CEO’s Note
With every passing year I become more and more proud of the role that SICO plays, not only as a market leader, but also as an authority on financial services in the GCC. We have successfully differentiated ourselves as an investment bank that brings true value to the market by offering a comprehensive bouquet of services that give our clients the advantage of being ‘fully informed’ regardless of the type of investment opportunity that they wish to pursue in Bahrain and the wider Gulf region where we are starting to establish a prominent presence.
SICO’s ability to inform clients is not just a result of our award-winning research. Our vast experience as an asset manager, broker, market maker and capital markets advisory house, and our first-hand knowledge of regulatory frameworks, investor appetite and new opportunities across the financial spectrum gives us the unique ability to provide on-the-ground solutions to challenging problems.
The types of mandates that we have been fortunate enough to receive are proof of the fact that we continue to be trusted partners on some of the most complex capital markets transactions in Bahrain. After successfully executing on our IPO advisory mandate for APM Terminals, Bahrain’s most successful IPO of the past decade, we were selected at the end of 2019 as issue execution advisor, receiving agent, and allotment agent for Bahrain’s largest M&A deal to date.
Among the many asset management mandates we have won this year from institutional clients, we are proud of our appointment as the investment manager for Minors’ Estate Directorate’s fixed-income and equity fund portfolio, a small but key mandate that gives us the opportunity to enhance the value of an investment portfolio that caters to a very worthwhile cause. Such mandates are a testament to the faith that the government of Bahrain has placed in us and indicative of SICO’s proven ability to deliver results across diverse investment products, risk appetites, and market conditions.
Beyond Bahrain, we have recently taken our first concrete steps towards establishing a direct presence in the Kingdom of Saudi Arabia (KSA). In November 2019, the Saudi Capital Markets Authority gave SICO regulatory approval to offer asset management services in the Kingdom. This move will further facilitate our investments in Saudi assets and allow us to provide clients with on-the-ground insights into a market that holds tremendous potential.
While this landmark development positions us on the cusp of something new and exciting, we are maintaining our prudent stance and taking a phased approach to our presence in KSA. Starting with asset management, our plan is to eventually create an entity that could offer investors SICO’s full portfolio of services and allow us to capitalize on market growth on the Kingdom’s upgrade to emerging market status on both the FTSE and MSCI indices, and the growing demand for regional fixed income active management capabilities. We aim to create a unique business model that would create opportunities for both local and foreign investors who are looking for their first entry into the Saudi market.
As we go after new opportunities in KSA, we will simultaneously continue to broaden our client base with our market-making and brokerage businesses, attracting new clients in both the UAE and Bahrain.
Market Background
As expected, structural and fiscal reforms continued in the GCC during 2019 with VAT being introduced in Bahrain and levies of some new fees/taxes to boost non-oil revenues. Amid these reforms, GCC equity markets ended the year on strong footing in line with the most major developed and developing markets.
Kuwait was the top performer with its premier index gaining more than 30% during the year on the back of flows from index inclusion. While the Saudi market ended strongly (7% up) after successfully listing the largest IPO (1.5% of Aramco) in history in December and thereby propelling the Tadawul’s market capitalization to more than USD 2.4 tn.
Bahrain was the second-best performing market in GCC, mainly led by a rally in market heavyweight, Ahli United Bank (AUB), on the back of a merger with KFH. The recent APM Terminals IPO was also tremendously successful with more than 100% return to investors in 2019, one year after listing in December 2018. The Bahrain Liquidity Fund (BLF), now in its fourth year, has played a major role in attracting capital to the market and improving the average daily traded volume (ADTV) of the Bahrain Bourse. BLF transactions in 2019 represented 31.25% of the total ADTV on the Bourse, which reached BD 1.121 million. We expect momentum to continue in 2020 with the upcoming cross listing of KFH in Bahrain as well as the execution of major projects such as the BAPCO refinery expansion and completion.
