Much to Build On

Recent Department of Economic Development (DED) data confirms the Emirate of Ras Al Khaimah’s (RAK) economic ascendancy, as GDP rose 4.2% for 2014 to AED27 billion, and passed AED30 billion in 2016, with broad brush-stroke contributions across major sectors of manufacturing, construction and real estate, wholesale and retail trade, and tourism. Such successful economic diversity is reflected in the financial sector, which, nonetheless, has been impacted by overstretched SMEs. As RAK lacks a bourse of its own, its listed stocks instead trade on the Abu Dhabi Securities Exchange (ADX), as well as the Dubai Financial Market and NASDAQ Dubai. Major local entities such as RAKBANK, RAK Ceramics, and RAK Insurance were in part privatized through IPOs on the ADX. Accordingly, our scope will be the banking and insurance sectors, which, reflecting the broader UAE sectors, are well regulated and compliant with international standards of liquidity, stability, and prudent risk taking.

Banking

The banking system in general indicates high liquidity ratios, adequate financial reserves and capital strength, while despite oil prices, vagaries, the value of available assets in the system is the envy of many. The financial sector of RAK and its broader economy also stand to benefit from major regional events such as Dubai’s World Expo 2020 and 2022 FIFA World Cup in Qatar and the massive infrastructure commitments they entail.
RAK also basks in the shadow of the UAE’s overall financial stability that has attracted international ratings and plaudits conducive to commercial expansion. In May 2016 Fitch Ratings affirmed Ras Al Khaimah’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘A’ with a ‘Stable Outlook.’ Furthermore, the UAE Country Ceiling was affirmed at ‘AA+’, pertaining to both Ras Al Khaimah and Abu Dhabi.
RAK’s banking system is state of the art in terms of online access and credit card facilities to match that of its larger neighbors. Clients enjoy a comprehensive range of financial services, from interest bearing accounts to mortgages and insurance, at relatively low tariffs when compared to the larger Emirates. And as the UAE Central Bank enforces strict requirements nationwide, RAK’s local system enjoys an excellent reputation, and also hosts a fast-rising premier bank of the UAE, the National Bank of Ras Al Khaimah (RAKBANK). It has no foreign exchange control and does not tax bank dividends, the latter being a welcome feature for foreign nationals, and made possible by the many bilateral international agreements signed by RAK to avoid double taxation. The system is also renowned for its client confidentiality.

RAKBank

Established in 1976 as the National Bank of Ras Al Khaimah, the institution was rebranded RAKBANK in 2001 as the strategy switched from corporate banking to personal banking and SMEs, which it would go on to become the primary local champion of. It serves customers through 35 branches and more than 280 ATMs. The bank is a public joint stock company traded on ADX, with 52.78% of its shares owned directly and indirectly by the government of RAK. It holds a Baa1 / P-2 ‘Stable’ rating from Moody’s, Baa1 / P-2 ‘Stable’ rating from Fitch Ratings and a A- / A2 ‘Stable’ rating from Capital Intelligence Ratings.

In January 2013, the bank launched its Islamic Banking unit, RAK Islamic. RAKBANK CEO Peter England explained to TBY how, “Islamic Banking in the UAE has to a large extent been more of a complementary offering. It has tended to be Islamic banks or banks offering Islamic services that match what they offer in the traditional banking space.“ To differentiate from the peer group, RAKBANK, having entered the conventional mortgage market, is poised to provide a sharia-compliant equivalent.

England also outlined a key difference between the bank and the wider local sector, and a problem that has blighted the books for 2016. While “a number of banks were benefiting from recovery post global financial crisis, (…) RAKBANK was a little different as we were not benefiting from recoveries, but conversely struggling with the SME defaults that started in April 2015.“ RAKBANK is the largest SME lender in the country, and many local SMEs got in over their heads by being over-leveraged. A subsequent decline in economic activity left them unable to repay their debts. The trouble was that “with the lack of bankruptcy laws, the typical approach was to leave the UAE and perhaps work things out with the bank from their home country.“ Yet as for the new bankruptcy laws, “the challenge will be in the implementation, because it is new and the technical and intellectual infrastructure needs to be developed, and the whole process, including the court system, needs to be aligned.“

As of September 30, 2016, RAKBANK’s MCap was at AED9.2 billion (USD2.51 billion). As of the third quarter of 2016, the bank had total assets of AED40.8 billion, up 4.8% YoY. For 9M2016 the bank posted a net interest income of AED2.1 billion, down 6% YoY, net profit of AED554 million was down YoY by a leaden 49%. The cost to income ratio, at 34.8%, was down YoY from 39.1%. Gross loans and advances rose AED192 million YoY mostly from the wholesale banking portfolio. Deposits climbed to AED28.4 billion from AED26.7 billion as of September 30, 2015. Customer deposits appreciated AED545 million to AED28.4 billion compared to December 31, 2015. A rise of AED534 million in demand deposits mostly fueled the performance. The deposits from the personal, business, wholesale banking, and treasury segments were respectively at 49%, 35%, 11%, and 4% of total deposits.

