the edge finance qatar report 2013

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Qatar’s Economy:Stability, growth and diversification

Asset Management:

Trends, lessons and risks

Banking Sector:

Customers, niches and technology

Plus: Moving the MENA economic debate

The GCC’s insurance sector potential


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The Edge | 1

Moving the MENA economic debate to a new level 2Richard Banks, director of Euromoney Qatar Conferences discusses the role of financial conferences in the MENA region.

Qatar: Policy continuity to aid stability, growth and economic diversification 4Aparajita Mukherjee provides an overview of the major developments in the Qatari financial sector in 2013.

w w w.t h e e d ge . m e

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Finance Qatar Report 2013

Asset management in the GCC: Trends, lessons, risks and regulations 12Farwa Zahra talks to GCC asset managers about regional trends, lessons and specifics in investment management.

Qatari banks: Customers, niche markets and technology 24Qatar’s bankers tell Aparajita Mukherjee that they are optimistic about the prospects of the sector in 2014.

GCC insurance: Potential and challenges 32Farwa Zahra takes a look at the general insurance industry in the GCC to track its growth potential as well as its challenges.

In 2012 Euromoney launched the first in a series of events to consider how finance must be redesigned, re-engineered and re-launched. Among those who spoke were HE Sheikh Abdulla Saud Al Thani, Governor of Qatar Central Bank at the conference.

One of the benefits of organising financial conferences is that each

event acts as a milestone, helping track the debate on economic development. Revisiting the conferences held before the global financial crisis, and listening to the slightly parochial concerns and inflated expectations feels like a step back to another time. Equally, there has been a distinct shift in tone at this year’s events than those of the previous few years – a move away from fire fighting, grounded rather in confidence and pragmatism.

Since the late 1970s, Euromoney Conferences has run events in more than 60 countries. In the Middle East, these events have provided an essential meeting point for international bankers and regional decision-makers. Part of the conferences’ strength is that the highest-profile delegates meet the highest-profile speakers, making the discussions in side rooms and coffee areas often as important as what is said on the main platform. For 2013, we have held events in Cairo, Dubai, Riyadh, Kuwait City and Manama and will end the year with the second Euromoney Qatar Conference this month. Each event has been distinguished by a strong focus on the domestic issues that face specific markets. In Riyadh, the need to find sustainable funding models for future infrastructure investment was a key theme, along with the need to create a more robust stock exchange. In Bahrain, the restoration of confidence to the market seemed a shared priority.

Moving the MenA econoMic debAte to a new level

While domestic issues were a high priority, the conferences also focused on the wider global challenges that face the world today. Understanding how to manage issues such as lower growth, lower yields on riskier financial assets, fiercer competition for scarcer good assets, and the threat of further financial system shocks have become mutual priorities for the international financial leadership class.

However, agreement on the issues of the day is not the same as consensus on solutions. The paradox of economic discussions today is that the experts call for solutions that are in direct contradiction of each other. We need greater regulation and yet more innovation; higher capital and liquidity requirements along with reduced risk; credit expansion, and contraction at the same time.

As a result, we need to combine new ideas with solutions that served us well in the past. We also need to listen to voices that have been marginalised in the past. The balance of power in the global financial system has definitively changed, so that bankers from the developing world are often more cognisant to the realities of the post-crisis economy than their developed world counterparts. This is one of the reasons our conferences in the Middle East North Africa region have grown so quickly. Thanks to their financial liquidity and global investments in developing markets, countries such as Qatar, the United Arab Emirates, Saudi Arabia and Kuwait are becoming leaders in global investment and domestic economic growth. The events are also being marked by a demographic shift as we see a younger generation of financial leaders come to the forefront of discussions. Our conference is the ideal environment for young financial professionals in Qatar, and an ideal opportunity to network with the industry’s key players. This is one of the reasons we have partnered with the Qatari government and the Qatar Central Bank on the Euromoney Qatar Conference to push forward these debates and discussions.

the edge finance | guest column

“We need to combine new ideas with solutions that

served us well in the past.” 2 | The Edge

Richard Banks is the director of Euromoney Qatar Conference.

HSBC SuppDec13.pdf 1 11/20/13 6:03 PM

4 | The Edge

POlICy CONTINUITy TO AID STABIlITy, GROWTH AND ECONOMIC DIVERSIFICATION

QAtAr:

The Edge | 5

economic overview | the edge finance

The State of Qatar witnessed many momentous events in 2013 which can be encapsulated into two broad dimensions – political and economic. While the former peaked with the succession of 33-year-old HH The Emir Sheikh Tamim bin Hamad Al Thani in June, the economic dimension had more drivers, notable among them the upgrade of the Qatar Exchange from ‘Frontier’ to ‘Emerging Market’ status and the reaffirmation of S&P’s Qatar rating. Coming from international agencies, these are powerful statements that will strengthen Qatar’s image in international markets and will guide domestic financial policy in 2014, writes The Edge Finance’s senior business editor Aparajita Mukherjee

The recent affirmation on the long- and short-term foreign and local currency sovereign credit ratings by rating major Standard & Poor’s (S&P) on

Qatar at ‘AA/A-1+’ (which indicates a stable outlook but admits the existence of several structural weaknesses) goes a long way in reinforcing Qatar’s economic stability, its policy continuity and its investment climate. This is especially pertinent when the nation goes through a change of leadership.

By their very nature, these reinforcements bring an additional dimension of responsibility for Qatar’s policymakers, especially with regard to “still-nascent public institutions, and limited disclosure, particularly with respect to government assets and investment income”, as has been stated by S&P.

Non-disclosure, as a systemic ill, was discussed at last year’s Euromoney Conference in Qatar when experts argued that liberalised financial markets hinge on a sufficient level of disclosure and transparency to allow efficiently functioning markets. One regulatory aid that goes a long way in helping the cause of disclosure is a unified financial regulator, something which has been discussed in the Qatari context for more than five years. In December 2012, HH Emir the Father Sheikh Hamad bin Khalifa Al Thani gave a long-awaited approval to regulatory reform, which international newswires

Qatar’s expected total emerging market exchange-traded fund volume.

