Headlines Say UAE Central Bank to Tighten Regulations - But the Real Story is Personal Loan Losses Loom

Under current CBUAE regulations a sub-standard loan is defined as one on which debt service is 180 days or more late.  This regulation dates to 1988.  Other countries in the Gulf have a 90 day time frame.  The latter is pretty much the international standard.

The National in Abu Dhabi is reporting that the CBUAE intends to tighten its requirement and bring UAE regulation in line with the 90 day standard. 

This report sounds rather ominous.

The immediate thought is that if these new rules are adopted, the amount of non performing loans will balloon.

But is that the case?

The article states that most UAE banks are using the more standard 90 day time frame.  A quick check of several banks' financial statements shows that to be the case.

What I think is more important in this article is some information about personal loans  that is tucked away in the middle of the article:  the estimate of a  potential 10% non performing rate.

One might quibble about the implication that credit bureaus (and quibble I will in a bit) are largely responsible for bad loans, but the ticking time bomb that personal loans represents is unmistakable.

Some signs of distress:

1. A group of Kuwaiti MPs is pushing for the government to buy Kuwaiti financial institutions' personal loan portfolios (Kuwaiti citizens' loans only) to relieve distress of the average Kuwaiti.  Estimates of the cost of doing this range from KD 2.2 billion to  KD 6.5 billion depending on which loans are included.  The appeals are usually accompanied by statements that the cost of living is higher than citizens' income and so borrowing is the  only way they have been able to make ends meet.  This AlQabas interview with Nasser AbdhulMuhsin AlMarri, Deputy Chairman and Managing Director of Noor Investment Kuwait, is one example.  See the first question.
   
2. Living beyond one's means through the use of debt is not uncommon.  In one country I'm familiar with, a lot of the locals I know at the junior level have debt service ratios over 70% of their monthly income - meaning that to make the minimum required payment each month, they should pay the lenders 70% of their salaries.
3. As I've noted in an earlier posting, the Central Bank of Bahrain issued a regulation to set a maximum that banks could lend consumers at 50% of gross monthly income because it was concerned citizens were getting in over their heads.
4. Cars in the Dubai airport parking lot. 
   

Some signs of lending practices that might make a sub-prime lender blush (though I'm told these folks are made of pretty stern stuff);

1. A local I knew was in over his head with credit cards.  With some help he negotiated revised payment terms and a lower interest rate.  Once this was done, one of the banks where he had been max-ed out and which had frozen his credit card wrote him a letter thanking him for clearing up his debt.  And now since he was a customer in good standing, they were not only re-instating his credit card but increasing the limit.  Yes, while his rescheduled debt sat in their work-out group's portfolio.  By the way this bank has won several awards in the GCC for banking excellence of one sort or another.  Marketing seems a natural category, though I think the awards were for something else.
   
2. I received a couple of SMS's from that very bank promising me that if I transferred my outstanding credit card balances from another bank to their fine institution not only would they happily accept my balances, they' also give me a credit line equal to 110% of those balances.  That way I could "afford" to spend a bit more.  Since my phone was registered in a company not a personal name, it seems fairly clear that this bank was happily blanketing the market with mass SMS mailings.  
3. One of my local friends advised me that rotation of creditors was a common strategy. Max-out at Bank A.  Go to Bank B to get a larger line.  Max-out at B. Go to Bank C.  Eventually one winds up back at Bank A and notes one's sterling credit.  Not only did I pay in you (Bank A) and Bank B in full, but look Bank C gives me  this  big a line.  I've got to be a really great credit.  To get me to move to your esteemed bank,  you'll just need to give me a bigger line.
   
4. I've seen outdoor billboards from one Shari'ah compliant lender offering to lend me and everyone else who passes by 95%  of the price of a new home.  Not much margin for error there if the price of one's new house drops just a bit.   To be fair, they no longer offer this level of financing.
5. There were ads from another retail bank offering to make a loan for a vacation with five year repayment terms. 

So now to the quibble.

Yes, a functioning credit bureau (with access to all borrower data) will make my job as a banker easier.

But, how much help do I need?  Do I need to be as smart as Gail Trimble to figure out:

1. Credit cards aren't used to purchase houses.  Or cars.  If they are, that's probably not a sign of good creditworthiness.  By and large they are being used for consumables.  If a prospective borrower already has a very high ratio of existing debt to income, that's also probably a sign that he or she is living beyond his or her means.
2. If this new customer is such wonderful business, how come my competitor is letting him slip away?  If the price of luring this customer to my bank is the simple act of increasing his/her credit line, whey doesn't his existing bank do this?  Am we really that much smarter than they are?  Really?  If this is such a great idea,  then why don't we do this with our existing customers?  After all, we do it with new customers about whom we have even less data.

