Ras Al Khaimah's financial services sector benefitting from economic expansion

In recent years, Ras Al Khaimah’s financial services sector has posted robust growth, driven by a rising population and new infrastructure projects. The industry has expanded beyond the emirate and of the four largest players – the National Bank of RAK (RAKBANK), Commercial Bank International (CBI), RAK Insurance and United Insurance Company (UIC) – three recorded positive results in 2014.

However, there are several challenges as well. Impaired loan provisions cut into banking profits in 2014, and the wider UAE insurance industry is still faced with comparatively low penetration and an over-reliance on reinsurance. Nevertheless, government support for expansion has led to new regulations from the federal Insurance Authority (IA) and the Central Bank of the UAE (CBU), which will reinforce stable growth in the sector. In February 2015 the IA issued a series of new regulations for Islamic and conventional insurers operating in the UAE, including limits on what kinds of investments firms can make in capital markets (see analysis). The planned introduction of mandatory medical insurance, long called for by stakeholders across the UAE, will also serve to underpin growth.

Although the country’s wider financial services sector is expected to feel the impact of falling oil prices, lending in RAK should remain steady thanks to targeted financing for small and medium-sized enterprises (SMEs) and the government’s recent sukuk (Islamic bond) issuance, which will help the country move forward on a bevy of planned infrastructure projects in the industrial, tourism, education and health care segments.

Market Players

The CBU is responsible for setting monetary policy, as well as federally licensing and regulating banks in each emirate, while all insurance companies operating in the country fall under the purview of the IA. RAKBANK, CBI, RAK Insurance and UIC are the emirate’s largest financial services providers, alongside the state-owned RAK Investment Development Office (RAK IDO) and RAK Capital. RAK IDO acts as the government’s corporate finance and advisory arm, and is responsible for implementing economic development policies, handling government investments, managing the emirate’s credit rating and identifying investment opportunities.

Meanwhile, RAK Capital is a special purpose company incorporated in the Cayman Islands, whose sole purview is participating in bond issuance transactions, such as when it issued a $500m sukuk on NASDAQ Dubai in October 2013.

According to the CBU, there were 40 banks operating in RAK as of the end of October 2014 – 34 national banks and six foreign banks. Additionally, as of September 2014, the emirate was home to 25 money exchanges. According to the most recent sector report from the RAK Department of Economic Development (RAK DED), there were 10 insurance firms in operation at end-2013, with gross written premiums (GWPs) for the sector at Dh263.4m ($71.7m) that year. All of these companies are active across the UAE, and benefit from access to the national financial services sector, which is one of the largest in the region; the UAE’s banking sector alone had total assets worth Dh2.38trn ($647.8bn) as of April 2015.

Exchange Activity

As RAK does not have a bourse of its own, listed companies in the emirate use the Abu Dhabi Securities Exchange (ADX), the Dubai Financial Market and NASDAQ Dubai. Larger public companies, including RAK Ceramics, RAKBANK and RAK Insurance, have been partially privatised through share sales on the ADX, while the RAK government has financed some spending by issuing sovereign bonds.

RAK benefits from the UAE’s solid track record of financial stability and well-respected fiscal environment, as well as, according to credit ratings agencies, the emirate’s economic diversification and lack of direct dependence on oil for growth. In May 2015 Standard & Poor’s affirmed its “A/A-” long- and short-term foreign and local currency sovereign credit ratings with a stable outlook, supported by RAK’s supply of building materials for regional projects and diversified export markets. This rating is particularly relevant for sukuk issuance, with Islamic bonds increasingly deployed by large public and private bodies, including RAKBANK, RAK Investment Authority and RAK Capital.

Banking

In addition to hosting many UAE and foreign bank branches, RAK is home to two banks with local roots; RAKBANK and CBI. The oldest and largest by assets is RAKBANK, which maintains its head office in the emirate.

