Economic buoyancy in the Gulf is sufficient to promote strong competition between banks
Flight to safety to UAE is good for banks there
Regional gaps in capital markets and value-transfer systems create opportunities for banks
A greater professionalizism among corporate treasuries is driving best practice among providers
Desire to export is growing and driving demand for transaction banking
Local banks are more than measuring up to international competitors
Cultural obstacles to introducing modern cash management are being overcome
Sanctions against Iran complicate regional transaction banking
HG, ADCB Growth levels vary across the Gulf Cooperation Council countries for example, its higher by far in the UAE and in Saudi Arabia, key coverage countries for ADCB. Within the UAE, Dubai is doing better than Abu Dhabi, notably in residential and commercial real estate. There are pockets of excellence in the UAE and trade has come back pretty strongly, particularly with other GCC countries. And that in turn has also created a fairly high level of competition between banks seeking to fund this current boom. We are all fighting for every asset penny we can find, and thats a big challenge for all of us.
JH, Sorouh The flight to safety is at the heart of this process: the UAE is still a safe haven within the region, and that helps liquidity flow into the country, which is a bonus for local banks and corporates.
CF, ADCBWe now see the economy coming back strongly across the Emirates: in Dubai, port throughput was up 12% last year, with passenger throughput at the airport also up sharply, all of which is boosting rehiring across all sectors. And that is aiding the process of real estate absorption. I think the real estate sector will continue to move positively, in both Dubai and Abu Dhabi.
JH, Sorouh On the Abu Dhabi side, I would point to the many government initiatives for infrastructure development: the airport, the museum district, new investments into education and healthcare. All of this will bring in additional professionals who will fill up new units and towers. Cleveland Clinic is building a new facility in Abu Dhabi with 450 beds, and to support that they will need 4,000 doctors, specialists and technicians, all of whom will need somewhere to stay.
Euromoney What about the broader region: how is that performing?
OP, Abu Dhabi Terminals If you look at the container transport and logistics side, volumes across the region have been broadly stable, both in the UAE and across the wider GCC. There hasnt been much in the way of growth in terms of throughput on the container side for the GCC, so a lot of the growth must be driven by real estate and other factors. In Abu Dhabi, we have, however, been fortunate to see double-digit growth this year. I think some of the bigger projects in the region will drive increased growth in housing and education, but within the GCC its probably the UAE that is best placed for future growth.
AC, DucabOur experience is very much construction-related. Oil and gas has been a very good segment for us. The general contractor segment is pretty flat, and even in Abu Dhabi we havent seen that much activity lately except in the utilities and infrastructure segment, so we believe that Dubai is again the dominant factor in the region. Oman is showing good progress: they seem to be investing in infrastructure again. We were expecting a lot from Qatar that country is coming through but very slowly; we will need to wait and see when all those big plans for the 2022 World Cup will be put in place.
OP, Abu Dhabi Terminals What we have seen with the ports general cargo segment, especially project cargo, this year is that basically volumes have halved compared with last year, so we get the sense that the Abu Dhabi government has curtailed or delayed a lot of spending in the oil and gas sector, which typically is the main driver for project cargoes.
MS, ADCB There is clearly development taking place across infrastructure, both in successful countries as well as nations that have undergone some sort of turmoil. But there has been less spectacular development in terms of financial infrastructure across the region, and thats what makes the Middle East unique in my view. In this part of the world there are gaps in the capital markets and in terms of the diversity and current capability of value-transfer systems, and that creates opportunities. Admittedly there are big plans on the drawing board, and thats what makes the region so attractive to banks. The other factor affecting the region is monetary easing, which has helped boost liquidity and companies across the region, but which is now probably coming to an end.
Euromoney Does foreign interest in the region remain high? And in terms of cash management, are corporates demanding increasingly sophisticated services?
HG, ADCB This is a big emerging theme: foreign banks, some with no track record in the Middle East at all, are having to expand into the region to follow their middle-market clients. And banks are hearing the same refrain from these clients, which may no longer need advice domestically, but who really covet advice on money transfer transparency and so on.
JH, Sorouh We certainly welcome that opportunity on the client side. If this is indicative of the international banking community taking a new look at the UAE, thats beneficial to everyone.