By the way a tip of the hat to the folks at Emcredit  the Emirates credit bureau.

Gulf Women's $40 Billion in Wealth - News or Marketing Campaign?

The local (GCC) press is abuzz with the story that women in the Gulf control US$40 billion in wealth.  Here and here.

And elsewhere, but you can Google that yourself.

However, since this was first reported in 2007, I guess we can draw the conclusion that the original 2007 article's statement that they have a conservative investment strategy of holding money market assets has been proven correct.  If they had invested in the market, they'd hold considerably less today.

Interesting how these news articles seem to be less about women's wealth than about the capacity of an investment firm to help them with it.

An Updated Tale of One Market: Dubai

A bit of an update to my earlier post "A Tale of Two Markets" as well as to the "GCC Business Confidence Survey".

1. Japanese contractors owed billions by Dubai firms.  The fact that the usually polite Japanese are going public means that they have been stiffed for quite a while and are really hurting.  You'll also note that this appeared in an Abu Dhabi paper not a Dubai one.
2. Nakheel offering purchasers in The Palm Jebel Ali the option to move to other developments.  The project is delayed no doubt to conserve cash.  See #1 above.
3. Dubai debt levels as percentage of GDP versus other GCC States.  Perhaps, an explanation for #2 and #3.  On an aggregate basis, Dubai Inc (both sovereign and publicly owned companies) has something in excess of US$80 billion in debt with US$50 billion coming due over the next three years.

There is also a bit of flash news on a Moody's estimate of US$25 billion in bad debt in Dubai. 

When and if  I get access to more details, I will update this post.

All of the above may explain the depressed business sentiment in the UAE. 

The Gulf Blog - Relative Competitiveness in the GCC

David Roberts over at The Gulf Blog has an interesting piece on GCC competitiveness looking at the ease of doing business in the Gulf as well as perceptions of corruption.

While his blog is well established and widely known and certainly doesn't need a plug from these pages, if you missed that article for whatever reason it's well worth a read.

Corporate Governance in the GCC - The BASIC Score

What's the current state of corporate governance in the GCC?

Is the trend in the right direction?

How are companies being encouraged to do more than the minimum?

Harking back to my earlier post today about the key role played by research and professional institutions in market development, I'd like to answer the above questions by reporting on the efforts of three local institutions to analyze and further corporate governance in the GCC:

1. The National Investor Abu Dhabi, a privately owned investment and merchant bank
   
2. Hawkamah, an institute devoted to corporate governance
3. Mudara, an institute focused on developing the professionalism of board members

Rather than use more electrons to describe them, I'll let them speak for themselves.  This link  provides a short "bio" of each of them as well as contact details.

 

They have devised an analytical process to analyze the liquidity (trading), volatility, and transparency of some 607 companies listed on the GCC stock exchanges.  Regional companies' performance against 43 data points are benchmarked against eight international companies to anchor results to best international practice.  Final summary results are expressed in a single number - the Behavioral Assessment Score for Investors and Corporations ("BASIC").    The effort began in 2008 with BASIC 1 and has now been expanded in 2009 with BASIC 2. 

BASIC is a tool that investors can use to make more informed decisions.  It is also a guide to rated corporations on how they might improve their score.  It is also (or should be) a highly useful device for regulators, stock exchanges and auditing firms.

Access to the BASIC report is via this link.

Some of the key findings:

1. There has been improvement in the average BASIC score since 2008.  The trend is favorable.
   
2. Despite their size, Bahrain and Oman tend to dominate in the aggregate averages as well as the top ten rated companies (each has 3 listed).  
3. Given greater regulatory requirements on the financial sector, as a general matter companies from this sector tend to score well.
   
4. Kuwait has the weakest overall score at 2.95 compared to the GCC average of 3.87 and as well has the dubious distinction of being the home of 7 of the bottom ten rated companies.
5. Rankings are:  Oman (5.05), Bahrain (4.62), Abu Dhabi (4.38), Qatar (4.36), Dubai (4.16), Saudi Arabia (3.06),  and Kuwait (2.95).  For those not familiar with the GCC, trading volumes on the Kuwaiti and Saudi stock exchanges are high relative to the rest of the GCC. 
   

As with any analytical tool, one might want to tweak this or that aspect, but what is more important is the work that these three institutions are doing and the salutary impact it apparently has and will have on the GCC.

The Role of Institutions in Market Development

Institutions play a critical role in the development of financial markets.