QAr637

Million

Inaugurating the MEED Qatar Banking Summit 2013, HE Sheikh Abdulla Saud Al Thani, Governor of Qatar Central Bank said that the total assets of commercial banks operating in Qatar increased by 18 percent to QAR875 billion in the first half of 2013 which touched QAR879 billion late last month.

6 | The Edge

the edge finance | economic overview

such as Reuters had stated, “investors hope will help to simplify the slow and complex process of doing business in the Gulf Arab State” and became effective on January 31, 2013. This law replaced the previous QCB Law No. 33 of 2006 and positioned the Qatar Central Bank as supreme authority with overall control, regulatory responsibility and supervisory powers for all financial service providers in the state.

broadening investor baseIn tandem with financial regulatory unification, a survey conducted by FTSE along with Qatar Financial Centre (QFC) showed that Qatar is increasingly becoming popular as an investment destination in the Middle East and North Africa (MENA) region due to the rise of localised liquidity pools and growing sophisticated collateral and risk management techniques.

“Markets such as Saudi Arabia, Qatar and the United Arab Emirates (UAE) appear increasingly popular as an investment destinations,” stated the MENA Asset Management Survey.

Clearly, a paradigm shift in the mobilisation of capital is underway in the region, influenced by political risk, the rise of localised liquidity pools, but not necessarily residing in national stock exchanges, and a growing adherence to sophisticated collateral and risk management techniques, the survey also included.“Positive attitudes towards Qatar substantially reflect the careful evolution of its legal, regulatory and tax environment in light of the regional and global changes and the maturing of its financial sector,” yousef M. Al Jaida, chief strategic development officer, Qatar Financial Centre Authority (QFCA), said.

The findings of the FTSE survey were corroborated with QFC’s first MENA Asset Management Barometer, released in April 2013 which stated that 70 percent of

asset managers were confident about the continued growth of MENA’s financial markets.

Institutional asset management paradigms refocused on debt in 2013. In an insightful data presentation by Bloomberg in April, it was pointed out that Qatari lenders including Commercial Bank and Doha Bank were boosting profits by selling more debt and equities to investors as income from lending slowed.

Commercial Bank and Doha Bank’s gains from investment sales in Q1 of 2013 were the biggest for any first quarter since 2005, data compiled by Bloomberg shows.

“The yield on lending is coming down,” Raghavan Seetharaman, CEO, Doha Bank, said, adding, “But you have options in investment allocations, whether it is bonds or equities, where we managed to make it up.”

impact of MSci upgradeBank of America Merrill lynch, in its analysis of the implications of Qatar Exchange’s upgrade to emerging market status, stated that the country is expected to benefit more than the UAE from the MSCI upgrade, describing Qatar as a ‘macro solid haven’.

Forecasted population of Qatar by end-2014.

2.2 Million

QFC’s first MENA Asset Management Barometer, which was released in April 2013, said that 70 percent of asset managers were confident about the continued growth of MENA’s financial markets.

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8 | The Edge

the edge finance | economic overview

With a view to increasing

volumes on Qe, stock market regulator QFMA has proposed slashing the par value of shares listed on the exchange from QAr10 to QAr1.

“We estimate, given the latest simulated constituents published by MSCI, that Qatar can expect to see total emerging market (EM) exchange-traded fund (ETF) buying of USD175 million (QAR637 million).” The corresponding figure for the UAE would be USD170 million (QAR618.8 million) of ETF buying, it observed.

In their analysis, Bank of America Merrill lynch attributed Qatar’s heavy investment in vertically integrated liquefied natural gas (lNG) infrastructure, location, cost advantage and economies of scale as the main drivers that have allowed enjoy a decade of double digit real gross domestic product (GDP) growth and having the world’s highest GDP per capita.

With a view to increasing volumes on QE, stock market regulator Qatar Financial Markets Authority (QFMA) has proposed slashing the par value of shares listed on the exchange from QAR10 to QAR1, which will make it more promising to issuers of initial public offerings (IPOs). Some IPOs, which have been expected for some time, include Qatar Petroleum and its four subsidiaries (which are expected to issue a total IPO worth QAR180 billion); Doha Global Investment Company (which will float shares worth QAR11 billion) and Barwa Bank (worth QAR2.05 billion).

liquidity of financing institutionsInaugurating the MEED Qatar Banking Summit 2013, HE Sheikh Abdulla Saud Al Thani, Governor of Qatar Central Bank (QCB) said that the total assets of commercial banks operating in Qatar increased by 18 percent to QAR875 billion in the first half of 2013 which touched QAR879 billion late last month. The same forum brought to the fore the liquidity of Qatar’s banking sector which is set to meet the country’s infrastructure finance demand in excess of USD100 billion (QAR364 billion) until 2022. “We are talking about a huge scale of infrastructure financing requirements,” said Bhupendra Jain, head of corporate banking, International Bank of Qatar.

The metro alone is going to cost about QAR127 billion and the port project between QAR25 billion and QAR29 billion. Then there are roads, electricity and water, sewage, Aviation City, stadiums for the World Cup in addition to hotels, new shopping malls and lusail City.

“Bankers say they expect the aggregate balance sheets of Qatar’s banks will continue growing as government investment in projects flows to construction companies and other service providers. Huge further increases in deposits with local and international banks operating in Qatar are also expected and will provide huge leverage for domestic borrowers,” MEED stated.

Forecasting trendsIn his foreword to the Qatar Economic Outlook 2013-2014, published in June 2013, HE Dr. Saleh Al Nabit

Minister of the Ministry of Development Planning and Statistics (MDP&S), says that the Ministry confirms the emergent role of the non-oil and gas economy in driving aggregate growth and in shaping other major trends. Declining yields from maturing oil fields, coupled with gas output that is capped by installed capacity, is likely to spell a gradual retreat in output levels of the hydrocarbon economy and a rising share of non-oil and gas. MDP&S expects that a shift from a marginal expansion of oil and gas production in 2013 to incremental decline in 2014 will nudge gross domestic down from 5.3 percent to 4.5 percent over these years.

