Mashreqbank PSC: Management Analysis - Case Study Example

Running Head: Mashreqbank PSC Mashreqbank PSC: Management Report [Client’s Name] [Student Number] The global economic recession is finally on its last phase as businesses all over the world gradually see better market activities. More and more businesses experience an upswing in production as demands have slightly increased. When the market activity of an economy is high, the potential for growth of the banking sector is high as well. This is because debts and deposits, the main activities of a healthy bank, will again, by principle, resume. However, the global economic recession has caused a lot of damage in countries where debts and investments were a plenty. Aim and Objective This is the scenario experienced by the Dubai market during the peak of the recession period. As an economic and investment hub, Dubai attracted every investor in the world and money kept on pouring in until the recession kicked in. With the current condition experienced by Dubai, the possibility of businesses and investments to be able to recover from massive loss becomes nil. Moreover, the banking industry of Dubai has invested too much on the housing and real estate industry to be able to risk so much again. The aim of this paper is to understand the financial and strategic performance of Mashreqbank PSC. In order to do this, the paper will perform industry analysis, environmental scan, and SWOT analysis of the Mashreqbank in order to estimate and project the future performance of the banking institution. The paper will then compare its result on the established models for estimating stock values of any firm. Mashreqbank PSC In celebrating its 40th year in 2007, Mashreqbank PSC leads the private banking and private investment sector of United Arab Emirates (UAE). In 2008, it was able to increase its customer deposits by up to 71.46% to $51.4 billion from $30.0 billion in 2005 (Mashreq, 2010). Moreover, it has steadily increased its assets to $93.24 billion in 2008 from $87.62 billion in 2007. Because of such feats, Mashreqbank is dubbed as one of the largest financial institution in the region. In 2006, it was recognized by Euromoney as the best bank in UAE with a return on average equity (ROAE) of 21.5% during that year (Mashreq, 2010). The bank boasts of its grand vision of keeping the leadership in the private banking sector of the region. In fact, Mashreqbank PSC is the very first bank that introduced the ATM cash dispensers, the first to introduce consumer loans, and the very first bank in the region to issue debit and credit cards. Its mission, vision, and values put strong emphasis on creating stronger teams, following a transparent and fair banking strategy and coming up with smarter solutions. The bank is also known for its innovative products and services that specifically cater to the needs of customers and clients on foreign trade services, direct banking, and comprehensive mortgage products (Mashreq, 2010). The bank is headed by seven highly respected people in the banking community of the region headed by Mr. Abdulla Bin Ahmad Al Ghurair, its Chairman and President. Economic Analysis When the world market began looking at the Middle East for possible expansions, Dubai immediately became one of the hottest investment hubs. Dubai started to attract the world by building massive infrastructures, beautiful buildings and shopping malls, and directing its efforts in real estate market financed mostly by debts from various financial institutions both local and from abroad (Cummins et al, 2009). Real estate properties became very expensive in Dubai but it did not pose much worry (at first) because the Dubai government encourages debt payments to virtually everything. But when the global market began to experience the blunt edge of the recession, Dubai is caught first and foremost (Teather, 2009). Dubai was a promising prospect for economic growth and development. Various international firms that began putting up businesses in the region prefer to do it in Dubai where they can freely operate without having to worry about taxes (AT&C, n.d.). Because debt is encouraged in Dubai and because the global economic recession is fueled by unpaid debts, Dubai experienced a massive downfall. The value of the shares listed in Dubai fell deep with the global economic meltdown and plunged even lower as Dubai, dubbed as millionaires’ playground, failed to increase the enthusiasm of the investors with the rapidly declining economic performances (Elliott & Stewart, 2009). Moreover, the largest company in Dubai, the Dubai World, has announced a six-month moratorium for its $60 billion debts which signals the collapse of the Dubai market. Industry Analysis Dubai’s banking and finance industry is one of the major contributors in the country’s economy. This economic progress occurred a little after the 911 attack when the US places stringent requirements on Middle Eastern investors and where these investors are forced to repatriate their investments (Cummins et al, 2009). According to a 2007 statement from the Middle East Economic Association, Dubai’s financial sector will grow up to $35 billion by the year 2015 (Husain, 2007). Moreover, the emirate is pushing all efforts to make this happen by continuously expanding the services it offers to its clients in the region as well as pursuing various assets around the world. The banking sector of UAE is served by 21 domestic and 25 foreign banks with Dubai and Abu Dhabi sharing more than 90% of the total domestic assets of the region. Prior 2003, the access of foreign banks to the market is limited despite their liberty to perform business in the region because the UAE government places restrictions on the number of branches international or foreign banks can open in the region. A legal ramification was placed in 2003 which allows foreign banks to open more than eight branches but a special provision was required for this to take place. Federal Law 