Commercial Bank International PSC (CBI)

The only other locally registered bank is CBI, which though headquartered in Dubai, was incorporated in RAK in 1991. It is comprehensively active in corporate and retail banking, as well as rising in the SME and Islamic Banking segments. In 2012 a strategic partnership was entered into with Qatar National Bank (QNB), the largest bank in the MENA region, and which holds a 40% stake in CBI. A network of 27 branches provides presence in all seven Emirates of the UAE. CBI is also listed on the ADX. The bank holds a long-term issuer default rating of ‘A-‘ from Fitch Ratings, and a long-term foreign currency rating of ‘A-‘ from Capital Intelligence Ratings.

A cursory glance at CBI’s latest financial results reveals profit of AED101 million for the nine-month period ended September 30, 2016, in contrast to a net loss of AED3.3 million for the same period of 2015. Net profit for 3Q2016 is AED32 million compared to a net loss of 28.6 million in 3Q2015. Customer deposits rose AED1.81 billion (16%) to AED12.92 billion for the quarter from AED11.11 billion in December 2015. Net loans and advances rose by AED1.73 billion (15%) to AED13.23 billion, from AED11.51 billion in December 2015. And meanwhile, the quarterly capital adequacy ratio of 14.3% was stable at 14.8% by December 2015.

Insurance

RAK’s insurance sector features two players originally incorporated in the Emirate, namely RAK Insurance and United Insurance Company (UIC). The 10 insurers in total also include UAE entities and international institutions. According to the Central Bank of the UAE, reforms have be introduced in the insurance sector to both safeguard policy-holders and provide early indications of any company in distress. At the end of 2014 the Board of Directors of the Insurance Authority issued Decision No. (25) of 2014 Pertinent to Financial Regulations for Traditional Insurance Companies and Decision No. (26) of 2014 Pertinent to Financial Regulations for Takaful Insurance Companies. These regulate the financial, technical, investment, and accounting operations of traditional and takaful insurers operating in the UAE.

A factor likely to prompt greater industry competitiveness through innovation is the likely introduction of mandatory worker health insurance. While already a stipulated fixture in Abu Dhabi and Dubai, the northern territories of the UAE have yet to be brought into the fold, and draft Federal legislation to do so, dating back to 2013, has yet to be realized.

Ras Al Khaimah National Insurance Company (RAK Insurance)

Established in 1974, and thus a sector pioneer, RAK Insurance, became 79.23% owned by RAKBANK as of May 2015. As of 2015 it was also providing online products such as motor, health, personal accident, critical illness, as well as a life products for SMEs. The insurer is also expanding its reach in the medical segment, which accounted for roughly 50% of total premiums in early 2016. As of early 2016, it held a 1.2% share of the UAE market’s gross premiums generated.

Standard & Poor’s Credit Rating Report (2016) for RAK Insurance confirmed a rating of BBB+/Stable/-, alighting, among other factors, on the firm’s above-market-average operating performance from a relatively small market share. The ‘stable’ outlook stemmed from the agency’s expectation that RAK Insurance would maintain a robust capital adequacy and positive operating performance, while remaining “operationally independent from its parent, RAKBANK.“ Gross premiums written (GPW) are forecast to grow by around about 7% per annum over 2015-2018. Capital adequacy is likely to remain strong and thus, supportive of the insurer’s growth projections. For the six months ended June 30, 2016 the company posted a gross underwriting profit from insurance operations of AED24.1 million, down from AED34.7 million for the same period of the previous year. Net profits of AED3.8 million were down heavily YoY from AED19.8 million.

United Insurance Company (UIC)

Established in 1976, and listed on the ADX in 1978, UIC’s product offering includes personal insurance, such as home, motor, medical and travel, plus SME and commercial insurance lines. The company has worked to broaden its distribution channels and, as a result, broker-intermediated business has become increasingly prominent. In UIC the insurer expanded its exposure by doubling its number of licensed brokers for comprehensive UAE coverage. As of June 2016, total assets of AED268.5 million were down 9.1% YoY. Gross premium income of AED53.4 million had shed 38.2% YoY, while net profit of AED2.8 million was down 83.4%. The insurer’s fundamental offering, reinsurance, is galvanized by partnerships with international giants Munich Re, Swiss Re and Allianz Global.

Overall, RAK’s financial landscape can be characterized as resilient and competitive, while benefitting from the wider UAE’s regulatory framework. Significantly, too, its future lies in the Emirate’s own meteoric rise, with growth driven by a diversity of economic sectors.