Vigorous activity, however, is anticipated in the non-oil and gas economy. Indeed, growth there could accelerate through 2014. A large infrastructure-spending programme that generates demand for cement, steel and other materials, as well as for services, will provide a stimulus to economic activity. A resumption of fast growth of the population, which is expected to climb to 2.2 million or more by end-2014, and an expansionary fiscal stance will also support growth from the demand side.

Of the several expected IPOs on QE end of the year, Barwa Bank is expected to float shares worth QAR2.05 billion.

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It is well recognized that family businesses are a critical feature of the Middle East – it is estimated that 75% of the private sector economy in the GCC is accounted for by family businesses.

The leaders of these businesses are increasingly concerned to see the establishment of the right governance model to ensure effective oversight and participation by stakeholders in the businesses with particular regard to improved management of risk.

Command Centre The management of underlying assets is a very important aspect of this and increasingly the families diversified business models require a degree of centralization and ‘a command centre’ as part of this governance model to ensure risk and investment performance is proactively and effectively managed to agreed parameters rather than ‘in silos’.

Liquidity Events In terms of investments, these businesses are now typically confronting the need to address ‘liquidity events’ which can be important for a particular corporate transaction or family need such as education or retirement.

Proactive oversight of the investments and assets held across the businesses is required in order to be able to meet such funding.

There are many solutions to tailor the governance to the particular business model and needs of the family and stakeholders. These structures now include specialist risk and investment committees. These allow for expert advice and timely participation in more specialist areas of the business.

A risk committee with access to professional groups can be particularly valuable in today’s increasingly risky world with recognition that there are frequently global exposures and with some very technical and less obvious risks which can be severe in terms of impact on a family.

A regular and robust process for oversight of assets and risk is one key area that is a necessity.With regard to the settlement and structuring of assets, particular care is also required to identify and manage risk to families.

Trust and corporate structures settled in robust jurisdictions are commonly developed with tax and succession planning in mind, but ‘dispute’ work highlights that there are many ‘less obvious’ risks to family assets that also require close inspection and management.

The two case studies from Pinsent Masons law firm and Northern Trust, both experienced in supporting families and their business interests, are indicative of the need for process and informed risk management.

Pinsent Masons: Case Study: The risk of mixing Family with businessA recent court judgement in London serves as a costly reminder of the perils of mixing family and corporate assets. Pinsent Masons explains the judgement and how good corporate governance can make the world of difference.

Maintaining an international

portfolio of assets can be a tricky business. In a recent case, the UK courts have made it clear that mingling a family’s affairs with a corporate structure risks piercing the corporate veil, exposing the assets within, not only to family based claims but to other risks such as greater taxation. With ever-increasing numbers of families opting to buy properties in European cities such as London, the prospect of inadvertently allowing a foreign court to assert jurisdiction should concern those with international residences.

A familiar scenario with unexpected results In this case the head of a prominent Saudi family held a portfolio of assets around the globe, including various luxury properties in London, held through BVI companies. Although residents of Saudi Arabia he and his family would spend the summer months at those properties. The family business and corporate structure became intermingled. Through the directors the father managed the assets, dipping in and out of the income and capital when he wished. Following his divorce in Saudi Arabia, as a result of the poor corporate governance and his use of the London property as a holiday home, he found the corporate structure nullified and a considerable proportion of the assets within exposed to a claim in England in excess of $60 million, as a consequence of having lived in London for a period even though the property was not held in an individual’s name.

This case demonstrates that any family resident outside England can come within the English court’s grasp if that family lived for any length of time in England in a property owned (directly or indirectly) by the husband/wife. The lessons to learn

Although each situation is different some basic steps can help mitigate the risks. In England pre-nuptial agreements are still not the last word in protection but are still invaluable, particularly in cases of inherited wealth, and can save costly legal proceedings.

Married or not, care needs to be taken as to how the corporate structure is governed to avoid potentially destroying the structure’s purpose and protection.

NORTHERN TRUST: A CASE STUDYTHE FAMILYA prominent Middle Eastern family wanted to “professionalise” their private investment office by incorporating better governance and greater transparency whilst reducing risk and increasing cost efficiency. The family office interacts with multiple third-party investment managers and historically had no centralised monitoring and reporting system.

THE SERVICES REQUIRED• A reputable single service provider delivering global

asset servicing, trust administration and banking services in support of the client’s rapidly expanding operational needs.

• Substantial reporting and analysis capabilities consolidated on a single web based platform for all asset types, with the ability to ‘look through’ to the underlying assets in their hedge funds on a daily basis. This was a premium bespoke service the previous provider could not deliver.

• An experienced trustee and fiduciary partner to administer the complex trust structures to preserve wealth for the future generations.

BUILDING THE RELATIONSHIPNorthern Trust has been working with families of significant wealth for over 125 years. We established the Global Family Offices & Private Investment practise specifically to look after these families, their private offices and their foundations. Combining our experience in working with nearly 400 families worldwide, we were able to provide a number of bespoke solutions customised to our client’s needs.

SERVICE, EXPERTISE, INTEGRITYBy working in close partnership with our client, Northern Trust was able to deliver: • Full asset servicing capabilities with performance

analysis, financial accounting and Sharia compliance monitoring on assets held worldwide.

• Institutional strength operational capabilities and instant visibility over the client’s consolidated wealth, ensuring control and improved risk management.

• Superior client service by incorporating our client’s specific needs with our traditional client-centric service model. We engaged a number of internal and external parties to provide additional financial literacy to engage and educate the next generation.

• A strong relationship across cultural borders built on trust and respect by communicating and interacting with our client’s traditional practices in mind.

