HSBC's regional pretax profit in the three months ended September 30 rose 28 per cent to US$487 million compared to $379m in the same period a year earlier.. Ravindranath K / The National
HSBC's regional pretax profit in the three months ended September 30 rose 28 per cent to US$487 million compared to $379m in the same period a year earlier.. Ravindranath K / The National

Mena a bright spot for HSBC profit in the third quarter

HSBC, Europe’s biggest bank by market value, revealed in its third-quarter earnings that the Middle East and North Africa was one of its best performing regions amid an economic boom in the Arabian Gulf that has driven up demand for loans. Other services such as securities underwriting and wealth management also benefited.

The bank’s regional pretax profit in the three months ended September 30 rose 28 per cent to US$487 million compared to $379m in the same period a year earlier. Income before taxes from retail banking and wealth management in the region outperformed the bank’s other lines of business, jumping 54 per cent to $91m from $59m.

However, the bulk of the pretax profit, about $246m, came from its global banking and markets division, which includes investment banking services such as arranging initial public offerings for companies and equities trading.

Banks in the UAE have been the biggest beneficiaries of an economic resurgence that propelled GDP growth to more than 4 per cent last year as corporations and individuals took bank loans for everything from refinancing old debt to buying new homes and cars. But because interest rates are low, this has meant banks – of which there are more than 50 servicing a population of 9 million in the UAE – have had to compete for clients and search for other ways to make money apart the interest they make on loans in fields that include trade finance, asset management and securities brokerage.

Elsewhere for HSBC, things have not been as rewarding. The bank reported overall lower than estimated third-quarter profits as it set aside more than $1 billion for customer compensation and an investigation into rigging currency markets.

Pretax profit rose to $4.61bn from $4.53bn in the year-earlier period, the London-based lender said yesterday. That compares with the $5.47bn average estimate of seven analysts compiled by Bloomberg. The bank made a $378m provision towards a settlement of the currency benchmark-rigging investigation and set aside an additional $701m to redress customers in Britain.

The chief executive, Stuart Gulliver, has exited at least 68 businesses since taking over in 2011 as he shifts investment to the bank’s most profitable markets amid increased regulation and compliance costs in Europe and the United States. The lender, which gets most of its revenue from Asia, has provisioned $1.97bn this year for customer compensation, litigation and other charges, overshadowing gains in profit. Its North America profit fell 85 per cent this year to $58m because of this.

HSBC’s shares were down 1.1 per cent to 632.5 pence in late morning London trading after dropping as much as 3 per cent earlier. The stock has fallen 4.6 per cent this year, giving it a market value of about £121bn (Dh711.21bn).

HSBC’s best-performing region was Europe, which swung to a pretax profit of $493m from a $45m loss in the same period last year. The bank said loan impairment costs decreased by $1bn in the region, mainly driven by improvements to UK commercial banking and an improving economy.

In Asia, profit fell about 3 per cent to $3.5bn.

* with agencies

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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