HG, ADCB During the economic downturn, we decided to re-price most of our clients. Some of that re-pricing was permitted by contract; in other cases it took place through negotiation. One of our local competitors here, a well-known international bank, re-priced customer contracts unilaterally and without discussion. With every single re-pricing we undertook 800 or 900 of them we sat across the table and had some fairly difficult and frank discussions with clients, but ultimately we came to some sort of an understanding. In every case, even with customers with overstretched balance sheets, or in sectors that we didnt like, we stayed with those clients, and that has broadly paid off.
MS, ADCB By aligning ourselves with key international and regional lenders, we can provide our clients with banking access in multiple jurisdictions. Another common trend across the corporate spectrum is that of professionalizing treasuries. This has meant the introduction of infrastructure such as enterprise resource planning, shared service centres, liquidity and risk-management expertise, and growing sophistication in funding and strategy execution. Government entities and GREs [government-related entities] in the UAE, especially Abu Dhabi and Dubai, are already operating at this level, and have driven best practice in the marketplace.
CF, ADCB International bank performance has been somewhat mixed here. Given the regions shallow capital markets, international banks have found the investment banking wallet very hard to find, and that has led to many of them exiting the market. But what makes the UAE exciting is that when one institution leaves, others rush in. We talk about the UAE being overbanked, with 54 lenders well, there are now 700 banks in Singapore. Client demand for sophisticated transaction-banking services has also soared. Corporates and GREs are rapidly moving to automation: they want straight-through processing and reduced manual intervention. Four years ago, we positioned our institution precisely in this context, believing that this trend toward greater automation was inevitable.
OP, Abu Dhabi Terminals I would agree with that. GREs increasingly have the drive and the desire to automate more and to use internet banking in a more sophisticated way.
Euromoney Was there a determination made at any point where companies suddenly decided they needed complex transaction-banking services?
MS, ADCB Two factors have driven this process. One was the financial crisis, during which balance-sheet funding was hard to come by. The other trend involved the trickle-through process of new regulations such as Basle III, which requires collateralized forms of lending. This has large bold letters on it saying: "Professionalize your working-capital management." Only recently have companies started to consider doing their cash management more professionally. Its now seen universally as a front-office business driven by treasurers with seats at the table and with big investments going in. Banks have a key role in this transformation, by helping corporate treasurers evolve to a more visible role within their companies: that of a portfolio risk and liquidity manager, not just a manager of cost reduction.
HG, ADCB We recently sat with a very large regional client operating in the region that does mobile wallet. His main concern was not ease of transfer, but having predictability on how much would arrive at the other end he wants to know that the amount he expects to arrive on his end actually will arrive. What clients want today is not just speed or online processing but they want to be able to promise the beneficiary how much money they will receive during a transaction. They want accuracy and they are willing to pay for it.
OP, Abu Dhabi Terminals Its also because the average amount of time a finance department spends on international payments where fee deductions are not clear upfront is just ridiculous.
AC, Ducab Another phenomenon that cuts to the heart of efficient cash management is the increasing desire among UAE corporates to boost exports. While foreign investors are looking to GCC markets, regional producers are looking overseas. This leads to a need for better banking products such as efficient cash management and trackability, letters of credit management, and the need to service clients from different banking regimes. GCC corporates are still learning about taxation, legal set-ups, export credit risks: all of this is very new to us.
MS, ADCB Would you say this is linked to the evolving professionalism of corporate treasurers? That has been a powerful driver of strategy execution as more functions come within the treasurers remit.
AC, Ducab Necessity is the mother of invention. Ive been in business in good times and bad. People at corporate treasuries have become more sophisticated for two reasons. First, in the past the products werent there, and neither was the marketing push. And second, the financial crisis forced treasurers to tighten up their financial divisions and keep a close track on where the money is going.
Euromoney Arif, do you find that your banking providers are getting better?
AC, Ducab We sometimes struggle to believe that local banks are capable of meeting our export transaction needs. This may be just a perception. But this presents both a challenge and an opportunity to local banking providers, as there is clearly a lot of drive on the part of GREs across the region to manage their risk levels and expand their business profile overseas. The banks that can meet these challenges are the ones that will profit most handsomely.