FIVE YEARS ONWe take the time to develop an intimate understanding of our clients’ desires and expectations. It’s one of the reasons we develop successful lasting relationships, often spanning the decades. As a trusted partner who delivered and exceeded

our client’s expectations, Northern Trust is now in a position to provide additional services beyond the original product set required, providing further economies of scale to our client.• We now form part of the family office investment committee

that advises our client about their asset allocations. • We engaged Pinsent Masons to consult with our client on

property tax options in London and they advised our client to value the properties separately rather than collectively. This resulted in a substantially reduced mansion tax liability for our client.

WHY FAMILIES CHOOSE NORTHERN TRUST• Our focus on the core business of custody and

administration, combined with our founding principles of service, expertise and integrity, puts us in a strong financial position.

• Since our inception, we have provided comprehensive solutions, including trust and asset administration, to families. In addition, we help families educate younger generations about wealth and establish or optimise a family office or foundation. We have the scale, flexibility and expertise to help our families achieve these goals.

• Our technology is unsurpassed in the industry. Our single operating platform and global system architecture support both of our businesses and all of our distribution channels, granting Northern Trust advantages in reconciliation, data quality, and expense management.

With reference to the above, Pinsent Masons and Northern Trust co- hosted an interactive event in Doha on September where participants from financial institutions, family businesses and the QFCA were able to share and discuss ideas around the theme of ‘investment opportunities whilst managing risk and liquidity’.

Special advertiSement Special advertiSement

GOVERNANCE AND MANAGING FAMILY OFFICE RISk Family BuSineSSeS in Gcc

For More Information Contact:Andrew NesbittDirector - Middle East RegionGlobal Family Offices, Abu DhabiNorthern TrustTel: +971 (0)55 9255586Email: [email protected]

Roger PhillipsLegal Director- Qatar OfficeTel: +974 44269206Email: [email protected]

Andrew Nesbitt

Roger Phillips

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The Edge | 13

asset management | the edge finance

Regional asset managers are unanimous that the investor community in the Middle East know what they want from them and that trust plays a major role behind their decisions. In conversation with The Edge Finance’s Farwa Zahra, a variety of GCC asset managers discuss the leading trends, lessons and specifics of investment management market in the region.

“overall, the gcc investors’ level

of knowledge and financial expertise is equal, if notslightly better than most of our client base globally.” - Vic Malik, Barclays.

A ccording to McKinsey, the Middle East and North Africa region contributed USD1.6 trillion (QAR5.8 trillion) to global sovereign wealth funds in 2011,

sharing 40 percent of the worldwide sovereign wealth under management. Despite the high number of high net worth individuals, experts believe that the overall assets under management from the Gulf Cooperation Council (GCC) still make up a small share of the global size. QFC’s (Qatar FInancial Centre) MENA Asset Management Barometer for 2013 shows that 44 percent of the asset managers expect the industry to grow between 10 and 15 percent, while another 31 percent forecast it to grow. between five and 10 percent. However, the head of asset management at Qatar National Bank (QNB), Ajay Kumar predicts growth marginally higher for 2014.

According to Beyond Convention: The QFC-Campden Wealth, Middle East Wealth Study 2013, the asset management industry in Qatar, like that of the GCC, diverges away from certain global trends. While private equity makes up a very small portion of assets to be managed around the world, much of the asset share in

the edge finance | asset management

14 | The Edge

the GCC’s asset management industry comprises private equity currently contributing between USD15 billion (QAR54.6 billion) and USD18 billion (QAR65.5 billion) to the industry, which, according to Terry Mellish, senior managing director and member of Natixis Global Asset Management (NGAM) international executive committee, is expected to increase further. “We’re seeing investors move their portfolios out of cash and fixed income into equity and alternative strategies, such as private equity or illiquid assets, with a view to maximising returns,” Mellish tells The Edge Finance.

Qatar’s economic growth has outpaced an already growing Middle Eastern economy. The upgrade of Qatar Exchange to ‘Emerging Market’ from Morgan Stanley Capital International (MSCI) is also likely to work as a substantial growth driver for the asset management industry. In a statement released by Qatar Exchange (QE) last month, Rashid bin Ali Al Mansoori, CEO of QE, was quoted as saying, “This upgrade will attract more international investors to the stock market, on the grounds that many of them are interested in investment in the emerging markets as the upgrade reflects the compliance with the best international practices and standards.” From an asset manager’s point of view, according to Kumar, the upgrade provides opportunities for the growth of interest in passive funds that allow investors to track the performance of worldwide stock markets.

gcc trendsIn the last decade, the GCC’s private equity has grown 15 times to reach USD1 billion (QAR3.64 billion), cites Markab Advisory’s latest report Asset Management Industry in the GCC: Growth Dynamics and Contours on the Next Phase of Evolution. Some trends particular to the GCC’s asset management, according to the acting head of asset management Robert Pramberger and manager Patrick Rahal at The First Investor (TFI) in Qatar, include correlation to oil prices, sensitivity to regional geopolitics, less institutionalised markets and strong government backing. Thomas F. Connolly, managing director and head of asset management, Middle East and North Africa, BNy Mellon Investment Management, adds, “There has been a strong demand for GCC bonds in the region. We’re noticing now that investors are also looking at the debt of Asian issuers to diversify some of this exposure.”

Kumar of QNB adds that these trends include shifts in allocation towards equity and yield-enhancing structured notes, preference for real estate investment, marginal flows in private equity, continued aversion to hedge

Afa Boran, head of asset management at Amwal, is of the view that understanding the particular investment criteria of the client and proper communication are very important in achieving client satisfaction.

The percentage of respondents in Beyond

Convention, the QFC-Campden Wealth Study on the Middle East, who

prefer wealth creation to wealth preservation.

