ticket issues, even by international standards

Date : 01/12/2016
Author:  Marmore MENA

GCC debt deluge

The GCC is raining debt issuances. From almost nothing a few years ago, all we hear and read these days is the jumbo-sized bond issuances from Saudi Arabia, Qatar, Kuwait, Bahrain, Abu Dhabi etc. The Saudis just closed a successful US$17.5 billion issue that was oversubscribed by more than four times, while Qatar raised $9bn in May followed by a $5bn sale by Abu Dhabi. Even by international standards, these are big-ticket issues.

Why such a sudden rush to issue bonds overseas?

The straight answer should be the growing fiscal deficit or budgetary gap between income and expenses. The IMF expects that GCC deficit to touch nearly $400bn cumulatively between next year and 2021. That’s huge in size measured by any standards. Having missed diversification opportunities several times in the past, it is nearly impossible to bridge this gap through non-oil income such as taxes and levies. More importantly raising non-oil revenues through a reduction in subsidies can be contentious and unpopular. Given the welfare economic model where GCC citizens are taken care of from cradle to grave, such sudden rushes to roll back subsidies can unsettle the social contract that the citizens enjoy. Given these constraints, the deficit can only widen or at best remain where the current estimates lie.

Hence there are only two options: dip into reserves or borrow. Saudi Arabia tried the first method last year, when its reserves drained from $731bn to $615bn. However, it reversed course and resorted to borrowing. It started with domestic borrowing before venturing overseas.

So why are GCC countries sitting on vast reserves and a deep banking sector and resorting to global bond issuances? The answer to the first question is simple: the opportunity cost of reserves is far higher than the cost at which monies can be raised. In other words, monies parked in reserves earn far more than cost incurred to raise similar sums. Although the Fed is on an interest-rate increase mode, rates are still at very low levels. What better time than now to borrow? Regarding the second question as to why global and not domestic, there is capacity issue for local banks. Also governments may fear that local issuances can crowd out credit growth for the private sector.

So are these bond issuances a sustainable strategy for the long term? Given the low debt-to-GDP ratio for key GCC countries, this appears a good and sustainable strategy. Overseas leverage levels are becoming unsustainable thanks to Japan (250 per cent of GDP), Europe (91 per cent) and the US (108 per cent). The current debt level of the GCC, at 15 per cent, appears very modest.

So what should we be worried about?

Many things. Firstly, increased debt-to-GDP ratio raises the risk of a lower credit rating. Already, Bahrain has fallen from investment grade to junk grade. Rapid deterioration in credit rating will mean higher cost of capital for future issuances. Secondly, credit default swap spreads (an indicator of risk perception) will spike. It is already increasing. Thirdly, the spurt in debt issuances is happening without proper debt management infrastructure. GCC governments should install a well-run debt management office if they have to broad base investors in these bonds. Finally, an active secondary market for these issuances is a must to develop the much-needed yield curve. A GCC secondary market totally dedicated to dealing only in bonds can be a good idea given the scale of bonds to be issued but a lot of work would be needed to build it. This would also help corporates jump on the bandwagon of raising debt. Presently, corporates depend near totally on the banking system.

So the fruit may be hanging low, but can be sour if not managed properly.

The article originally appeared in The National | Business.

Tags:  Bonds, Debt Issuances, Economy, GCC

Ratings:
 Current rating: 0 (3 ratings)

Are GCC businesses leveraging social media enough?

Date : 04/10/2016
Author:  Marmore MENA

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As social media penetration continues to grow exponentially, so does the opportunity for Gulf businesses to engage their customers

This increasing reach, twinned with the growing presence of young people on social media, has opened up new avenues for companies to interact with their customers of the industries that are currently active on social channels across the region, the retail industry leads engagement on Facebook in almost all of the GCC countries, with over seven million active followers.

This is followed by the telecommunications industry at close to five million users. While the remaining top five industries in the GCC, based on the number of Facebook followers, are e-commerce, electronics and airlines. The most used social media channels for businesses in the region are Facebook, Twitter and LinkedIn.

