Tag Archives: Bank

Security cheques in the UAE on course for extinction

December 6, 2017 By in Bank Tags:

Nothing in this article is to be construed as legal advice. This is an economic analysis of what I see as being possible rational decisions.

What are security cheques?

Let me first explain: a post-dated cheque has traditionally been used in the UAE as a last ditch guarantee in the event that a bank or other party cannot be paid by the person signing the cheque, often in the case of a loan or service rendered or goods supplied, ahead of an expectation of receiving payment in the future at some point. This is because a criminal case could be filed against that person in the event that the cheque is presented and then returned if there are insufficient funds in the account related to it. The ultimate penalty for this in the past was jail, providing a lot of leverage to the party trying to recoup their funds. There are various laws surrounding how a bounced cheque is handled by the legal system but the spirit of the law seems clear to me and that is to stop people from behaving in a fraudulent manner. However, various parties, including banks, company suppliers and vendors as well as individuals such as landlords have used the letter of the law to apply anti-fraud rules to economically distressed companies and persons.

Why do I say this? Well, think of it this way: If the intent of the law was to, for example, jail people who cannot pay back a loan then there would be a law that specifically states that. However, in the absence of a security cheque that bounces, a person who fails to pay back a debt does not necessarily face the same fate as a person who has bounced a cheque and certainly the path to the final legal judgement is much more balanced. This reasoning clearly points to the fact that the law was not meant to punish those in financial distress. It is the spirit of the law that has been twisted and put to use for purposes not intended. I am not a mind reader, but the logic certainly points to these conclusions. Continue reading →

Stark SME stats don’t tell the full story

November 27, 2017 By in SME Tags: , ,

The issue of lending to SMEs in the UAE was discussed at the Middle East Banking Forum in Abu Dhabi on Wednesday, where a number of solutions were raised to tackle a perceived dearth in funding for the country’s small businesses.

Mubarak Rashed Al Mansoori, the governor of the Central Bank of the UAE, said the Bank was working on a multi-pronged solution to the conundrum, one of which is to encourage private equity (PE) investors to take up some of the slack left by the banks.

Important as it is for PE players to participate in the SME sector, it’s worth remembering that their contribution forms a different part of the capital structure for businesses of all sizes. There’s undoubtedly a place for equity investment in SMEs, but that doesn’t mean they won’t need debt as well.

That’s not to say that the Central Bank is looking for solutions in the wrong place. But it’s worth noting that the bank has already done everything in its power to support the SME segment. The banking sector and the SMEs themselves, however, deserve a little more scrutiny. Continue reading →

Earnings Quality vs Quantum of Earnings

October 21, 2017 By in Analysis Tags: , 5 Comments

The third quarter (Q3) is over and earnings season has begun as listed companies release their Q3 financials. We’ll take a deep look at these financials, starting with the heart of the economy – the banking sector. My main aim here is to look at the picture that the financials give and try to understand what might be going on in terms of a longer term trend. My focus is the quality of earnings and the direction that earnings are moving in.

I want to take a moment and clarify a few issues. I am looking at earnings and not at creditworthiness, which looks positive given the capital adequacy ratios of these banks. The second point is that I am selecting the larger banks that first released earnings, so selection is not based on financial performance. Indeed, the banks that released earnings first should be applauded for working to provide investors with important transparency and timely provision of information. Continue reading →

The UAE's banking paradox

August 1, 2017 By in Analysis Tags:

In this section I look at the UAE banking system and come to some startling conclusions. It seems that banks are grabbing market share in a market with deteriorating margins and increased risks.

Last week I took a look at Union National Bank’s Q2 financial results. The focus was to look beyond the headline numbers and try to understand the underlying fundamentals and what the core trend might be. This led to the idea of core revenue and expenses, ie interest income from direct lending and debt securities and interest expense of deposits and debt securities. UNB also provides Islamic financing so I added those in as well. This tells us what is happening at the basic banking level and then I look at any out-of-the-ordinary movements in other parts of the business.

Mashreq recently reported Q2 results and announced an increase in profit of 3.4 per cent over Q2 2016. But looking at basic banking, core revenue rose 9.97 per cent whilst core expenses rose 19 per cent. This is not a good sign since if it continues, sooner or later, net core income will become negative. Operating expenses are flat at about 1 per cent so had little impact on changes to net profit. Continue reading →

Fintech's power is in the unbanked and unbankable

April 6, 2017 By in Entrepreneurship Tags: ,

3d rendering of futuristic blue circuit boardIn today’s article ­Kath­arine Budd, the chief executive and co-founder of Now Money, a Dubai-based fintech start-up, joins me in explaining how fintech works.

To understand this new financial services phenomenon, it is best to start at the very beginning. A very good place to start.

Although you might now be able to operate your bank account from a website or mobile app, the systems that sit behind these online user interfaces have barely changed since they were implemented in the 1970s. The international payment transfer system Swift still runs on the telephone systems. This means that no matter how nice the front-end website your account is on, the transactions displayed are still run off legacy systems, which can lead to legacy issues such as delays in processing transactions and potentially losing the transaction in the system altogether.

So why don’t banks just scrap these legacy systems if they are not able to match modern-day systems? Not that simple. To try and keep up with changes in market demand, these systems have been repeatedly improved upon using incremental upgrades, usually by different IT teams, until they now represent a hodgepodge of sub-systems.