RAKBANK has five subsidiaries; RAK Islamic Finance (RAKIFC); RAK Insurance; BOSS and RAK Technologies, both back office support service providers; and RAK Funding Cayman, established in mid-2014 as a subsidiary for the issue of one of the bank’s recent bonds. The bank owns 99.99% of both RAKIFC and RAK Funding Cayman, and 80% of BOSS and RAK Technologies.

Founded in 1976 by the ruling Al Qasimi family, RAKBANK has developed into an important growth driver in the emirate. The bank was reorganised in 2001, which saw it rebrand and diversify its activities from purely corporate services to retail and SME banking. RAKBANK has also expanded its Islamic banking activity, which is divided between its Islamic banking division, RAK Amal, and RAKIFC, which has paid-up capital of Dh100m ($27.2m).

Today, the bank has three business segments – retail, business and treasury – across both the traditional and Islamic lines, and operates 35 branches across the UAE, as well as over 200 ATMs and a variety of banking platforms including telephone, online, live chat and mobile banking. As of the end of 2014, RAKBANK’s authorised and issued share capital stood at Dh1.68bn ($457.3m), with 52.77% held by the government of RAK, 27.65% by UAE citizens and 19.58% by foreign investors.

The emirate’s other locally registered bank, CBI, was established in 1991 and operates a retail network spread across the UAE. Like RAKBANK, CBI’s lending portfolio is well diversified, with the bank offering corporate, SME and retail services ranging from personal accounts to home, auto and project finance. CBI shares are also traded on the ADX, with total shareholder equity of Dh2.3bn ($626.1m) as of end-2014, up 7% over 2013.

Strong Performance

Both of RAK’s banks had a strong year in 2014. RAKBANK posted strong top-line growth; income rose by Dh405m ($110.2m) to reach Dh3.6bn ($979.9m), and for the first time in the bank’s history operating profits surpassed the Dh2bn ($544.4m) mark. Profits for the year came to Dh1.45bn ($394.7m), a Dh23.8m ($6.5m) increase over 2013, while bank assets grew by 15.6% to reach Dh34.8bn ($9.5bn).

Growth from Islamic finance activities and net interest income, up Dh291.7m ($79.4m) y-oy, contributed to the positive results; however, higher provisioning, which rose by 74.8% y-o-y to Dh593.5m ($161.6m), muted profits.

Nonetheless, RAKBANK remains well provisioned overall, with a loan loss coverage ratio of 87.1% at year-end, compared to 73.3% in 2013, without taking mortgaged properties and other realisable asset collateral into consideration.

For its part, CBI reported a 40% rise in net operating profits over 2013 to reach Dh465m ($126.6m), thanks to robust asset growth and an increase in fee-based income. The bank’s total assets rose by 33% to reach Dh19.7bn ($5.4bn), while net fee and commission income was up 7% at Dh220m ($59.9m). However, higher provisioning led to a 24% year-on-year (y-o-y) drop in net profits, which fell from Dh177m ($48.2m) to Dh134m ($36.5m). Provisions increased from Dh156m ($42.5m) to Dh332m ($90.4m) throughout the year.

Lending

Lending has been on the rise across the UAE. RAKBANK reported 15% growth in net loans and advances in 2014 to reach Dh25.3bn ($6.9bn) and a 6.9% rise in deposits to Dh24.7bn ($6.7bn). Meanwhile, CBI’s total loans and advances were up 23% to Dh13.1bn ($3.6bn) for 2015, while deposits rose 38% to Dh14.5bn ($4bn), up from Dh10.5bn ($2.9bn). Despite this strong growth, sector players continue in their efforts to secure a greater share of the local lending market.

“By the end of the first quarter of 2015, 6% of our lending portfolio came from loans offered to RAK-based customers, which is below the market share we aim to have,” Peter England, the CEO of RAKBANK, told OBG. “In recent quarters the bank increased lending in our home emirate, especially in the form of mortgages and financial solutions for businesses to support companies operating across the emirate.”

