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page 1 The UAE’s Financial Services Sector The UAE’s Financial Services Sector, MBA | 2 Topics addressed » The UAE’s banking sector » Equity markets » Dubai: the Gulf ’s financial hub? » The impact of the financial crisis: Mergers & Acquisitions

The UAE’s Financial Services Sector - eRutledge ... · The UAE’s Financial Services Sector ... counterpoint to DIFC »Mubadala ... , GE Capital, the finance arm of General Electric

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TheUAE’sFinancialServicesSector

The UAE’s Financial Services Sector, MBA | 2

Topicsaddressed

» TheUAE’sbankingsector

» Equitymarkets

» Dubai:theGulf ’sfinancialhub?

» Theimpactofthefinancialcrisis:Mergers&Acquisitions

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The UAE’s Financial Services Sector, MBA | 3

The UAE’s Banking Sector (1)

» TheUAEfinancialsystemisdominatedbythebankingsector

» Bankownershipispredominantlyheldbythegovernment,at52%

» Itaccountsfor10%ofnon‐oilGDPandemploys1.5%oftheworkforce

» Accordingtothemostrecentdatathereare52banksoperatingintheUAE,24ofwhicharelocallyincorporated,thelargestbankslocallyaredomestic

» EmiratesNBD remainstheUAE’slargestbankbothintermsof:shareoftotalassetsandequity

UAE ranking by assets (US$ bn)

The UAE’s Financial Services Sector, MBA | 4

The UAE Banking Sector (2)

Bankgrowthinassetstumbledafterthefinancialcrisis.

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The UAE’s Financial Services Sector, MBA | 5

Impact of ‘Financial crisis’

» Theglobalfinancialcrisisof2008‐09sawasharpdeclineinliquidityandanexcessiveincreaseinnon‐performingloans,italsorevealedsomestrengthsandweaknesses:

» Strengths:

» Highshareoftraditionalbankinglimitedlossesfromexposurestostructuredproductsandderivatives

» Banksweresupportedbyhighprofitsandcapitalbuffersintherun‐uptothe2008/09internationalfinancialcrisis

» Weaknesses:

» Highexposuretotherealestateandconstructionsectors(25%oftotalloans,includingmortgages),aswellasequityprices.

» Financingmainlydirectedtolargeprivatebusinessgroupsorgovernmentownedrelatedenterprisesconcentratingcreditrisk

The UAE’s Financial Services Sector, MBA | 6

UAE Equity Markets - Characteristics

TheUAE,acountrywithlessthanonemillionnationalcitizens,hasthreestockmarkets:AbuDhabiSecuritiesExchange– marketcapitalizationapproximately$106.6billion;DubaiFinancialMarket– marketcap.$66.1bn;NASDAQDubai–marketcap.$33.4bn.

» Afterseveralattempts,theUAEmarketswererecentlyupgradedbyMSCIfrom‘frontiermarkets’to‘Emergingmarkets’alongwithQatar(in2013)

» Investorsaremainlyretail,notinstitutional,leadingtomorechurningofstocks.

» Littleforeigninvestment,onlyapproximately3.3%ofstocksareheldbyforeigners.

» Limitednumberoflistedcompanies,reducespotentialfordiversificationofUAEportfolios.

» Concentrationofcompaniesinsectorswhichwerebadlyhitbyfinancialcrisis.

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The UAE’s Financial Services Sector, MBA | 7

The UAE’s Three Equity Markets

ADX (67 listed, e.g.) DFM (65 listed, e.g.) NASDAQ Dubai (10 listed, e.g.)

The UAE’s Financial Services Sector, MBA | 8

Impact of the ‘Financial Crisis’ on Equities

» Changesontheregionalstockmarkets;year‐on‐yeargainsandlosses:

Source: GIH, 2014

Country/Market 2008 2009 2010 2011 2012 2013

Bahrain ‐ 33.5% ‐ 17.9% ‐ 0.6% ‐ 0.2% ‐7.0% 16.9%

Kuwait ‐ 45.4% ‐ 9.8% +20.0% ‐ 10.6% ‐5.0% 5.1%

Oman ‐ 39.8% +17.0% +6.1% ‐ 8.6% 9.6% 22.2%

Qatar ‐ 24.6% +8.9% +17.5% ‐ 4.8% 0.6% 20.7%

SaudiArabia ‐ 56.5% +27.5% +8.2% ‐ 0.9% 10.2% 24.6%

UAE

Total marketcapitalisation $132.0bn $135.9bn $104.8bn $101.6bn $103.2 $172.7

Indexgains(Dubai– DFM) ‐ 72.4% +10.2% ‐ 9.6% ‐ 4.0% 9.8% 96%

Indexgains (AbuDhabi– ADX) ‐ 47.5% +14.8% ‐ 0.9% ‐ 3.5% 10.1% 53.4%

DubaisuffersmostfromthefinancialcrisiscomparedtootherdomesticandRegionalStockmarkets,duetomarketconcentrationsinfinance,realestate,andDubai‘debtcrisis’

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The UAE’s Financial Services Sector, MBA | 9

The Gulf’s Financial Hub?

AbuDhabi – Sowwah SquareonAlMaryah Island(formerlySowwah Island) willbeacounterpointtoDIFC

» Mubadala,thedistrict’sdevelopers,saySowwah willbecomethecity’scentralbusinessdistrict.

» AnalystssayitisanattempttoturntheEmirateintotheMiddleEast’sfinancialhub.

