As one of the Middle East and North Africa’s major banking players, Bankmed is actively working to expand within the region, taking advantage of promising conditions in a number of key locations
The Middle East and North Africa (MENA) region has always been an attractive market for investments and business opportunities. Though it has oscillated between potential and challenge since 2011, the economic outlook for the region remains positive, in spite of the hindrances that are impeding growth. These hindrances include declining oil prices, continued political and security problems, and a slowdown in the Chinese economy, which impacted trade flow, albeit to a lesser extent. Growth within the MENA region is projected at about 3.8 percent for 2016, higher than the 2.3 percent that had been projected for 2015, although the region is currently navigating troubled waters.
With respect to GCC countries, growth is projected to slightly decelerate to 2.8 percent in 2016 from 3.3 percent in 2015, with inflation subdued. The challenges brought in by declining oil prices have, in fact, triggered oil exporters to use accumulated financial buffers and available financing to absorb some of the impact on growth, while gradually reducing their fiscal spending. Moreover, these countries are also expected to apply structural reforms and further diversify their economies in order to promote and accelerate development in a sustainable and inclusive manner.
Oil importing countries, on the other hand, have somehow benefitted from lower oil prices. Growth is expected to slightly strengthen from 3.8 percent in 2015 to four percent in 2016. However, some countries within this group continue to grapple with serious issues, including the spillover of the war in Syria, the high rate of unemployment, and the need to improve the overall investment climate.
Banks and financial institutions in the region continue to grow despite the challenges, given the great pent-up demand for financial services and intermediation in the region. In this context, Bankmed continues to identify great potential within the region. In fact, the bank’s expansion strategy has always been based on selectivity and prudence. Hereby, it has extended its operations into countries that are characterised by their healthy growth potential, political stability, and good economic framework.
Backed by a distinctive, balanced risk approach and extensive banking experience, Bankmed has broadened the scope of its operations within the region and even beyond in an aim to diversify its revenue stream and its concentration risk. Hence, in addition to a long-existing presence in Europe through a wholly owned private banking subsidiary in Switzerland, Bankmed Suisse, and a branch in Cyprus, Bankmed has expanded its footprint into Saudi Arabia, Turkey, Iraq and, most recently, into the Dubai International Financial Centre (DIFC), as the first bank in the MENA region to operate under a Category 1 license.
Turkey: a well-diversified economy
With an important geostrategic position and an increasingly key role as a regional hub between Europe, MENA and central Asia, in addition to its supportive business environment and diversified economy, Turkey is most certainly the right venue for Bankmed’s expansion through the bank’s subsidiary, Turkland Bank (T-Bank).
GDP growth is forecasted at around three percent for 2015, as recovery in the EU and depreciation of the Turkish lira support industrial and export activity. Current account deficit fell to 4.6 percent of GDP in 2015, down from 5.8 percent in 2014. Turkey’s growth forecast has been downgraded for 2016 to 3.5 percent, but in the short and medium terms, the recovery in Turkey’s economy is highly dependent on the implementation of structural reforms that contribute to boosting economic growth. Moreover, the recent formation of a government will likely send signals of certainty and sustainability across the Turkish economy, which will boost investor and consumer confidence.
Nevertheless, geopolitical risks, stemming from the regional turmoil, as well as vulnerability to external shocks due to persistently large current account deficits, pose challenges to the economy. In this regard, the Turkish economy remains vulnerable to a shift in US monetary policy and a change of sentiment towards emerging markets.
The economic activity generated by industries such as hotels, travel agents, airlines, and other passenger transportation services contributes significantly to Turkey’s GDP growth. Over the past decade, Turkey’s popularity has grown significantly as the country has become a leading international tourism hub. In the medium term, tourism’s share of GDP is forecasted to rise by 4.1 percent per annum by 2025, proving that the tourism industry is a pillar of the overall economy.
Turkey’s economy is well supported by its sound financial sector, which proved to be resilient in face of the global financial crisis in 2008 and the eurozone crisis more recently. Banking dominates the Turkish financial sector, accounting for 60 percent of overall financial services. The sector exhibited a 19-percent compounded annual growth rate over the period 2008-2014. Turkey’s banking sector continued to show healthy growth in 2015, with a primary focus on the SME sector. Loans to SMEs reached their highest annual growth of 37 percent in 2013. They had declined to 22 percent as of June 2015, yet still exceeded by far the year-on-year growth in retail loans of 13 percent in the same year (see Fig. 1). Similarly, total loans to total assets showed an upward trend, as the ratio increased from 56 percent in 2011 to 63.7 percent as of June 2015.
With respect to T-Bank, Bankmed’s subsidiary, it has been putting a special focus on financing SMEs, which have grown to become the dynamo of the Turkish economy and consequently one of the prioritised customer bases for the banking industry. SMEs are considered an important segment within T-Bank’s expansion strategy, and the bank aims, in this regard, to capture a large segment of the market by offering tailored financial solutions to its growing client base.
Hence, in line with its expansion strategy, T-Bank has grown its network to reach a total of 34 branches, expanding further into the industrial centres of Turkey. Furthermore, within the scope of its operations as a boutique bank, focusing on SMEs, the loans provided to this sector in Turkish lira grew by 25 percent in the first half of 2015, exceeding the year’s target. Capitalising on this success, T-Bank continues to strengthen its position in financing the SME sector.
A kingdom of opportunities
Saudi Arabia has an array of attributes that make it an attractive venue for Bankmed’s expansion plans through the Bank’s investment banking wing, SaudiMed Investment Company (SaudiMed). The kingdom is characterised by its natural resource base, its strategic importance as an oil exporter, its large asset base, and strong FX reserves, in addition to a long-standing and stable exchange rate system, as well as a strong and supportive business environment. Moreover, Saudi Arabia has been one of the strongest growing economies in the G20. Prior to 2014, rising oil prices and production resulted in large external and fiscal surpluses, and strong government spending led to robust private sector activity.