Investing in a system upgrade – which would be expensive, have a material risk of failure and need all other banks to adopt for interoperability purposes – doesn’t look so appealing. This disincentive ensures that customer frustrations continue.

Enter a new breed of start-ups that are innovating where banks are stagnating. The start-ups are cooperating with regulators and cybersecurity experts and developing new technology. These organisations have become know as “fintechs” and their purpose can range from offering customers alternative ways to bank, usually through mobile, to using advanced analytics to provide investment recommendations.

Continue reading →

Trust but verify: a deeper dive into the UAE’s latest business news

March 14, 2017 By in Oil, Finance, Corporate Governance, Economy Tags: , , , 1 Comment

Etisalat’s preliminary 2016 financial statements are available at the Abu Dhabi Securities Exchange. Earnings per share for 2016 operations? Dh0.97. Proposed dividends per share? Dh0.80. This gives a payout ratio of 82 per cent. Rationally, your payout ratio is high when you do not believe that there are any opportunities to invest in and so return cash generated to the shareholders.

Etisalat’s dividend policy would suggest that it does not see growth opportunities and therefore expects to simply be a yield play. This refers to business operations and not market price movements. Whether Etisalat is being rational in expecting the economy to stagnate, or worse, and is therefore taking a defensive cash position, or on the other hand is in denial and simply continuing to pay a historical dividend even though the payout ratio is high will be revealed by its stated strategy that it presents at the shareholders’ meeting.

If the strategy is defensive, closing certain operations or at least remaining steady, then the stated strategy will be consistent with the dividend strategy. If, on the other hand, Etisalat presents a transformation strategy or even an expansionary strategy, then this will be inconsistent with its dividend policy.

The suspense is unbearable.

Continue reading →

A Random Walk through UAE Economic Data

August 30, 2016 By in Economy Tags: ,

The news on the economy continues to be grim. I went searching for data to help us understand what is going on. I was surprised at what I found. You’ll have to read the article to find out if the surprise was pleasant or not.

In the absence of a team of research analysts to mine the data that I need (free marketing anyone?) I need to use what is available. One of the best sources of aggregate economic information is provided by the Central Bank of the UAE, available for free on their website.

As a start I took a look at their monthly statistical bulletin for June 2016, which they note is preliminary. I decided to look at some of the more oft repeated mantras and see if the data matched. Looking at what is happening with the banks should give us a good idea at what is happening generally.

One of the scariest pontifications is that the government is withdrawing its deposits, thus squeezing the economy by limiting the ability of banks to lend. Government deposits increased to 184 billion dirhams up 14% from 161 billion one year ago in June 2015. So, no, the government is not withdrawing deposits, it has added to them substantially. Pleasant surprise.

Continue reading →

NBAD and FGB's Merger Challenge: Work Culture

July 12, 2016 By in Leadership Tags: , , , 1 Comment

In my last article I talked about the two main paths that the merger of FGB and National Bank of Abu Dhabi could take. The first is simply extending the current business of each by using the path of acquisition rather than organic growth. The second is to trigger a radical redesign of the business model. I concluded that it made strategic sense for FGB and NBAD to take the second path. In this article I touch on how that can happen.

FGB and NBAD are banks and banks, in the end, are predominantly about service. The product part is simple. Money: you can deposit it with them and you can borrow it from them.

The price part, interest rates, is also simple. It has nothing to do with the cost of manufacture as banks don’t manufacture money and besides it is mostly electronic. No, price is driven by the human resources running the banks as well as market supply and demand of money. Since this is driven by people, we can conclude that banks are in the services business.

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Activist investing would be a boon to the UAE

May 17, 2016 By in Asset Management Tags: ,

In my previous article I suggested, using scenes from the film A Beautiful Mind, that game the­ory could explain why more than 50 banks exist in an economy too small to commercially need such business. The idea is bas­ically that banks choose to be mediocre because competition would harm them to the benefit of customers.

The feedback was tremendous, and I would like to expand on some of the points made. The first is the concern that I might antagonise people in the banking system. I believe that transparency and open dialogue fosters a healthy commercial environment and that most people will listen if your intent is positive. The few people who have a closed mind might react negatively to new or open ideas. One just needs to accept that this exists and hope that the greater good outweighs any personal backlash.

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The Rise of the Alternative Lender

January 20, 2015 By in Credit Tags: , ,

Standard Chartered, HSBC, Lloyds and RBS have all withdrawn from the SME sector in the UAE. Is this an indication of problems in the UAE SME sector? Absolutely not. It is an indication of troubled global banks and a flawed banking strategy.

Understanding the issue, and the opportunities that it presents, requires an understanding of the common attributes of these four banks and their failures. The starting point is that all of these banks are known as strong commercial banks catering exclusively to retail and corporate clients for most of their 150 to 270 year history.

Then along came Wall Street, its investment banks and fat deal fees. Mortgage backed securities, collateralised loan obligations, foreign exchange futures, interest rate derivatives. Fast talking MBAs backed by deep thinking PhDs. Black Scholes equations, Ito’s lemma, Gaussian copula functions and stochastic calculus. Easy as taking candy from a baby. What could go wrong?

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