It's easy to see the importance of those who establish the regulatory and operational architecture of the system:

1. Legislators who establish the laws
2. Regulators who translate those laws into specific regulations and procedures and then enforce them
3. Accounting Standards Setters - IASB, FASB and particularly relevant to the GCC because of its specialist focus on Shari'ah compliant financial institutions  AAOIFI
   
4. For listed securities, exchanges who establish listing and trading rules and provide a forum in which buyers and sellers can conduct transactions
5. Various professional groups that establish conventions for dealing
6. Brokers and custodians
   
7. The Reuters and Bloombergs out there who provide the instruments through which market information is made available and often the mechanism for conducting trades

But there is another group with a key role, those who provide information to investors to help them make more informed investment decisions and those who take actions to set or encourage the development of industry practice and standards:

1. Research firms - not only for company research but also research on sectors, individual countries and macro trends as well as investment strategies
   
2. Rating agencies - Fitch, Moody's, Standard and Poors and those with a particular GCC focus: Capital Intelligence,  Islamic International Rating Agency
   
3. Professional Development Associations - CFA Institute, ISDA,  Hawkamah, Mudara  and others.
   

 The work these groups do can have a profound effect on not only the behavior of individual companies but overall market conduct as well.

A Tale of Two Markets: Saudi Arabia and the UAE

"It was the best of times.  It was the worst of times."

Those who read my previous post (6 November) of the Oliver Wyman/Zogby International poll and saw the stark disparity between business sentiment in the UAE and the Kingdom of Saudi Arabia may be inclined to apply Dickens' description of England and France quoted above to these two GCC states.

What is a key factor which affects and as well reflects business sentiment?  And which might be responsible for the views of Saudi and UAE businessmen?

Liquidity in the market - the availability of lendable /spendable funds: 

1. So one's customers can buy whatever one is selling.  
2. So one can borrow to support one's own ongoing business activities (working capital) as well make any needed long term investments in plant, equipment and property.  And perhaps an acquisition or two.  And of course to refinance existing debt as it matures.
   

The nice folks at Markaz up in Kuwait kindly provide a highly useful tool for exploration of this topic and even "nicer" they do so for free: Their "Daily GCC Fixed Income Report."

Let's take a look at the 4 November 2009 issue.

Look at the "Interbank Rate Section":

1. The first thing to focus on is the dramatic decline in interest rates from 31 Dec 2008.- save for Oman.  This decrease reflects increased liquidity.  That's a good thing, though too much liquidity can be a bad thing.
   
2. Next notice that Libor (the London US Dollar rate) is much much lower than the rates in any of the GCC states.  That gives a relative indication of difference at the macro level in liquidity between the Gulf and Europe. 
   
3. Then notice that the UAE ("AEIBOR") has the second highest rates in the GCC - an indication that liquidity is relatively strained.  Only Oman is tighter.
   

Notes:  

All the rates shown are for local currencies.  Libor is the US Dollar.. Euribor is the Euro.

These rates reflect the interest rate one bank would charge another creditworthy bank to place a deposit with it.

Loans to corporations or less creditworthy banks would have a margin added to this "base" rate.

 

Another interesting bit of  information in the report is the table of  5 Year Credit Default Swap Rates.  These reflect the cost of buying "insurance" on a 5 Year Bond.   The lower the price the better.

Here the takeaway is that Dubai's CDS rate is well above  that of other GCC States and even above Turkey and Lebanon.   Using these rates, one can construct a relative market price based "sovereign risk rating" matrix.  Saudi the "best" credit and Dubai the "weakest" in the GCC.  But note that prices can also be affected by  other factors than just the obligor's credit.  For example, the volume of bonds outstanding and number of "market makers" willing to write  insurance are important factors.

  

Turning back to AEIBOR, it's possible to perform a more detailed in-country liquidity analysis. 

Before we do that, a bit of "tafsir" on AEIBOR or as the Central Bank of the UAE calls it "EIBOR". The rate is determined (in banker-speak "fixed")  by getting quotes from 12 banks in the Emirates.    The two highest and lowest quotes are excluded.   An arithmetic average of the remaining quotes is then computed.  That result is the EIBOR "fixing".

As we ranked liquidity at a country level above by looking at rates, we can do the same with individual banks.    Unfortunately, I couldn't find the CBUAE's report for 4 November on their website.  So let's work with the CBUAE's  current report.   Select "Today's Eibor Rates" for the fixing report.

At first glance, one can draw some quick impressionistic conclusions about relative liquidity.  Those banks with higher prices are less liquid than those with lower prices.

But one big caveat to our study of individual banks.

This is but a single data point.   The rates from a single day.

To really understand the liquidity situation of banks one would have to look over a longer period to see if there was a persistent pattern.

Why?