In terms of the total number of fans on Facebook, the fast moving consumer goods industry is one of the most popular in the region. According to recent industry estimates, the GCC’s FMCG market will likely cross the $270bn mark by 2018, with the regional population expected to expand to around 56.5 million. Faced with ever increasing competition, it is becoming crucial for FMCG companies to increase their visibility in the market by tapping social media and engaging with end users.

Qatar Airways has a significant presence across all social media platforms and the largest number of followers compared to its regional competitors with a Facebook fan following of 11.6 million people. This features news, videos, pictures of the cabin crew at new and interesting destinations, and other elements aimed at engaging with existing and potential customers.

The airline also has a Twitter account with close to a million followers, and a YouTube channel with more than 36,000 subscribers.

In the retail industry, Arabian Oud, with 4 million Facebook and 1.5 million Twitter followers leads the pack. In telecoms, STC and Mobily have a stronger presence on Twitter compared to Facebook, and Souq.com dominates social media outreach in e-commerce, with 8 million Facebook followers and 380,000 Twitter followers.

The social media presence of SMEs is also on the rise, according to a 2015 survey of 260 regional SMEs by LinkedIn. In the study, 92 per cent of respondents said they were already on social media platforms, with a further 5 per cent preparing to establish a presence. Many of these will surely have taken the plunge since the survey was conducted.

The main driving factor in the adoption of social media was found to be the ease of generating business, with 34 per cent of Gulf SMEs claiming that they gained new customers through social media advertising and 32 per cent directly linking their social ad spend to revenue growth.

However, other industries like banking have a very limited presence on social media platforms, or are not using them to their full potential. Banks in the region should look at social media as more than a simple marketing tool. They should see it as an essential factor to develop actionable insights and gain real value from consumer interaction, especially at a time when fintech solutions are threatening existing business models across the globe.

There are a few exceptions to the overall trend of banks in the region underutilising social media channels. Some such as QNB, Saudi Investment Bank and Emirates NBD have significant fan followings on Facebook. QNB’s posts on Facebook are related to the products and services it offers, the financial performance of the group and its social initiatives. The bank also has a reasonable presence on both Twitter and YouTube, unlike other GCC banks.

Social media can be used as a marketing tool to help businesses achieve growth, improve brand image, procure talent, and become more consumer-centric. Especially by getting, feeding and addressing complaints.

With growing internet and smartphone penetration, and rapid advancements in technology, it has become imperative for businesses to engage with customers or risk losing out to competition. And while challenges exist – such as lack of Arabic content and data security – the benefits outweigh the costs.

But tools used to enhance brand image can also be used to tarnish it. For example, Subaru Emirates paid a hefty price for social media mismanagement after a road accident occurred that claimed four lives. The company was branded sexist and insensitive after posting an image of the accident with the status “woman driver at it again”. By the time it was taken down 26 hours later the damage had been done.

Another issue faced by companies is that it is difficult to quantitatively assess the impact of social media activities on business growth. It can be cumbersome to measure a return on investment, so many do not go through the process.

Digital and social network ad spending in the Middle East and North Africa region is below the global average and significantly lower than other parts of the world such as North America and Europe. It can therefore be said that GCC businesses have not fully realised the potential of social media, despite rapidly growing MENA expenditure.

Businesses in the region have, however, recognised the importance of engaging with their customer base to improve both their reach and operational efficiency.

With penetration figures continuing to rise, and social platforms becoming increasingly prevalent in every aspect of our lives, customer engagement and ad spending is sure to grow in response.

So while GCC businesses might not be leveraging social media to its fullest potential, they are fast making up ground and we can expect much more activity in the months ahead.

The article originally appeared in Gulf Business.

Tags:  GCC, Sector, Social Media

Ratings:
 Current rating: 0 (3 ratings)

Should GCC banks be wary of Fintech entry?

Date : 27/09/2016
Author:  Marmore MENA

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Since the time internet revolutionized global communication, information technology (IT) has been disruptive, and has changed the business model of almost every industry known to mankind. Early adopters of technology enjoyed competitive advantage, while laggards lost customers. In the same vein, Financial Technology aka Fintech, is the next big change brought about by IT.

The western countries, especially the US, have adopted technology at a much faster pace than the rest of the world. At present, almost 80% of Fintech investment happens in the US, followed by the UK. Developed markets in the Asia Pacific have also been investing and implementing Fintech solutions in recent times. However, adoption in the GCC is still in its infancy. But with growing awareness, Fintech is slowly breaking ground in the region.