MS, ADCB Clearly the opportunity is there. Global banks have grown far more risk-averse. They are more conservative, hold less cash on their books, and may walk away from transactions unless there are long, systemic relationships involved. Theres also a preoccupation with regulatory compliance among global banks, with many rethinking their strategy in markets they dont view as essential to their future.
Euromoney Do corporates typically find that banking service is consistent across all regional markets?
AC, Ducab The UAE is certainly number one regionally in terms of service. Wherever we venture across the region, we prefer to take our UAE banking partners with us. But if we had to use banks in other countries beyond the region, we might struggle to find the same level of efficiency, service and comfort.
OP, Abu Dhabi Terminals Right now we are heavily reliant on local bank relationships. In fact, we only use UAE banks. The problem then is two-fold. On the one hand, if we pursue international deals, our local banking providers may struggle to support our aspirations. On the other, currently we dont have established relationships with any international lenders.
CF, ADCB I think thats an issue for local banks in terms of being able to follow their clients. We are starting to see local banks across the GCC becoming far more internationalized. Look at Qatar First Bank, now I think the largest bank in the GCC, with assets of around $250 billion. The extent to which QFB is taking on the world is quite extraordinary.
Euromoney Do you find that local banks are increasingly as good as international banks?
CF, ADCB At ADCB, we have built up correspondent relationships with around 200 banks worldwide, as well as hammering out strategic alliances with Bank of America Merrill Lynch, Santander Group and Kookmin Bank of Korea. There are three or four other strategic alliances in various stages of discussion. This makes it much easier if we look to, say, help Abu Dhabi Terminals build a port terminal in Kenya, as we can work together with an African strategic partner or correspondent partner to ameliorate risk and ensure the project runs smoothly.
HG, ADCB Another point to make is that there is a real exodus of high-quality bankers from international banks to join GCC lenders such as ADCB. There is not a single senior manager in our team who is not from a big western bank. We are proud that we stand shoulder to shoulder with the best international banks, and even drive the conversation in the crowded large-corporate market and our clients tell us as much.
CF, ADCB This is such an international place, so its not just a case of saying: "Well, its just a bunch of corporate executives being transferred from London." This is people coming into the UAE and the GCC from all over the world.
AC, Ducab The challenge now is being able to incorporate all these talented people. Banks and corporates across the region are improving governance and management, but that process does need to accelerate. Talent and ability needs to be more effectively absorbed into the system and to be encouraged to flourish.
HG, ADCB In the west, a young educated person can sit across the table from a grey-haired chief financial officer and command a discussion and that CFO will listen, and might act on that information. In this part of the world, theres a different dynamic, where cultural norms are as important as credentials.
Euromoney Does that make it harder at some level to instil modern governance and management across the region?
HG, ADCB Theres a large retailer on the ground here that under western rules would be bankrupt. It has a good brand but very poor managerial controls, and its a firm we are talking to constantly. The CFO, who is a highly paid westerner, spends every Thursday signing cheques. A colleague had a conversation with the CFO, who said the owners wanted control and were worried about fraud. We talked to them about the services we offer auto reconciliation, remote signing, facsimile signatures, things that can materially change your life. Their answer was clear. They didnt want any of those new services, even if they were free. This is a big challenge for all of us here and bear in mind that this retailer is a first-rate company.
OP, Abu Dhabi Terminals When we talked about the internet and automated banking with you guys, I made the mistake of telling the board about it, and they were not in favour of going down this route. But I discussed it with my CEO and we decided we had to try it, so we rolled it out anyway and later on we presented it to them and now they are very impressed.
AC, Ducab Having sat on boards here for the past decade, I would say that this thinking can be changed and indeed is changing. You just need to work at it. Actually, the concept of governance is a pretty hot topic with local corporates, and they are all learning quickly. When I first came to the UAE everything seemed very temporary: short-term contracts, a lack of career development plans, joint ventures that dissolved when a contract ran its course. That feeling of impermanence bred distrust and created an environment where owners demand to see a CFOs signature on everything. But our firm now has appropriate authorization matrices in place. So things have improved.