Bank interest rates reflect not only liquidity but management of their interest rate "books".  Most banks do not match fund assets with liabilities.  An example of match funding would be to take a six month deposit to fund a six month loan made by the bank.  Rather banks deliberately create interest rate mismatches by taking, for example, a one month deposit to fund a six month loan.  At the end of the one month when the deposit was due, the bank would then take another deposit.  The tenor it would take would depend on its existing interest rate gap book and its gapping strategy.  The result is (in banker-speak) interest rate "gaps".  If you take a look at the notes to your favorite bank's financials, you'll see an interest rate risk table which will show the gaps that bank has taken.

The Central Bank of Bahrain has fairly extensive disclosure requirements so let's use Bank of Bahrain and Kuwait's 2008 financials.  Note 28 provides a maturity (but not a repricing gap analysis).   That will be good enough to illustrate the point. Bear in mind that the typical 5 year loan  resets interest every 3 or 6 months.  And the interest rate reset is what drives the interest rate gap.  But close enough for both government work and this blog's purpose.   

The bank's treasurer uses the interest rate on deposits as the tool to achieve the desired gap position. With deposits, he can adjust his bank's bid rate (the rate which the bank will pay another bank or a customer for a deposit placed with it) and his bank's offer rate (the rate at which the bank will place a deposit with another bank) to attract or discourage transactions.

GCC Business Confidence Survey

An interesting survey of business sentiment by Oliver Wyman/Zogby International.
Note:  The survey was conducted with C-Level business executives in Saudi, UAE, and Qatar.

There are a variety of interesting findings:

1. The opening of Iran seen as extremely positive (a bit of a surprise) especially given the recent surge of media comment on the regional Iranian threat.
   
2. Conflict with Iran as the biggest negative (no surprise there)
   
3. Sentiment against maintenance of the US Dollar as the major world currency as well as realistic expectations for that happening (or in this case not happening)
   
4. Despite the UAE being seen as the most business friendly, Saudi businessmen are actually more positive about business prospects in their country and the economic stimulus policies of their government.  UAE business views are decidedly and grimly downbeat.
   
5. The comment about consolidation of regional companies into global leaders is in my view applicable to a rather slim segment.  (Page 5)
   

Arab and GCC Banks: Financial Position and Capacity

Earlier this week at the Kuwait Financial Forum, H.E. Hamood Bin Sangour  Al-Zadjali Executive President of the Oman Central Bank advocated bank mergers as a way of strengthening the GCC financial sector.  As a first step, he called for active GCC central bank promotion of domestic bank mergers to be followed by regional cross-border mergers and expansion. 

A very worthy goal.

The GCC has too many banks.

As a result, limited financial capital and human talent are dispersed preventing the development of the scale and muscle necessary for local banks to truly compete on the global stage and to fully  serve regional markets.

Perhaps, that last comment about limited capital seems strange.  After all, the GCC states are major oil exporters.  It seems intuitive that their banks would be major players in the world.

Let's drill down into the details to see that this is not the case.

Each year The Banker prepares a list and analysis of the "Top 1,000 World Banks".  Note that this is based on financials from the close of the previous financial year: the 2009 list is based on 2008 fiscal year end financials.

The 2009 Top 100 Arab Banks had Tier 1 Capital of US$138 billion, roughly 3.2% of the total Tier 1 Capital for  the Top 1,000 banks. The GCC Banks' share was US$110 billion or 2.6% of the Top 1,000. 

To put this into an even starker perspective, the Tier 1 Capital of just JPMorgan Chase was $136 billion - roughly equal to all of the Top 100 Arab Banks.  The market capitalization of  ICBC (PRC)  US$248 billion.

Looking at assets, the Top 100 Arab Banks had total assets of US$1.3 trillion and the GCC Banks' share of that amount was just short of US$1 trillion.

By contrast one bank, Wells Fargo (ranked #18 in assets among the Top 1,000) had US$1.3 trillion in assets.  Dexia Bank Belgium (#25 in the list) had total assets equivalent to all the GCC banks in the Top 100 Arab Banks.

What's even more striking is the Emirates Bank-NBD (UAE), the largest of the Top 100 Arab Banks,  had total assets of US$76.9 billion - roughly 57% of JP Morgan's Tier 1 Capital!  When compared to US banks, Emirates Bank-NBD would be slightly larger than Country Wide (the 16th largest US bank) and slightly larger than JP Morgan's Delaware Bank (the issuer of JPMC's credit cards).

National Commercial Bank (Saudi Arabia) had the largest Tier 1 capital among the Top 100 Arab Banks at US$6.68 billion.

For those interested in pursuing this topic further, additional information on The Banker's 2009 List is here and on the Top 100 Arab Banks here.  You'll find links to detailed charts on the Top 100 Arab Banks at end of the second link.