60%

Market sentiments in the Middle East

Market volatility has eroded my confidence in the marketsAGREE

However, asset growth is increasingly a priority over protecting principalAGREE

The willingness to take investment risks in the Middle East is higher than anywhere elseAGREE

Biggest investor concerns in the Middle East

Unemployment Terrorism Value of real estate Natural disaster War

44% 44% 39% 38% 38%

Middle East average

Global average

Middle East average

Global average

Middle East average

Global average

Europe

61%61%68%

74%67%

57%

37%44%

Source: 2013 Annual global investor study conducted by Natixis Global Asset Management.

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The Edge | 17

funds and low deposit rates, driving investors to look for alternatives to enhance returns. For the respondents of the wealth study done by QFC and Campden, however, both private equity and hedge funds remained popular.

risk appetiteWhile handing investment control to asset managers opens the clients’ portfolio to a diverse range of businesses and markets, the risk factor remains inevitable. However, the demographics of clients often define their risk-taking patterns, according to Amwal’s head of asset management Afa Boran who says, “An investor retiring soon is likely to have a different risk appetite to that of a relatively young investor who is expecting to work for a long period of time. Similarly, someone who has significant excess funds should have a different risk appetite than someone with limited funds.”

The overall trend in the GCC, however, is changing in favour of riskier decisions on the part of investors. According to 2013 NGAM’s Global Survey Of Individual Investors, for 75 percent of the 250 investors surveyed in the Middle East, asset growth is increasingly a priority

over simple protection. “We are seeing a greater appetite for risk and more clients willing to invest in what are perceived as higher-risk asset classes, such as equities, private equity and non-liquid asset classes such as infrastructure,” says Mellish of NGAM. The survey’s findings support the QFC-Campden Wealth Study results according to which more than 60 percent of the respondents preferred wealth creation to wealth preservation.

While the GCC investors may be risk takers, they are informed. “Overall their level of knowledge and financial expertise is equal, if not slightly better, than most of our client base globally,” says director of global Investments and solutions at Barclays Wealth and Investment Management, MENA, Vic Malik, who finds MENA clients exceptionally informed about real estate.

regulatory environment Despite the immense scope Qatar and the GCC puts forth to the asset management industry, experts at TFI believe that more institutionalised capital markets and improvement in the regulatory environment can boost trading volumes and investment product offerings and lead to more capital inflows to the industry.

Speaking about the regulatory environment in the region, Kumar of QNB says that the regulators have been evolving with changes in structure, coverage, reach and content, further adding, “We have witnessed significant increase in segregated mandates vis-à-vis mutual fund subscriptions in line with the way the GCC markets are structured. However, mandates have evolved towards multi-asset class strategies and absolute return strategies.”

While 52 percent of the managers interviewed for the QFC’s Asset Management Barometer saw regulations as a challenge, Kumar believes that the tussle between industry players and regulatory bodies will help mature the region’s asset management market.

investor preferencesExperts in the industry believe that the customers are looking for trust, whether it is based on the asset manager’s portfolio, past record or their experience. “Trust is an important issue, now more than ever,” says Connolly of BNy Mellon, “Investors in the region know

Acting head of asset management at The First Investor, Robert Pramberger, says asset management is all about long-term relationships and building trust.

“investors have come to realise

that there are other risks beyond just investment risks.” - Ajay Kumar, QNB.

GCC’s asset management industry’s private equity share.

QAr65.5billion

asset management | the edge finance

Asset Management in the GCC at a glance

Total GCC Assets Under Management

GCC management companies GCC funds

USD 30.9

billion

101 378

HedgeFunds

Property

Fixed incomeand sukuk

Others

Equity

Money Market

0.5%0.9%

4.2%6%

39.3%49.1%

Breakdown of GCC funds by asset class

Funds by Country

QatarUSD157 million

UAE USD1.3 billion

OmanUSD510.7 millionSaudi Arabia

USD23.5 billion

Kuwait USD4.2 billion

BahrainUSD1.3 billion

Source: Qatar Financial Centre Asset Management Barometer 2013, 2013 Annual global investor study conducted by Natixis Global Asset Management, Markab Advisory Asset Management Report 2013, Zawya.

the edge finance | asset management

20 | The Edge

what they want and they won’t settle for second-tier strategies or managers.”

Other than track record and consistency, Pramberger and Rahal of TFI believe that the customers within the region prefer clear investment guidelines and constraints, easy access to the investment team, fundamental analysis behind an investment decision, and capital preservation. “The increased knowledge around portfolio construction and risk awareness is starting to shine through, with investors now looking to balance asset growth with protection of capital,” says NGAM’s Mellish. Transparency, according to Barclays’ Malik, is another vital benchmark for the clients. “The clients want their asset managers to explain the sources of return, whether positive or negative,” he says.

Product innovationWith government being a major investing body in Qatar, the rest of the country’s wealth is distributed across a rather small number of private owners. “Unlike other markets, Qatar has limited investor base. Therefore, we focus on providing a greater range of products to expand assets under management,” says Kumar. Such a market, he adds, leads asset managers to innovate customised product offerings.

“Where scale is limited, the market by nature of its own dynamism will provide opportunities for innovation,” Kumar continues. One such offering has been introduced by NGAM. Durable Portfolio Construction is the company’s risk-centric approach that aims to help investors build better portfolios which can be more efficient in withstanding the ups and downs of unstable market cycles and produce stable wealth growth throughout the years.

Considering MENA’s competitiveness in the sector, asset managers, according to Barclays’ Malik, have to differentiate through investment strategy, performance or a superior investment process. Commenting on the customers’ product preferences, Malik believes that fixed income has been relevant for a reasonably long time in the Middle Eastern capital market. However, 70 percent of the managers interviewed in QFC’s Asset Management Barometer agreed that increased spending of local governments has been impacting the MENA’s asset management scene positively. “large government

surpluses and increasing state spending have led to large pools of relatively untapped or passively managed regional wealth and a rapidly growing investable capital base,” say Pramberger and Rahal of TFI.

lessons for asset managersWhile the 2008 and 2009 financial crisis made clients sceptical about asset managers, many industry players also learnt their lesson. Pramberger and Rahal are of the view that in order to be successful, management companies within the region not only need to do their homework to avoid toxic investments, but should also favour liquid investments. “Avoid investing when you don’t have a full understanding, in an up-market you might not be best but in a down-market your clients will be happy and avoid large losses,” advise Pramberger and Rahal, who further suggest that no single strategy of investing works best, “Blend top-down and bottom-up when taking an investment decision.”