CF, ADCB When we kicked off our cash management services in 2009, you could have counted our roster of automation mandates on the fingers of one hand. But that number has grown exponentially since then, and we executed more cash management mandates in the first half of 2013 than we did in the whole of last year. There is trepidation of going first, but what helps here is the sheer amount of human interconnectivity. There are so many communities here: people are always talking, sharing what is happening, so if one company launches high-end cash management operations, everyone hears about it, and that breeds confidence. We see this happening on the cash management side, where there is more of a willingness to bring in sophisticated services.
MS, ADCB In the Middle East, especially the UAE, it is government and GREs that drive better governance. Ten years ago I remember calling on a government-owned confectionery factory in eastern Europe. We were there to talk about treasury automation and cash management. The CFO greeted us in his office. There were no computers anywhere, and he said: "Its all paper-based here; we need to start at a very early stage." In this region, there are definite drivers among both government and central banks to modernize and improve governance.
AC, Ducab There was an incident recently that gave our board pause for thought. A local company lost a lot of money when a single payroll employee allegedly made a fraudulent error and ended up causing a considerable loss. Its that sort of event that leaves local companies wondering if they are ready to embrace technology.
CF, ADCB The biggest companies in the world can still get hacked at a corporate level. This isnt nirvana here these are things you have to think about. If you dont have any computers, you cant be hacked.
MS, ADCB But then again the bigger issue is that automation is necessitated by the relative ease with which manual processes can be fraudulently replicated or signatures forged. That has driven automation everywhere consistently.
HG, ADCB The frauds that take place in branches or lending processing centres rarely have anything to do with computers. In most cases they are low-tech incidents like reaching into a vault door when the camera is sweeping in another. Incidents like someone stealing a password or getting a higher level of access than they are entitled to are extremely rare.
OP, Abu Dhabi Terminals From an internal-control point of view, automated banking tends to be safer. Say you have 200 cheques to sign. You may reject the first three or four, but at some point you just decide OK, no problem, and you start approving them far more easily. There is a much higher chance of error in approving a cheque than in transferring money. Second, at a company I used to work for outside the UAE there were limited numbers of people who could sign off on something. When my boss was travelling, hed give me a stamp that authorized cheques, and that was considered an acceptable form of internal control. With automated banking that is no longer a concern.
Euromoney How damaging are these low-tech incidents to the take-up of professional cash management services?
AC, Ducab News travels very fast here, plus its a cultural thing: it sits on the minds of people around the region. But at the same time I am seeing a change in the cultural part and in the attitude to this. Banks and corporates are adapting if they want the whole world to come here, they have to embrace this new future.
MS, ADCB When we refer to automation, it isnt all merely about internet banking and proxy payments. There is substantial emphasis on authentication, encryption and security management; whatever features you offer, its only as good as the next hacker coming through and taking their chances. That is the language of industry now and that is what will instil confidence in the corporate and industrial world here.
Euromoney Howard, with so many companies now handing control to a younger generation, is that accelerating the adoption of technology and the willingness to accept new forms of banking?
HG, ADCB We are going through a succession with a large family group here right now the third generation is taking over. The problem is that the first generation patriarch remains an adviser to the board. The grandson is a very bright guy, but he has to challenge his father, who is the power centre of his family and the architect of an amazing company that survived the downturn. The grandson is struggling to get support within the family to push through important changes such as bringing in a family-office system, or allowing daughters to take key positions within the company. We are trying to bring in automated services such as straight-through processing, cash management, central lending and treasury functions. The company has more than a dozen sub-entities, each borrowing separately, each with inefficient cash management systems. They dont pool, some are undercapitalized, others overcapitalized, and I think it will take him the better part of a generation to solve these issues.
JH, Sorouh The context here is provided at a higher level by the recent transition of power in Qatar. What sort of an example does that set for the rest of the GCC?
HG, ADCB But then look at King Abdullah in Saudi Arabia. When he became king, no one believed it would be anything other than status quo in the future. Yet despite being 88 years old, he has revolutionized the country, and in my opinion has done an amazing job. The problem now is that hes getting on in years, but all the innovation is coming from him, so Im not sure its just a function of the young replacing the old.
OP, Abu Dhabi Terminals You often see, in many countries, that its when the new generation takes over from a successful generation that the company goes downhill.
Euromoney Across the world, corporates are winnowing down their number of banking providers. Is that happening here?
