On March 18, 2014, we had the opportunity to attend HSBC’s CEEMEA Investor Forum in New York City. We were particularly excited to be able to meet with three sizable banks from the United Arab Emirates (UAE). Each of these firms is actually a holding in the WisdomTree Middle East Dividend Fund (GULF). As of March 19, 20141:
• First Gulf Bank (6.24%)
• Abu Dhabi Commercial Bank (3.97%)
• Dubai Islamic Bank (1.95%)
As Index creators seeking broad exposure to dividend-paying companies in the region, we have a rules-based approach to allocating company weight in our Indexes. But it is still useful to meet with company management to hear color on their businesses and especially what they view as prospects for future dividend increases. We are especially appreciative of HSBC for inviting us to its conference and facilitating the meetings with company management—especially right before MSCI announces qualifying constituents from Qatar and UAE for its Emerging Markets Index2.
First Gulf Bank: “Cannot Talk about First Gulf Bank without Talking about the Dividend”
At the start of every meeting, we made it quite clear that our primary focus was on the respective firm’s dividend and dividend policy. The representative for First Gulf Bank, in my opinion, had the most spirited response, saying, “One cannot talk about First Gulf Bank without talking about the dividend.” First Gulf Bank’s dividend payout ratio in 2009 was 20% of its net profits. By contrast, in 2012 it was 60% of net profits, and the proposed dividend payout ratio cited for 2013, subject to shareholder approval, was 63%.3
Is the dividend sustainable? First Gulf Bank’s representative pointed out its measures of Basel II capital adequacy. Excluding the impact of a sizable loan from the UAE ministry of finance, this figure over the past five years has been stable at between 18% and 20%. The key point about this number is not so much its absolute level but rather its stability; if First Gulf Bank were exhibiting wide fluctuation within this metric, that could indicate greater exposure to issues overhanging from the global financial crisis of 2008–09 and exposures to Dubai real estate. As long as this stability remains, he feels comfortable with the dividend payout ratio, but of course we recognize that the future can never be forecast with certainty.
First Gulf Bank’s breakdown of revenues comprises wholesale banking (40%), consumer banking (40%) and other banking activities (20%). The company’s representative cited 350,000 credit card relationships and indicated that the average yield earned by the bank on these accounts was 27%. Additionally, approximately 60% to 70% of these borrowers tend to be “revolvers,” meaning that they do not pay off their balances every month, making them potentially very lucrative customers for the bank.
Abu Dhabi Commercial Bank: Another High Dividend Payout Ratio
Abu Dhabi Commercial Bank also looks to pay out a substantial portion of its earnings as dividends, recommending a 30% payout ratio relative to 2013’s net income.4 Another way in which capital was returned in 2013 was through a buyback of approximately 7% of Abu Dhabi Commercial Bank’s outstanding shares. Guidance along this line was that there was approval to purchase an additional 3% of the outstanding shares this year. This is a significant percentage of shares outstanding and returning cash to shareholders.
Dubai Islamic Bank: Excitement over the MSCI Reclassification
Every UAE firm that we met with on March 18, 2014, was excited about the prospect of membership in the MSCI Emerging Markets Index—an event that is thought to be able to bring significant liquidity to the region’s equity markets. Dubai Islamic Bank, however, was taking direct action on this front to help facilitate liquidity.
At the time of our meeting, the amount of outstanding shares eligible to be purchased by foreigners stood at 15% for Dubai Islamic Bank. However, filings with the UAE government and central bank were in the process of bringing this limit up to 25%—a move made in direct response to MSCI’s upgrade of UAE from frontier to emerging market (EM) status. Generally speaking, one of the biggest issues plaguing UAE companies, at least from an index creator perspective, is the limited availability of shares for foreign investors, so we took this limit increase as a positive sign of a firm taking direct action on this point.
For reference, the maximum amount of shares available to foreign investors, at least from the UAE government’s perspective, is 49%.5 When lower amounts of shares of UAE companies are available for ownership by foreign investors, it is actually a company-level decision, and companies have the ability to ask for an increase in levels from their boards of directors and shareholder bases if they see demand from greater levels of index inclusions.