For NGAM’s Mellish, managers learned the importance of “true diversification, with a full understanding of the different factors driving assets, sector and stock selection”. Another lesson learned from the crisis was that while the credit and market losses may not have a direct impact on them, operational losses directly hit these companies. “Investors have come to realise that there are other risks beyond just investment risks, such as counterparty and operational risks, and the latter are not compensated for,” says QNB’s Kumar.

The key to success within the GCC, like any other region, is the ability of the asset manager to strike a balance between product sales and investment solutions. Kumar continues, “Engineering the investment universe to meet investor requirements is exciting but risky and expensive, whereas product sales are inexpensive [but may] not be a perfect fit for investor. The balance becomes critical for the overall viability of the business where margins are coming under pressure.” Explaining his philosophy, BNy Mellon’s Connolly says, “you have to be a true partner, rather than a product pusher.“

The percentage of managers who agreed that increased spending of local

governments has impacted the MENA asset management scene positively.

70%

“investors in the region know

what they want and they won’t settle for second-tier strategies or managers.” - Thomas F. Connolly, BNY Mellon Investment

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QAtAri bAnkS:CUSTOMERS, TECHNOlOGy AND NICHE MARKETS

Bankers in Qatar share optimism on the performance of the sector in 2013. They feel that both on the product side, as well as on the choice of portfolio, banks are guided by what the customers want. With fierce competition a reality that will not change in the near future, Qatar’s bankers are confident of making their individual business models work for them. by Aparajita Mukherjee

L isting the most important monetary, financial and institutional developments

in March 2013, the Qatar Economic Outlook 2013-2014 issued by the Ministry of Development Planning and Statistics mentions the Qatar Central Bank’s (QCB’s) issuance of local currency debt of QAR4 billion every quarter, split into QAR3 billion in conventional bonds with three-year maturity, and QAR1 billion in Islamic bonds, or sukuk, with five-year maturity. The principal objective, it states, is to ensure better liquidity management in the banking system, extend the yield curve, and provide options for domestic financing in view of funding and business needs related to Qatar’s large pipeline of infrastructure investments.

Along with liquidity management, QCB’s regulatory priority is creating a pool of funds, drawn out of the commercial banks’ investment portfolio for channelling into infrastructure. To that effect, in June 2013, QCB issued a circular that reduced bank limits on equity

and debt investment from 30 percent to 25 percent on capital reserves.

At the MEED Qatar Banking Summit 2013, held in September, the local bankers that The Edge Finance spoke with felt that infrastructure will increasingly become a focus area of their business. However, given the volumes, this will mostly be driven by the state exchequer and some significant part by QNB, though relatively smaller banks like IBQ were emphatic that the sector would not only need substantial finance, but would open up business ancillaries for them.

QCB has also put in place regulations which protect the rights of consumers, imposing certain service levels on banks and controlling the amount of debt which consumers can individually borrow, along with placing maximum caps on the lending that individual banks can undertake. Commenting on these regulatory initiatives of QCB, Ross Officer, country head of Mashreq Qatar, says that such regulations have a twin purpose – one, to ensure the ongoing health of the banking system, and two, to protect individuals from excessive borrowing.

Islamic banks, on the other side, are reaping the advantages of QCB’s decision to close down Islamic windows of conventional banks which have since sold their portfolios to the Islamic banks, contributing to consolidation in the Islamic banking market. Commenting on what impact this has had on their business, Ali Al Mesaifri, chief operating officer of Qatar International Islamic Bank (QIIB) says that it reduced the level of competition for the Islamic financing market and has helped only for those Islamic banks that have placed successful strategies to leverage from the closure of Islamic windows.

As testimony of the strength of the Islamic finance market, Al Mesaifri cites QCB data and says that Islamic banks contribute more than 24 percent of assets to the total portfolio of Qatari banks, while their share in deposits is more than 26.5 percent in 2012.

Some bankers The Edge Finance spoke to foresee that with the forthcoming spate of initial public offerings (IPOs) on Qatar Exchange (QE) this month, the bond market is also likely to see rejuvenated efforts both from the corporate sector and the government which are likely to issue domestic bonds meant for local banks and these would be listed on QE. The bonds would be for medium or long-term periods, in tandem with Basel III which stipulates a larger share of banks’ liquid assets. Banks will need to hold those instruments in Qatari riyals in order to meet with Basel III requirements.

business trendsOn the product side, banks in Qatar are looking forward or have already started participating in the projects which have invited tenders such as QRail. On the delivery side, many banks have also fine-tuned their delivery mechanisms and are fast replacing brick-and-mortar banking with mobile and electronic channels. This is true

The Islamic banking market has witnessed a degree of consolidation after the QCB ruling in 2011 which stipulated that conventional banks have to wind down their Islamic windows.

the edge finance | retail banking

26 | The Edge

of a wholesale-sector-led banks such as al khaliji, as it is of HSBC and Standard Chartered. World Bank data says that for every 1000 adults in Qatar, 673 deposit in commercial banks, which is lower in comparison to Saudi Arabia, at 749.

Attesting this trend, Kris Werner, head of retail banking and wealth management, HSBC Qatar, says that HSBC is seeing an increase in the utilisation of electronic channels such as mobile banking, internet banking and other e-channels. “It is clear that time and the convenience of banking are the driving forces behind these trends,” he adds.

Customers, according to Werner, are also more conservative in their requirements and are more focused on products and services that they truly need rather than taking on something just because it is available. He continues, “Customers rely greatly on ethical banking and transparency of matters such as terms and conditions, product features and interest rates.”