MS, ADCB This is indeed being seen in the Middle East, but at the same time, corporates value banks for their ability to borrow when they really need capital. This results in corporates retaining special relationship banks that really offer no rationale from a purely treasury perspective.
CF, ADCB I think the credit crunch has caused people to rethink this process, particularly if youve gone from 50 banking partners to 15, and five of those are bailed out or nationalized. We recently won a regional cash management contract for a Fortune 1000 firm from a global bank, and my impression is that the corporate actively wanted to diversify the range of banks with which it works. That was very instructive.
JH, Sorouh Traditionally weve had banking relationships with regional banks and in particular Abu Dhabi banks. Given the size of our new entity and the amount of funding and refunding well require, there will be more business to go around, but we will continue to have our core local funding provided by ADCB and a few other institutions. We wouldnt mind seeing a few smaller players in the market for syndication purposes. Theres also a looming mandate to have Islamic financing in place, possibly in the form of a sukuk, and well need the likes of ADCB to facilitate that structure.
OP, Abu Dhabi Terminals Our situation is slightly different but not necessarily with a different outcome. In many ways we mismanaged our banking relationships in the past: we have had a relationship with most banks in the UAE at some point, and we are consolidating that and trying to move to being partners with just a few banks and to build up a proper track record with the chosen few.
Euromoney Financially mismanaged because you tried to have relationships with everyone?
OP, Abu Dhabi Terminals Before the current management team that includes myself, I dont think anyone at ADT focused on the benefits of cash management.
HG, ADCB Its important to understand why local and regional companies tend to have relationships with everyone. Its not because they love every bank; rather, its because of the efficiency of moving cash around here. Companies here are now consolidating their banking relationships. There is a telecoms company here with a highly professional management team that is focusing all its attention on two or three banks and dictating what they bring to the table. As a bank you like those situations but they are difficult as the client commands the outcome.
AC, Ducab We started with very few local banking partners, but weve branched out into a wider portfolio for practical reasons, because some banks have specific areas of expertise. But no single bank excels in all fields, so we are increasingly doing some cherry picking. Our shareholders also want us to go for more Islamic banking services. Recently we were split between ADCBs conventional offer and an Islamic banking offer from a different bank; we asked if ADCB could go Islamic and they could so there was no reason to diversify. That shows how flexible banks can be if theyre good enough.
Euromoney Are international banks returning to the region or ramping up headcount again? What is the reaction from regional corporates when they return?
HG, ADCB More often than not we are winning against international banks. One of them, a big name in cash management, is losing deals to us every day. Where theyre losing out isnt only on product capability but also on inconsistent relationship management. This is a part of the world where relationships are extraordinarily important and where they often transcend into a personal relationship. You often go to events and picnics with your clients and their families, and these guys notice if a foreign bank has changed CEO four times in three years, or that the team leader they liked has moved on. These companies know me, and they increasingly say that if I can match international banks in terms of cash management service, theyll move their business to me.
Euromoney What has been the main change affecting company thinking?
AC, Ducab We are seeing a certain amount of aggression from international banks. Some of the newcomers are very competitive, in particular some of the Asian banks.
CF, ADCB Over recent years many of the big Chinese banks have set up in the DIFC [Dubai International Financial Centre] and have been highly aggressive in financing Chinese trade. When we talk about big international banks, many people think of the likes of Citi, Barclays and Deutsche Bank. But the big Japanese banks have seriously re-emerged in recent years, and some of the big Korean and Chinese banks are pushing hard into the region.
HG, ADCB We have a philosophy where we say: "If we cant perform at home, we cant perform anywhere." We actually use that relationship card. Theres a very large retailer here that just did a big transaction with a big US bank and when I met with the CEO, I reminded him that this is our home market; that we have an obligation to support each other. Trust me, that relationship card works here.
CF, ADCB But we shouldnt expect this business to just land on our plate. If we arent coming up with ideas, we shouldnt expect that local connectivity to usurp the fact that we didnt do our job.
HG, ADCB One thing we tell our clients is that the competency levels at ADCB are at least as good as at any international bank. In many cases we are doing better than international banks here, and that is being underscored by the amount of deals were winning.
AC, Ducab A lot of local companies are aiming to expand their export business, so choosing a banking partner comes down to what they can offer you in an overseas market. GCC companies now want to know whether their local banks are going to step up, to secure stronger overseas alliances and networks.