Nonetheless, the year 2015 brought some challenging issues to the Saudi economy: declining oil prices and geopolitical developments, especially in Yemen. Real GDP growth is projected to slow to 2.2 percent in 2016 from 3.4 percent in 2015, as government spending begins to adjust to the lower oil price environment. Over the medium term, growth is expected to be around three percent, while inflation is likely to remain subdued.
Lower oil revenues have triggered the need for structural reforms, switching the focus of growth toward the private sector. In this regard, the government aims to increase the employment of nationals in the private sector and diversify the economy further away from its reliance on oil, creating various opportunities relevant to Bankmed’s expansion strategy. Within this context, SaudiMed continues to leverage the experience and expertise of its team to deliver customised and innovative financial solutions that address the unique needs of sophisticated clients in Saudi Arabia, Lebanon and the wider region. Notwithstanding the relatively negative sentiment that has dominated regional capital markets throughout most of 2015, SaudiMed managed to increase the overall number of client mandates signed during the year, marking 2015 with some notable transactions.
In parallel, and in terms of product development initiatives for the year, SaudiMed’s structured finance team capitalised on the recent success of its inventory securitisation financing proposition to build a robust pipeline of new securitisation deals with a broad spectrum of local and regional conglomerates. The efforts of SaudiMed’s asset management team were equally buoyant during the year. The team continued to work on providing real estate investment opportunities in the country. Furthermore, the team worked on building a strategic relationship with a renowned international asset manager and also with a promising local private equity player to market and sell a diversified set of suitable investment products to its local and regional client base. The team’s efforts to date have been focused on providing clients with opportunistic investment products, characterised by relatively low volatility and steady income streams.
Potential despite uncertainties
Prior to 2014, Iraq enjoyed an array of attributes that made it very appealing for Bankmed’s expansion plans. These aspects included fiscal and current account surpluses buoyed by oil production and exports, high FX and strong import cover, as well as very low external debt. In fact, the Iraqi economy was the fastest growing across the MENA region until 2013.
Moreover, the trade magnitude between Iraq and Turkey, where Bankmed is present through its subsidiary, T-Bank, has been a catalyst that triggered the bank to extend its operations into Iraqi territories. This aspect was further enhanced by the low banking density within the country (one bank for every 32,000 people), which in turn served as a good opportunity for Bankmed’s entry into the market, through branches in Baghdad, Basra and Erbil.
The heightened security developments that surfaced in mid-2014, along with declining oil prices, have had a huge impact on Iraq’s economy. Nevertheless, driven by the projected ramp-up in oil production and the rebound in non-oil growth, medium-term growth prospects remain positive.
Moreover, the Iraqi government and the Iraqi central bank have been seeking methods to absorb the shocks. Specifically, recognising the need to restructure the economy and commit to reforms, the Iraqi authorities have taken measures to improve the resilience and inclusiveness of economic growth in the country.
In this regard, they have been focusing on strengthening financial institutions through further private banking sector development and state-owned enterprise restructuring, in addition to improving the business environment, governance, and the labour market. The authorities have succeeded in maintaining the exchange rate peg. Indeed, we still believe the opportunities in Iraq are significant, given that it holds fifth place in proven oil reserves in the world.
As an active participant in the Iraqi market, Bankmed still identifies potential for growth in the country, despite the challenging operational environment there. The bank’s operations in Iraq cover both retail and commercial activities, and these activities continue to contribute to Bankmed’s overall growth.
Continuous progress and stability
Characterised by its stable political system, vibrant society, abundance of natural resources, actively diversifying economy, and liberal business and trading environment, the United Arab Emirates (UAE) offers the perfect attributes for Bankmed’s growth plan (see Fig. 2). Most importantly, the UAE’s prime position as a trade platform between Asia, Africa and the Middle East serves as a key business destination for the Levant, as well as for Iraq and Turkey, another aspect that Bankmed looks to capitalise on through its presence in Lebanon, Iraq, and Turkey.
Hence, in early 2015, both Bankmed and its fully owned subsidiary MedSecurities established a presence in the DIFC, one of the world’s most prominent hubs for financial activity. Through this step, Bankmed became the first bank in the MENA region to operate in the DIFC under a Category 1 licence, the most comprehensive licence granted by the Dubai Financial Services Authority.
Despite lower oil prices, sluggish global growth, and volatility in emerging markets, the UAE has been able to limit the underlying economic spillover effects with its effective economic policies and strategic economic diversification. Fiscal and external buffers have been able to strengthen the resiliency of the UAE’s economy in the face of a forecasted decline in real GDP growth from 4.6 percent in 2014 to three percent in 2015.
Growth is expected at 3.1 percent in 2016, and the implementation of megaprojects and private investment in the run up to Expo 2020 are expected to boost the economy in the medium term by a compounded annual growth rate of 5.7 percent up to 2020.
Furthermore, the UAE’s sound and robust banking sector allows it to support the potential growth of the economy through its sufficient capital and liquidity buffers. The value of banking sector assets as a percentage of GDP is expected to reach 170 percent by the end of 2015. The fall in international reserves is consistent with the decline in oil prices, which is the main reason behind the depletion of foreign reserves. However, the UAE continues to benefit from its perceived safe haven status
Given these positive conditions, the UAE serves as an ideal platform for promoting the synergy created by Bankmed’s presence throughout the region. This aspect provides us with greater opportunities to better serve our clients within these locations.
Moving forward, Bankmed will continue to study expansion plans regionally and globally, seeking promising opportunities that could be available in new markets while bolstering its presence in existing ones.