This was an even stronger performance than the UAE as a whole, where lending saw a 9.5% increase. National y-o-y loan growth is expected to fall slightly, to between 7% and 8%, in 2015 due to a slump in the property market and volatility in the equities market, as oil prices more than halved in the six months to January 2015. Prices have since recovered somewhat, although lending is still expected to be lower. RAK, not directly dependent on oil for domestic growth, will be less affected.

Construction Surge

The link between RAK’s financial services sector and the UAE’s overall economic growth continues to benefit the industry, while ongoing regional initiatives could also have positive knock-on effects on lending in the emirate. New construction projects planned for Dubai’s World Expo 2020 are expected to drive demand for building materials. The Middle East Economic Digest has reported that an estimated $6.9bn worth of new developments are planned for the event, with the first wave of construction set to begin in late 2015.

RAK is also set to benefit from the run up to the 2022 FIFA World Cup in Qatar, which is expected to generate $70bn in new construction projects. “World Expo 2020 has seen a surge in infrastructure projects, government spending and new business operations in Dubai. As a result, the country as a whole stands to benefit from growth in business activity, and banks are presented with the opportunity to be at the forefront of this momentum. We expect a trickle-down effect into RAK, with additional businesses in support of the expo setting up shop in the emirate’s competitive free zones,” England told OBG.

RAK is well positioned to draw on its considerable natural resources to supply cement, aggregate, ceramics, glass and other materials for these projects, which will in turn boost demand for new lending, particularly in the SME segment. With RAK’s largest bank reporting triple-digit growth in SME-focused lending in 2014, the business banking segment in particular is poised for resurgence.

According to Andrew Paul Smith, the CEO of RAK Insurance, this should bode well for the insurance industry’s long-term prospects in the emirate. “I see healthy and sustainable growth in the insurance sector given the UAE’s appetite for construction projects,” he told OBG.

SME Lending

Retail banking is RAKBANK’s largest line of business, with retail activities accounting for 88.7% of the bank’s total operating income and 69.1% of assets as of the end of 2014. This is followed by business lending, at 5.6% and 6.3%, respectively, and treasury lending, at 5.6% and 21.7%, at end-2014.

However, stronger performance in the business segment could rival retail activities over the medium term. RAKBANK reports it has adopted a conservative stance regarding further provisioning, as part of a broader strategy that has seen it avoid the pitfalls faced by other UAE banks in the wake of the 2007-08 financial crisis. The bank halted lending to the construction sector in 2006 and did not re-establish a strong presence in business lending until mid-2014. The bank’s non-performing loan (NPL) ratio remained steady at 2.4%, while net credit losses to average loans and advances came to 2.5%.

RAKBANK continues to target low-risk clients, focusing on individuals and SMEs, most notably with a new asset-based finance option rolled out in mid-2014 that crossed the Dh100m ($27.2m) threshold by year-end. This strategy saw the bank’s business lending soar; it reported 131.4% growth in the segment for 2014, to reach Dh2.2bn ($589.84m). Growth continued into 2015, with the bank’s asset-backed programme having expanded into Islamic lending.

“Asset-based finance covers financing for a wide variety of assets, including commercial vehicles and professional equipment, and offers high loan amounts, competitive rates, options for funding or refinancing of existing assets, and flexible repayment periods,” England told OBG. “By the end of the first quarter of 2015, asset-based finance crossed the Dh200m ($54.4m) mark. During the same quarter, we launched a sharia-compliant counterpart to asset-based finance through RAK Amal, under the concept of ijara.” CBI has adopted a similar strategy, with its business lending focused on the SME segment in 2014. The bank’s SME loan portfolio has grown over 50% over the course of the year to reach Dh784m ($213.4m).

The Al Etihad Credit Bureau (AECB) is working to make it easier for banks to assess consumers’ financial risk. Established in 2012, the bureau was originally mandated to implement and operate a new credit reporting system across the UAE. The AECB is currently working with financial, utilities and government organisations to share data and information on potential borrowers and improve the consumer credit market.