MS, ADCB Thats the classic supply-chain point of view as the UAE has probably the worlds most diverse supply-chain network. Our global strategic alliances are a blessing and a challenge. Many ostensibly global banks have branches in over 50 countries but full-service operations in only a few of them. Does that allow them to assess local suppliers, or provide local retail banking services? No. So the challenge for any bank is to prove, through a network of global alliances, that it can offer the same level of service overseas that companies have come to expect at home.
Euromoney What are the other risks we are seeing around the region?
HG, ADCB One of our biggest challenges today is Iran, because of the changing levels of sanctions, and because of our proximity here. We are a 144a bank, so our CEO and key personnel here are personally liable if we make a mistake. We have a full-time team in the bank that studies sanction laws, as every day theres some tweak or change.
JH, Sorouh There are a couple of banks in Dubai that have crossed swords with the long arm of the US law when it comes to Iranian sanctions. That gave us great concern as we had a lot of money on deposit with them that took a while to get out, as the interbank market dried up on them pretty quick.
Euromoney Does that make it harder for you to value assets in countries that are undergoing extreme institutional change?
HG, ADCB Its more about the funds flow. Theres an airline that flies to Tehran several times a week and its an important route for them. Its a challenge for us, though, as we cant touch that part of the business. Or theres a big supermarket with exposure in Iran: when we manage their accounts, all their Iran operations have to be ring-fenced from the rest of the business, and all these accounts have to be double- and tripled-signed off before things are OK.
CF, ADCB We arent insulated here. ADCB has raised money in dollars, and maybe in the future we will choose, over time, to decouple from the US markets. But dollars are very important for us, and if our access to the currency changes, it will affect our entire business. Institutions failing to comply with sanctions can themselves become sanctioned, at which point its harder to find counterparties willing to deal with you.
MS, ADCB Many large firms, including in telecommunications or pharmaceuticals, are doing perfectly legitimate business into Iran. Yet theres no currency they can settle in, so they are forced to try to offset their receivables. And who has those receivables? The Iranian government and the national oil company, which are the chief subject of sanctions.
Euromoney Any final thoughts on how the market is developing across the region?
CF, ADCB There have been signs of normalization in recent years. Were in a growth phase here and we expect clients to demand new borrowing requirements, and we want to support that. Im cautiously optimistic that the banking community has learned some good lessons in recent years, and with Basle III coming in, I expect the financial system here to strengthen further. Our main objective, though, is about more than simply offering credit; its also about providing everything surrounding treasury services, automation and a growing debt market.
OP, Abu Dhabi Terminals From a relationship point of view, you have a bank that should stick with you in good times and bad, so to the extent that companies have had to accommodate banks requests for increased margins in periods of financial crisis, banks equally should now be going back to clients and saying: "Look, things have picked up, so we should really look at lowering your margins again."
HG, ADCB One topic of discussion that is coming up more in conversations is a simple one. It asks if the region has learned from the recent crisis. Banks arent venture capital firms. We dont give free samples away ultimately, we want our money back. And I think we are in a situation here where Im not 100% sure that people learned all that much from the past few years.
AC, Ducab Its nowhere near as bad as it was it was madness before 2009, totally out of control. The pre-crisis years were crazy. A lot of people were terribly hurt by the crisis, and that pain is still fresh in the minds of many, so Im confident we will not see the craziness rise again to the same level.
JH, Sorouh I feel the UAE economy is in good shape. Im very bullish about what the future holds and about the relations we have with banks willing to stand by us in difficult times. Banks including ADCB are working down their bad loans and we are working down some of our inventory on the residential side.
MS, ADCB Weve seen an uptick in the range and quality of corporate treasury services provided in the likes of the UAE, Saudi Arabia and Qatar. Regional banks are improving all the time, and foreign lenders continue to plough into the region in search of profit. Ultimately, the benefits will flow to lenders who have the best and most committed relations with corporates and the wherewithal to provide funding as well as world-class cash management and treasury services, and its notable that while global banks are being more selective in how they use their balance sheets, local banks such as ADCB are creating ever-more global and regional alliances. Its a very interesting time for ADCB and other regional banks seeking to establish a valued transaction banking brand across the Middle East.