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Digital-only banking


Digital-only banking is the new wave that is expected to change the way the banking industry works. In a survey conducted by EY, almost 78% of GCC customers indicated that they would be willing to switch banks for better digital banking experience, and 64% would feel comfortable switching to a digital-first bank. Unlike traditional banking, which is more branch-centric, digital-only banks would avail them more independence in utilizing the services offered by the bank.

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The cost-per-customer-visit for traditional branch-based banking is multi-fold, compared to digital-only banking. Traditional banks spend an estimated 40-60% of the total operating costs in the maintenance of branch networks, which the digital-only banks eliminate. Fintech firms are a threat to traditional banks that offer similar services at a much higher cost. These firms have already begun cannibalizing on the traditional banks’ customer base, thereby pressurizing the margins of the latter.

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Remittance

Global remittance industry was estimated to be worth close to $650bn, at the end of 2015, and is growing at a CAGR of 3.75%. Saudi Arabia and UAE occupy the second and third spot in global remittance send volume, accounting for a combined USD 74bn, majority of which goes to India (USD 23bn), followed by Pakistan (USD 9bn) and Philippines (USD 7bn). According to the World Bank, the cost of sending money home to diaspora averages 7.7% globally.  But Fintech players are emerging in the horizon, leveraging on online and mobile platforms, and have increased the pressure on banks by charging an average fee of 0.9%; much less than the average for banks (global average). In 2015, the cost of sending remittances to the MENA region decreased 95bps from 8.37% to 7.42%.
 
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P2P Lending
Beehive, a Dubai-based sharia compliant P2P lender, is the UAE’s first online platform for lenders and borrowers. It provides low cost finance to SMEs, while providing a direct access to alternative asset classes that can potentially generate higher returns to investors. According to Beehive, people just invest 5% of their net wealth on such platforms, but witness returns of 15%-20%, on an average. This has encouraged more than 2,000 investors to register with the platform in the UAE, which has successfully completed 100 deals since inception. P2P lending could change the way lenders and borrowers interact in the future, in both the retail and commercial banking spaces, as it offers attractive returns for lenders and cost efficiency for the borrowers. Platforms such as Beehive can serve as a funding source for the Small and medium enterprises (SMEs), though they might not be able to replace banks in funding big ticket corporate credit.

Islamic Finance
According to Marmore’s report on ‘Fintech in GCC’, one of the biggest potential impacts of Fintech will be on Islamic finance. Fintech could potentially increase the reach of Islamic financial services, and provide more choices that suit individual needs at competitive cost. SMEs that find it hard to obtain sharia-compliant bank funding from Islamic Financial Institutions (IFIs) could look to Fintech firms to fill that gap. Fintech’s penetration into Islamic finance is expected to intensify competition among traditional IFIs.  Some of the Islamic finance players that have ventured into Fintech include Abu Dhabi Islamic Bank (ADIB), Dubai Islamic Bank (DIB), and National Bonds, a shariah-compliant savings and investment firm. ADIB has teamed up with IBM to build a digital studio that will work on digital innovation projects across the bank. Conventional Islamic banks seek to expand their presence in the Fintech space by adopting technology in their service offerings.

Crowdfunding
Fintech firms have created platforms for lenders and borrowers to meet, without the need for a middleman, which in many cases are traditional banks. Crowdfunding and Peer-to-Peer (P2P) lending are the new buzzwords among borrowers in recent years. In 2015, the global crowdsourcing market was expected to have grown by an estimated 112%, to reach a value of $34.4bn. The GCC region has also witnessed the emergence and the growth of the crowd funding concept, and experts opine that crowd funding would continue to grow due to dearth of venture capital and public offerings for entrepreneurs. For instance, a UAE-based platform, Eureeca, calls itself a crowd-investing arena, as it allows interested investors to view profiles of available projects to invest in. In return, the investors will gain shares in the businesses, in which they make their investments. Investors might divert more money into these crowd funding platforms for better returns and borrowers will have an alternative avenue apart from the traditional banks. Crowdfunding might impact private equity firms in GCC, as start-ups might find it as an easy alternative to raise capital.