Islamic Finance

As in the rest of the UAE, Islamic finance offers a formidable value proposition to RAK’s financial services sector, and 2014 saw a dramatic upswing in RAKBANK’s Islamic finance activity. RAK Amal recorded 188.9% y-o-y growth for the year to reach Dh2.2bn ($598.8m), while net income from sharia-compliant financing rose by Dh143.5m ($39.1m), in line with an overall increase in its Islamic financing portfolio. Islamic customer deposits were up Dh627.1m ($170.7m) at Dh2.6bn ($707.7m).

“The 189% increase in gross finance and advances in 2014 was mainly due to a surge in market demand, especially for sharia-compliant auto finance, personal finance for expats and business banking solutions,” England told OBG.

Debt Market

RAKBANK has returned to issuing traditional bonds after a long market absence. As part of its new euro medium-term note programme, the bank announced in June 2014 that it had priced $500m worth of five-year bonds at 3.25% – its first issuance since 2005.

In February 2015 the bank announced it would raise a further $300m through a re-opening of its earlier bond, due in June 2019, bringing the bond’s total size to $800m. The bank plans to complete a process known as a tap, with the final price for the issue set at $100.875. “We aim to take advantage of the low-cost financing opportunities in the bond market, while tackling the duration mismatch from funding longer-tenure loans using short-term deposits. We also wanted to diversify our sources of funding and access a wider base of investors. The bank is highly capitalised, and we plan to use this in the bank shareholders’ best interest by undertaking measured investments in growth areas,” England told OBG.

Insurance

RAK’s insurance sector comprises two firms originally founded in the emirate – RAK Insurance and UIC – as well as multiple branches of national and global firms. According to RAK DED, the emirate’s 10 insurance companies generated GWPs, including reinsurance, of Dh248.1m ($67.5m) in 2009, which grew by a compound annual growth rate of 8.4% to reach Dh342.2m ($93.2m) by 2013. Auto insurance was the dominant business line for insurers in the emirate, accounting for 90% of premiums in 2013, followed by cargo and transport insurance (4%), other (4%) and fire (2%). Theft and life insurance measured at less than 1% of GWPs.

UIC: Established in 1976, UIC listed on the ADX in 1978. The company focuses on personal insurance, including home, motor, medical and travel, in addition to its SME and commercial insurance lines, although restructuring in 2013 saw UIC abandon its traditional reliance on shareholders and affiliates to move towards an open-market model. The company has worked to broaden its distribution channels and, as a result, broker-intermediated business has become increasingly prominent. UIC doubled its number of licensed brokers in 2013 and now operates in every emirate in the UAE.

Reinsurance is the core of UIC’s offerings, thanks to partnerships with Munich Re, Swiss Re and Allianz Global. According to its 2014 annual report, UIC’s GWPs rose 24.4% in 2014 to Dh178.9m ($48.7m), though underwriting losses were significant, amounting to Dh44.4m ($12.1m), compared to a Dh9.7m ($2.6m) profit in 2013.

Losses continued into 2015: the company announced a first-quarter loss of Dh7.1m ($1.93m) compared with a loss of Dh9.1m ($2.48m) in the same quarter of 2014.

Outlook

RAK’s economy is well positioned to benefit from national and regional development activities in the coming years, as the emirate offers a significant supply of construction materials. This growth is likely to trigger a rise in new lending and insurance activities across the emirate. RAK’s major financial service providers have thus far successfully navigated economic volatility over the previous decade, thriving despite challenges presented by the global financial crisis and broadening their expertise and reach well beyond the emirate’s borders.

With the CBU continuing to push for new regulatory reforms in line with Basel III requirements and RAK’s banks reporting strong growth, the sector is well positioned to profit from expansion. Insurance firms are also set to benefit from regulatory changes. Thanks largely to robust national growth, RAK’s financial services sector appears poised for a strong year in 2015, and it should remain resilient despite near-term concerns over fluctuations and price volatility in international energy markets.