Interest in Islamic products doesn’t just come from Islamic investors but from conventional investors too, according to Philip Southwell, president and country executive for MENA at Bank of America Merrill Lynch.
“So if you can, you should issue Islamically because that way you can address the widest possible population of investors, both conventional and Islamic,” Southwell told Khalil Hanware of Arab News in an exclusive interview in Dubai.
“If you look at the percentage growth of Islamic issuance year by year, it is very positive,” added Southwell, who is also a member of the bank’s Emerging Markets (ex-Asia) executive committee. Southwell has 20 years’ experience in banking in Europe, Middle East and Asia Pacific.
The following are excerpts from the interview:
Since you are based in Dubai, can you please tell us the strengths and weaknesses of Emirati banks? Are banks in the UAE strong enough to withstand global shocks?
Emirati Banks are fundamentally sound. I think a lot of their issues were caused by liquidity problems. But the actions taken by the UAE central bank, and by both the Abu Dhabi and Dubai Governments, ensured that any major issues were avoided. They were quick to act and overall the liquidity issues were manageable. I think that capitalization of the banks is good, and continues to improve. And the capital adequacy ratio is also fine. Introducing Basel III rules will require all banks to add capital and change the nature of some of their businesses as there are some businesses which are very “expensive,” in risk-weighted asset terms, under Basel III. Still, negotiations are taking place with regulators and the authorities. The changes are well flagged and they are coming. All banks understand the issues and are managing their capital along these lines.
What impact, if any, has the so-called Arab Spring had on banks in the region?
I think in financial terms some countries and some cities in the GCC are winners rather than losers as a result of the Arab Spring. The analogy I would make, would be with the performance and the role Singapore played during the Asian crisis in the late 1990s. People moved their capital to Singapore from other regional countries because it seemed like a safe haven. I think the GCC in general and the UAE in particular similarly benefited in terms of people coming here, businesses coming here and capital invested here.
Part of the blame for the Dubai financial crisis was fixed on banks. It was suggested that their liberal policies contributed to the crisis. Was this true? The UAE central bank has since taken tough measures to keep a tight rein on the banks. What changes have you noticed in the way UAE banks operate these days?
Obviously the banks are partly to blame, but the issues were broader than just the banking sector. The general issue was one of liquidity and if the government-related entities, if the institutions, if the corporates had borrowed long-dated money then, to a large extent, these financing issues wouldn’t have happened. The reality is that there was a lot of short-dated recapitalization work that needed to be done to support the longer-dated investments. And it was this mismatch that created the problem. The mismatch was not unique to banks, it also existed in a lot of government-related entities and with a lot of corporates. If you look around the region today, you see a lot more interest in the bond market. You see much more focus on the longer-dated debt. You see the committees of banks are very focused on getting their maturity matching correct. So, these are all good things.
Credit cards debt is heavy in the region. What should be done to reduce it?
There are a number of factors behind this increased credit card usage. The most obvious one is security, which means that when I use credit cards I don’t have to carry cash around. The second issue is the highly transitory nature of the population here: credit cards may be an easier way of borrowing than more traditional methods. I don’t presume that this region has worst credit card debt than anywhere else. In all GCC countries, the managing of credit records is improving all the time.
The IPO market did not perform well in the Gulf region last year. Do you think the IPO market will pick up in 2012? What is your assessment?
The IPO (initial public offering) market will return when there is confidence in the underlying secondary markets in the region. If you look at liquidity across each of the stock markets in the GCC today, there is a marked increase from the end of Q4 2011 and Q1 of this year. In percentage terms, all markets in the GCC are trading higher volumes than they were this time last year. But in absolute value terms there is one key market in the region and that’s the Tadawul. There was on average $ 1.5 billion trading in Q4 last year and between $ 3 billion and $ 4 billion for much of Q1 this year. So it is a very liquid market. The UAE has also seen significantly higher volumes but it remains a relatively thin market in global terms. The second issue is that if you look at the strong developed capital markets elsewhere in the world, such as Singapore, they have listing rules that apply equally to everyone: rules that are easy to understand whether you are an international investor, or a domestic investor or a company that can be listed. Here in the GCC, no country has the same set of rules today. But Saudi Arabia and the CMA (Capital Market Authority) have made significant progress. The Saudi market is strong and it presents a clear focus for us. We have been building our business for the last 10 months and we have a very strong market share across the international banks this year. But clearly we have a long way to go to compete with some of the big domestic brokers, because we don’t target the retail market in Saudi Arabia.