Conclusion
Fintech firms have already made their presence felt across the globe, with innovations such as digital remittances, robo-advisory, algorithmic trading, and P2P insurance and lending platforms. Surprisingly Banking and Financial Services Industry (BFSI), the biggest and most prominent sector in the GCC, is yet prepare for the entry of Fintech in the region, as potential competition. In the coming years, the demand from consumers is expected to give rise to faster adoption of these technologies across various verticals in BFSI. Traditional banking and financial service players will have to improve their operational efficiency by cutting down on needless expenditure, adopt technology, where possible, and improve their asset quality, if they wish to compete with their digital cousins.

The article originally appeared in Wealth Monitor.

Tags:  BANKING, CROWDFUDING, DIGITAL, FINTECH, GCC, IN, ISLAMIC FINANCE, REMITTANCE

Ratings:
 Current rating: 3 (3 ratings)

Bankers can finally look forward to merger activity

Date : 08/08/2016
Author:  Marmore MENA

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The article originally appeared in The National | Business
The GCC’s investment bankers must be a stressed lot – too much work and such little reward.

The fee-based investment banking business has four key components – syndicated loans, equity capital markets, debt capital markets and mergers and acquisitions (M&A). While in other markets we can witness activity across these four components, in the GCC investment banking advisers depend on syndicated loans for their survival – 50 per cent of total investment banking fees on average.

Equities is dull thanks to poor performing capital markets and the related dull initial public offering environment.

The debt capital market looks promising given the slew of activity expected from sovereigns and corporates.

However, the sticky point seems to be M&A, which can be erratic and suffers from some idiosyncrasies.

The fallout of the global financial crisis and the recent oil price crash have dented the stamina of corporates, leading to weaker balance sheets for many companies. The operating environment has become difficult because of stagnant earnings and increased cost of capital. After hitting a peak of US$70 billion in 2014, our research expects that corporate earnings will touch $62bn this year. This should be a dream environment for M&A advisers, as difficult environments force corporates to restructure, improve efficiency and productivity, hive off non-core assets and concentrate on strategic business. In other words, corporates need the help of M&A advisers to do all this.

However, the value of announced M&A transactions reached $18.7bn during the first half of this year, a decline of 29 per cent compared with a year earlier, and the slowest first six months for deal-making in the region since 2014, according to Reuters.

What can explain this conundrum?
The GCC market is dominated more by private companies than public companies. Scouting opportunities in the private market are onerously difficult because of lack of transparency and family control. This prevents deal flow even though there may be genuine need for M&A. Even when assuming healthy deal flows (cases where companies express interest to hive off non-strategic units), the actual completion of transactions can be low (poor deal closures), as poor information can prevent meaningful negotiations and conclusion of transactions.

The M&A environment in the GCC is also characterised by dominance of "mega" deals. Take the recent example of Emaar Properties chairman Mohamed Alabbar leading a group that bought a $2.36bn stake in Americana along with a group of investors; or the merger of National Bank of Abu Dhabi and FGB, which is expected to create a mega-bank with total assets of about $171bn; or the celebrated Emirates Bank and National Bank of Dubai merger to form Emirates NBD in 2007.

Such mega-deals can crowd out other transactions and can also create league tables – rankings of investment bankers – that can look very different and distorted from one period to another, thus making it difficult to compare.

How will things be going forward?
Given the low oil price environment, corporate stress levels are bound to increase. The need to restructure, enhance productivity and efficiency and hive off unnecessary non-strategic assets will be pursued vigorously by private and public players.

This should certainly be good news for investment bankers. Also, it is unusual that companies are sitting on very high levels of cash as measured by data available for publicly listed companies. At the end of last year, total cash levels reached about $250bn, with financials (read banking) accounting for $155bn. Hence, banking-related M&A transactions will continue to see action, followed by energy and telecoms. Mega- deals may continue to dominate the scene, but given the oil price effect across the board, representation from mid-level segments and SMEs can also increase.

This will help to improve the ratio of pipeline to closure, which should be good news for investment bankers.

Tags:  Capital, Economy, GCC

Ratings:
 Current rating: 3 (3 ratings)
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