Echoing similar sentiments, Officer of Mashreq Qatar, says that trends in retail banking tends to be driven by three things – consumer demand, technological innovation and central bank regulations. Consumers typically want to take loans and obtain credit cards at the best possible rates and service levels, while banks seek to give their clients remote access to their bank accounts and other services using the latest technology.

As testimony of the strength of the Islamic finance market, Al Mesaifri cites QCB data and says that Islamic banks contributed more than 24 percent of assets to the total portfolio of Qatari banks in 2012.

25%Cap on banks’ investment limits in equity and debt,

as per a QCB circular issued in June 2013.

retail banking | the edge finance

The Edge | 27

Lending exposures of select BanksMasraf

Al Rayan

Al Khaliji Commercial

Bank

Doha Bank

Commercial Bank

Qatar International Islamic Bank

Qatar Islamic Bank

Qatar National Bank

0% 20% 40% 60% 80% 100%

Government andrelated agencies

Industry Contracting Real estate Personal Other

Source: Loan book data year ending 2012 provided by company reports and QNB Financial Services


Mohamed Abdelkhalek, group chief business officer, al khaliji says, “For banks gaining new customers, it is directly correlated to product features, commercial terms, distribution, brand recognition and service delivery.”

With a small population, but one with Internet penetration of over 90 percent, Charles Carlson, CEO of Standard Chartered Bank Qatar, says that based on his interactions with customers, online banking is an absolute must. “The customers that I have talked to use online banking and one of the main reasons they bank with us is because they want to move money to any country around the world and they want to do it online.”

innovation and customer profilesIt is not technology alone that drives innovation in banking in Qatar. For banks such as al khaliji, innovation also defines how they attract new business. Mohamed Abdelkhalek, group chief business officer, al khaliji, says, “For banks gaining new customers, it is directly correlated to product features, commercial terms, distribution, brand recognition and service delivery.” Thus, he adds, innovation can range from a simple facelift of an existing product to improve its appearance, to a more radical innovation process, which can change the company’s entire business model.

But innovation alone cannot guarantee that a particular bank will achieve its bottom-line unless banks are proactive and analyse customer needs. This can be achieved by using all the available tools to study transaction history and utilise the findings by predicting customers’ needs and requirements. “By doing so, banks are now in a much better position to interpret customers’ behaviour and introduce products and services to meet their requirements,” Abdulkhalek says.

Officer of Mashreq is of the view that banking is a

Qatari Banks vs GCC BanksAsset quality and credit losses

The percentage of non-performing loans to gross loans in Qatari banks is generally much lower than regional averages:

4% GCC Islamic

Banks

Qatari Islamic

Banks1.5%

and impairment on securities to operating revenues:

Key conventional local banks 1.4%GCC Banks

Asset Quality

3.3%

20.2% GCC Islamic

Banks

Qatari Islamic

Banks9.8% Key conventional local banks 9.1%GCC Banks

Credit Losses

23.8%Source: Data from banks rated by S&P 2013, Qatar’s Islamic Banks are on a fast track to growth, S&P Ratings Services.

28 | The Edge

Thinking Beyond To build SuSTainable Value

Special adVerTiSemenT

Reputation is about credibility, trust, and performance

Over the course of the last 5 years, QNB has witnessed a significant transformation and today, is not only the largest Bank in The MENA Region but, according to Bloomberg Markets in 2012, is the World’s Strongest Bank based on assets under management in excess of $100 billion.

Underpinned by a clear and consistent strategy, QNB has been expanding its operations both within Qatar and on the International Stage. It currently operates in 26 countries across Asia, Africa, Europe and The Middle East, has approximately 13,500 employees in over 570 locations and has an ATM network of over 1,200 machines.

Historical Roots and International Expansion

Established in 1964 as the country’s first Qatari-owned Commercial Bank, the QNB Group has an ownership structure split between The Qatar Investment Authority (QIA) and the Private Sector. This arrangement has worked well enabling QNB to enjoy an exciting period of international expansion combined with its pivotal

role of supporting the rapid growth of the domestic Qatar economy. Strong relationships with the Corporate sector (both private and public) has contributed significantly to consolidating the Bank’s leading market position. Alignment with The National Vision 2030 and the increasing diversification of the Qatar economy will see QNB play a pivotal role in the country’s development in the coming years.

Robust Financial StrengthQNB Group has steadily grown to become the largest bank in The Middle East and North Africa Region (MENA) and is by far the leading domestic financial institution with a market share exceeding 45% of banking sector assets.

The Group recorded net profits, for the nine months ended 30th September 2013, of QR 7.1billion (up 14.1% on the previous period in 2012) and this demonstrated QNB’s success in achieving strong growth across a diverse range of revenue sources. Total assets increased by 24.5% to reach QR 437 billion, the highest total ever achieved by the Group.

In addition, QNB Group is amongst the highest rated regional banks from

international credit agencies: Standard & Poors (A+), Moody’s (Aa3), Fitch (A+) and Capital Intelligence (AA-).

A Brand of QualityBased on the Group’s continuous strong financial performance and an expanding international presence, QNB is currently ranked as the most valuable brand in the MENA region, with a current world ranking of 120 in 2013.

Also, the Bank has consolidated its position within the rankings of the World’s 50 Safest Banks in the Emerging Markets. According to the latest update published by Global Finance Magazine in 2013, QNB secured an impressive top ranking in Qatar and was rated number 3 Arab Bank within the Global League Table List.

All of these factors have combined to both grow the QNB business and enhance its reputation both within the Region and Internationally.

With a strategic focus on both building “core” business strengths and maximizing international opportunities in key target markets as they arise, QNB is well placed to enhance further its growing reputation.