However, there is a lot of international institutional interest in Saudi Arabia and the interest is primarily in the big companies. In a way Bank of America Merrill Lynch are ambassadors for the Saudi market. We have seen a lot of interest from our international investors who acknowledge the global significance of some of the domestic corporations. SABIC (Saudi Basic Industries Corp), for example, is massively important from a global perspective. The number of companies in the exchange is not relevant to me. What matters most is the size of the free float and how much it trades everyday. Investors don’t want to own large portions of the free float, neither do they want to own positions that are illiquid. Therefore, the key is to focus on the liquidity and size of the free float.
The sukuk market continues to grow globally due to an increasing interest in Islamic modes of financing. What prospects do you see for sukuk in the region?
There continues to be huge interest in Islamic products, and this interest isn’t restricted to Islamic investors, but comes from conventional investors too. If possible, you should issue Islamically because that way you can address the widest possible investor base. If you look at the percentage growth of Islamic issuance year by year, it is very positive.
What role do SMEs play in the MENA economy?
I can’t overstress the importance of SMEs (small and medium enterprises). To an extent, the performance of SMEs is a barometer for the performance of the economy as a whole. I think on the plus side you find a large number of successful SMEs in the region, many of which are backed by family offices and trading houses. You also find a large number of successful SME’s housed in the various freezones across the GCC. But many countries in the GCC also have a large proportion of their own populations working in the state sector, in some places upwards of 90 percent, and this is an indication that the role of SMEs is not as strong as we’d like it to be.
Oil prices have fluctuated wildly in recent weeks. What impact will it have on the global economy?
Oil prices reflect the macro environment and vice versa. When the sentiment is very positive and there are no new geopolitical disturbances, we see oil futures rise. When the sentiment is less positive we see oil prices soften.
Where do you see the global economy heading in 2012?
There isn’t a homogenous view of the global economy. On the one hand we forecast that emerging markets will grow more than 5 percent this year. On the other hand, the G5 economies are forecast to grow closer to 1 percent this year. The blended average is of 3.5 percent to 3.6 percent this year for the global GDP growth, but the figure does not give an accurate reflection of the underlying forces at work. If you look at how the MENA economies are likely to perform over the next 10, 20 or 30 years, one needs to focus on the core macro issues. We have a group of countries in the Gulf which have effectively zero debt, which have very significant sovereign wealth fund assets, very significant central bank assets, and very significant oil and gas reserves. These countries are in a position, in balance sheet terms, that most countries would aspire to. But with all that wealth there are still issues to resolve and manage and the most significant of these issues is demographics.
Please tell us about the activities of Bank of America Merrill Lynch in the region? What challenges do you foresee for the banking industry in the region?
Bank of America Merrill Lynch has a very strong position in the US — as an institution, it banks one in two households. The business we have in the US is a corporate and investment bank and also a large wealth management and retail banking operation. Since the merger in 2008, and Q4 financial crisis in 2008, the bank has steadily built its reserves and increased its capital. Our business in the Middle East is to service governments, financial institutions, corporates and wealthy people. That is what we are doing in the region. I joined the bank in Q3 2011 and have managed the business from both Riyadh and the UAE serving as the two key hubs. We are seeking to further develop our Saudi business over the coming months and we have had real successes in developing our equity and investment banking businesses. Bank of America Merrill Lynch has been operating in the region for 50 years, and our strategy is to continue to grow profitably across the GCC.