» AbuDhabialsohoststheUAECentralBank,whichregulatesthebankingsector

IntheUAE,Dubai servesasthenation’s‘financialcapital’.

» Buildinguponitshistoryastheregion’scommercialandtradingcentremanydozensofbanksarelocatedinDubai

» BourseDubaihaslargestakesinboththeNewYorkandLondonstockexchanges

Qatar – isarelativenewcomer,nonethelessunlikeeitherBahrainorDubaiithasbyfartheworld’slargest(per/capita)naturalgasreserves.

» Qatar’sgasreservesthe3rd

largestintheworlddoactasamagnateformanyfinancialinstitutions

» Itestablisheditsfinancialcentrein2005,whichoperatestointernationalstandardsandprovidesafirstclasslegalandbusinessinfrastructurefortheentitiesthatoperateoutofit

The UAE’s Financial Services Sector, MBA | 10

Dubai: the Gulf’s Current ‘Financial Hub’ ? (1)

» AccordingtoTheGlobalFinancialCentre’sIndexDubai isrankedthe25th mostimportantfinancialhubglobally,falling2places

» In2014Qatar rose6placestorankaboveDubai

» AbuDhabiwasanewentrantintheGFCI2011andhasmadesignificantprogressinGFCI12,rising10places,in2014itfell3places

» ItwasalsoratedasaGlobalContenderalongwithBeijing,MoscowandShanghai

» Consideredas‘globallyconnected’becauseofglobalawarenessoftheiractivitiesbutnotyetsufficiently‘broad’and‘deep’

» Dubaiwasamongthetencentreslikelytobecomemoresignificant Source: Global Financial Centres, 2014

FinancialCenter

Rank Change

London 1 ‐

NewYork 2 ‐

HongKong 3 ‐

Singapore 4 ‐

Tokyo 5 +1

Zurich 6 ‐1

Boston 7 +1

Geneva 8 ‐1

Frankfurt 9 +1

Seoul 10 ‐1

Qatar 24 +6

Dubai 25 ‐2

Abu Dhabi 42 ‐3

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The UAE’s Financial Services Sector, MBA | 11

Dubai: the Gulf’s Current ‘Financial Hub’ ? (2)

DubaiInternationalFinancialCenter’svision:

“Tobeauniversallyrecognizedhubforinstitutionalfinancialservicesandtheregionalgatewayforinvestment”

TheDIFCisafinancial‘FTZ‘withitsowncivilandcommerciallawsseparatetothelawsofDubai.

» InadditiontotheNASDAQDubaistock‐market,theDIFChoststheworld’slargestmarketfortradablesukuks (Islamicbonds)(e.g.DubaiPort$3.5bn;Nakheel$3.52bn,26arelistedcurrently)

» Recently,GECapital,thefinancearmofGeneralElectric,listeda$500mnsukuk –thefirsttobeissuedbyamajorUScompanyandwaspurchasedbyinvestorsacrosstheMiddleEast,AsiaandindeedEurope.

The UAE’s Financial Services Sector, MBA | 12

The Impact of the Financial Crisis

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The UAE’s Financial Services Sector, MBA | 13

Mergers & Acquisitions (motives)

M&A activityreferstothebuyingandcombiningoftwoormoreseparatecompanies,suchaconsolidationcanaid,finance,orhelpagrowingcompanybecomestrongerandmorecompetitiveinagivensectoroftheeconomy– motivesinclude:

1. Economiesofscale:costsavingscanbemade– onebrand,oneadvertisingcampaign,oneheadofficeetc.

2. Cross‐selling:a bank buyinganotherbankcouldsellitsproductstotheotherbank’scustomersandviceverse;amanufacturercanacquireandsellcomplementaryproducts

3. Synergies:asalargercompanytheycanbargainforbetterpricesforservicesduetoincreasedordersizeandassociatedbulk‐buyingdiscountsetc.

The UAE’s Financial Services Sector, MBA | 14

UAE Mergers & Acquisitions

M&Aaredomesticandinternational

» EmiratesBankandNationalBankofDubaimergedastheglobalfinancialcrisishitin2007,thenin2011theENBDacquiredthetroubledDubaiBank

» UNCTAD’sWorldInvestmentreport2012‐ thenumberofcross‐borderM&Asbyinward‐investingfirmsnumbered20in2010and31in2011.

» TheUAEtopstheMENAregionintermsoftotalM&Adealvalues,comprising29%oftheMENAtotal(worth$445mninQ12012),followedbyQatarandSA.

» Ernst&YoungreportsthetoptwodealsinMENAbyvaluein2012arebothworthUS$2BnandinvolveUAESWF/PEfirmsbuyingglobalassets:MubadalaDevelopment’sacquisitionofBrazil’sGrupoEBXandCenturionInvestmentCompany’sacquisitionofIndia’sUAEExchange&FinancialServices.

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The UAE’s Financial Services Sector, MBA | 15

Mergers & Acquisitions (planned?)

Whyhavethreestockexchangesinacountrywithunderonemillionnationalcitizens,witheachrunningfulloperationsatconsiderablecost?

» ItisaquestionthattheCEOsoftheUAE’sexchangesseemtohavebeenponderingthemselves:

» TheDFMandADXannouncedplanstomergein2010,monthsaftertheDFMandNASDAQDubai revealedthattheyintendedtomerge

» Ifthethreeweretocombine,itwouldundoubtedlybecometheMENAregion’skeybourse…

» Thiswould:‐ attractmorecompaniestolistontheexchange‐ increasethenumberinvestorsandinvestmentopportunities