QNB Financial Supplement.indd 2 11/28/13 12:53 PM

Credit Growth in Qatar 2009 to 2013

*Based on July 2013 annualised figures.Sources: (Qatar Central Bank Statistical Bulletin, Standard & Poors 2013)

Credit to non-publicentities (left scale)

Credit to government and public entities (left scale)

Domestic credit growth(right scale)

010

52030405060708090

2009 2010 2011 2012 July 2013*

10

15

20

25

30

QAR billion %


very competitive industry in Qatar. Banks must compete for business, based on the quality of their service, and attractiveness of pricing and product innovation. “Most banks have made large investments in technological innovation,” he says, “in order to improve customer service by reducing turnaround times and reducing dependence on their branch networks for servicing customers. I believe that these trends will continue as long as technological innovation continues.”

Carlson of Standard Chartered draws attention to an important product innovation that can work for family-owned businesses. “If I am banking on priority or premium, I want some investment products and it should be totally tailor-made.” This is usually the case with ultra-high net wealth individuals who may have cross-border service requirements.

Another segment that banks need to focus on in Carlson’s view is family governance, which should be clearly sorted out, especially in business environments, such as Qatar with many family-owned businesses.

Focus on customer segments defines a bank’s identity and its business models. Bankers The Edge Finance spoke to underline the crucial role played by customers, but in Abdelkhalek’s view, it is also the overall financial climate that determines what segment of customers a particular bank will choose to focus on. He is of the opinion that putting all customers in a uniform bracket is not correct, a sentiment Carlson agrees with. “Some customers are rate-driven and seek the best market rates, while others place a high value on service standards and value long-term-term relationships that will give them access to

“banks are now in a position to

interpret customer’s behaviour and introduce products and services.” – Mohamed Abdelkhalek, group chief business officer, al khaliji.

30 | The Edge

The Edge | 31

retail banking | the edge finance

Ross Officer, country head of Mashreq Qatar says trends in retail banking tend to be driven by three things – consumer demand, technological innovation and central bank regulations.

673Number of adults per 1000 in Qatar with deposits in commercial banks.

financial advice as and when needed. Customers these days closely scrutinise known aspects of a financial institution – like how much trust there is in the brand, how competitive the rate is in comparison to market rates, and what products or services stand out,” says Abdelkhalek.

business portfolioAs with choice of customers, so with portfolios, each bank has its strength areas. For al khaliji, the focus is clearly outlined in a medium-term plan for the bank which outlines their strategy between 2013 and 2015 as creating and delivering long-term sustainable shareholder value. Al Mesaifri of QIIB adds that banks are also innovating their retail products and channels to improve services and developing services for the small-to-medium enterprises segment, which is an area of focus by the government for the development of the private sector economy in Qatar.

Ali Al Mesaifri of Qiib says

that closure of islamic windows of conventional banks reduced the level of competition for the Islamic financing market.

With one of the highest growth rates in the world, the gcc insurance market presents a mix of risks and opportunities, writes Farwa Zahra

With an average annual revenue growth of 16.8 percent recorded

over a six-year period, the Gulf Cooperation Council (GCC) countries make up one of the fastest growing insurance markets in the world. From USD6.4 billion (QAR23 billion) in 2006, insurance premiums in the region touched USD16.3 billion (QAR59 billion) last year, cites Moodys.

The GCC’s average insurance penetration, according to Alpen Capital’s report GCC Insurance Industry published in 2013, is 1.1 percent, far below the global average of 6.5 percent. The trend in the long term provides increasing opportunities, considering the size of the untapped market. It is, then, no surprise that 60 percent of the respondents of Qatar Financial Centre’s (QFC) GCC Insurance Barometer published in 2012, expected premium growth to exceed the region’s GDP.

opportunitiesQatar has an even lower insurance penetration rate of 0.7 percent as of 2012, according to Alpen Capital, so the future of the insurance sector is ostensibly even more promising here. Ahead of the 2022 World Cup, Qatar’s increasing workforce demand will come with an expansion in its insurance market, which has recently outperformed Kuwait’s insurance sector.

The current boom in Qatar’s

gcc inSurAnce: opportunities and challenges

construction and infrastructure projects is a key growth driver. “The region [is] set to invest more than USD900 billion (QAR3.3 trillion) in infrastructure projects over the next decade,” says Alexis de Beauregard, chief officer of marketing and retail product offering at AXA Gulf Insurance, who sees this as a great opportunity for insurance providers.

In June 2014, Qatar mandated its universal health law, which requires insurance coverage for basic healthcare. Inevitably, the legislation will also mean expansion in the size of Qatar’s insurance market, particularly on corporate lines. Conrad V. Busuttil, country head and chief operations officer of lifecare International Qatar, distributing Bupa products in Qatar, explains for example how their corporate plan caters for groups of 80 members or more. “There are no pre-established set pieces in this cover,” he says, and the idea is to initiate from a blank sheet and underwrite the product entirely according to the clients’ own demands and requisites.”

Another driver behind the growth of insurance penetration, according to QFC’s publication (Re)Insurance, is the emergence of shari’ah-compliant Takaful, which has attracted a target population previously untapped.

challengesWhile the GCC provides a ground for growth of insurance companies, it is not free from challenges. The fierce competition in the GCC insurance market poses a major challenge to industry players, states Alpen Capital’s report, driving consolidation in the insurance industry, “for efficiency gains and economies of scale,” says AXA’s Beauregard. The GCC’s low penetration rate also explains the lack of awareness about insurance products. This, he adds, highlights the need to educate the market.

Nevertheless, recently experts have noticed a change in the level of customer knowledge. “The insurance awareness of the population and the customer expectations are increasing. They are more looking for value for money deals as well as for technical expertise,” Beauregard agrees. This also means that the increasing size of the GCC’s insurance market seemingly works more favourably for international players as 50 percent of the respondents for QFC’s MENA Insurance Barometer, published in 2013, expect a greater share of foreign insurance companies on the basis of superior skills and services.

The challenges in the GCC’s insurance market may be huge, but the increasing number of avenues this region provides makes it an attractive destination for insurance industry companies from all over the world.

32 | The Edge

the edge finance | insurance

Qatar’s insurance penetration rate is 0.7

percent, compared with the GCC’s 1.1 percent and global average rate of 6.5 percent.

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