10 establishes the control of the Central Bank of UAE on the financial and economic affairs of the region. Federal Law 6 allowed Islamic banks to operate in UAE (Mahasneh, 2004). Thus, there are two types of banking institutions operating in Dubai, conventional banking (which is both local and foreign owned) and Islamic banks. The lack of very strong competition from foreign banks allowed banks in Dubai (and in UAE) a monopolistic advantage. Data from 2004 in a research conducted by Husain (2007) showed that Emirates Bank International ranked 9th in the region followed closely by National Bank of Dubai at 10th place and National Bank of Abu Dhabi at 14th. Masreq bank ranked 18th with a capital of $1.2 billion and an asset of almost $8.6 billion. The National Bank of Abu Dhabi has the biggest market share of loans and deposits at 13%. According to the same research, banks in UAE are characterized by fast growth (up to 140% growth of the balance sheet), high earning growth rates, very high loan to deposit ratio, very high ratio on market capitalization to deposit, and low dividend yields (Husain, 2007). When recession has reached UAE, all of the sectors of its economy are adversely affected, particularly the retail, tourism, and real estate industries (RNCOS, 2009). With Dubai World in the brink of bankruptcy, all major financial institutions in Dubai and in neighboring emirates and countries are poised for massive losses as government-owned Dubai World proposes plans for debt restructuring to its creditors. IMF estimated that the local financial institutions in Dubai will have to lose at least half of the loans of Dubai World (Reuters, 2010). In other words, the local banks in Dubai, by virtue of the industry analysis performed, took all the blunt force of the economic recession and are, by principle, struggling to make both ends meet. Company Analysis Needless to say, Mashreqbank is among the very first casualties of the recession, particularly since significantly huge amounts of money were invested in Dubai World and in other real estate projects. Banks in Dubai have been getting hold of investments related to the real estate with the economic upswing experienced a little after 911. Mashreqbank has been very accommodating to debtors and investors alike, pouring more money than any other banks, except probably the Dubai Islamic Bank, its counterpart in non-conventional banking in the region (Parasi, 2010). Banks in Dubai have more than $15 billion worth of investments to the Dubai government which is a major shareholder of Dubai World. When the economic recession forced Dubai World to declare an economic loss of more than $20 billion, Mashreqbank is on the verge of extinction as well. Expectedly, Mashreqbank’s financial positions have weakened in 2009 with its advances to customer deposits dramatically dropped to 89% from 106.9% (Mashreq, 2010). Return on average equity has also dropped from more than 16% to barely 10%. The same thing can be said about its return on average asset which is at 1.1%, the lowest in the last five years. By February of 2010, the company announced a 39% decrease compared to the profits announced about the same time in 2009. Mashreqbank used the wait and watch strategy as the global economic recession hit Dubai hard. As the leading retail and private bank in the region, Mashreqbank has a lot of stake to lose when events unfold and so instead of pursuing strategic plans in a highly volatile market, it decided to wait (Parasi, 2010). With the large scale real estate bubble in Dubai and in Saudi Arabia and with the inability of the debtors to pay their loans, International banks as well as local banks have become more stringent in their loans. Valuation Models Using Capital Assets Pricing Model (CAPM) to forecast the value of the company in the next few years yields the following: For the risk-free rate Rf, we use 5.01% as dictated by the Central Bank of UAE; Beta coefficient for the Mashreqbank is -0.06; and a risk premium of 4.96%. The future value of the stocks of Mashreqbank is 0.003% its current value. Conclusions The implication of the simplified CAPM calculation for the future value of the stocks of the company in the next few months based on the economic indicators provided by the Central Bank of UAE is very clear – Mashreqbank could not expect to raise the value of its stocks in the next future. This is because of the presence of various social, political, and economic factors that pushes the value of the stocks of the company down. In the light of the recent recession and the weakening of the confidence of investors towards Dubai’s market, there is a very high likelihood that investors, particularly the foreign investors, would bring their money elsewhere. Adding injury to the insult is the fact that its large dominion over the retail and investment banking industry of Dubai hurt its finances more than anything else as Dubai World, with its huge losses, drags Mashreqbank down. Despite the confidence projected by the top management of Mashreqbank, there is no way for the bank to recover its losses in the next few months. A loss of more than $10 billion hurts the company as much as it hurts the industry. Thus said, the confidence shown by the top management of the bank amidst the chaos that has been boiling all over is just a façade and investors knew about it. Hence, the present value of the stocks and the very loud negative performance in the stock market. Mashreqbank may have been huge and may have dominated the market but such dominion would only be advantageous if the economy is doing well. In the event that the economy fails to recover immediately, the bank needs more luck to recover. References Al Tamimi & Company. (n.d.). Taxation Law in the UAE. Retrieved online from http://www.zu.ac.ae/library/html/UAEInfo/documents/UAETaxationLaw.pdf Associated Press. (26 November, 2009). Dubai Debt Plea Sends Fear Around the World. MSNBC. 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