Within the fixed income space, the US Federal Reserve played its part and delivered 3 rate cuts during 2019 in an attempt to stave off a slowdown in global growth. Other investment themes that drove regional bond markets were the inclusion into the widely followed JP Morgan EM Bond Index, Brexit, and most notoriously the international trade wars, mainly between the US and China. A combination of better fiscal balances by GCC states as well as the implementation of budget deficit reducing measures helped GCC credit spreads tighten to their lowest level in four years at 134 basis points with the average yield now at just 3.16% compared to 4.65% at the start of the last year. Bahrain government bonds have in fact been one of the most compelling credit stories this year and even more so after being upgraded to a positive outlook by S&P. In total, gulf borrowers raised more than USD 100 billion in bond placements during 2019, marking a 28% y-o-y increase led by Saudi Arabia, Qatar, and the inaugural Aramco issue.
Operational Highlights
In 2019, SICO continued to outperform the market and gain momentum on the AUM front for both equities and fixed income with total assets under management reaching USD 2.1 billion up from USD 1.9 billion at the end of 2018. The 16% increase in AUM can be attributed to both new mandates and our ability to continue outperforming the market. Our asset management team has been extremely active in attracting new institutional investors and high net worth clients. Our fee-based income continued to record healthy growth increasing by 51% to BD 6.3 million from the BD 4.2 million recorded for the same period in 2018. SICO’s diverse product offering under asset management continues to grow to include fixed income, money market, and real estate funds, as well as our signature, top-performing equity funds.
As we work to expand our coverage universe and increase access to global markets, we are attracting new retail brokerage clients in the UAE, where our ranking continues to improve, and Bahrain, where we have maintained our position as the number one broker for the past 21 years with more than 40% market share of total executions on the Bahrain Bourse in 2019. In Q12020, we will begin a gradual rollout of new markets in Europe and North America through our online trading platform SICO LIVE.
Despite a relatively slow year in terms of new public market transactions, the investment banking team is capping off the year with a big win as an advisor on the BD 124 million NBB-BISB M&A deal. The appointment is a strong vote of confidence in our ability to effectively advise and give guidance on valuation, optimal capital structures, distribution policy, liquidity, and restructuring on key transactions.
SICO’s resounding success with the APM Terminals last year carried on into 2019 with a stellar performance on the secondary market during and after the successful completion of our 6-month, post-IPO market making mandate. In the absence of an active public market, SICO has been mandated to carry out a number of private market advisory services in 2019. The valuable advisory that we provide for these private transactions are adding much-needed depth to the market, helping investors make informed financial decisions, and opening the doors to new opportunities for both the owners and sponsors of these transactions.
Institutional Capability
With an eye on expansion and new growth opportunities, we are actively working to strengthen the team at the top. In 2019, we recruited three new senior managers including a new Head of Distribution and Business Development, a new Head of Proprietary Investments, and a new CEO for our subsidiary, SICO Funds Services (SFS).
As we grow our talent pool with a diverse set of expertise, we are also very proud of the fact that we have several team members who have worked their way up in the ranks to take on new senior positions including new Heads for Market Making, Treasury, Client Relations, and Operations, all of whom have been with SICO for more than 10 years.
The ramp-up in senior management is also creating new growth opportunities across the organization in both middle management and entry level positions. Because we are an organization that values succession planning, we have made sure that we have a solid succession strategy in place not just on the CEO and senior management levels but across the board so that everyone is clear on their future path to growth.
I believe that this strategy has proven successful because it allows us to look at the skills that will be required to achieve our future goals and then work to develop those skills internally whether that is through mentorships or professional training. We fully recognize that people are our most important asset which is why we promote from within the organization whenever possible. Mentorship is embedded in our culture and it is the responsibility of everyone within the organization to mentor the next leaders. This approach has allowed us to look at and develop the personal qualities of our people because good leadership requires more than just technical skills.
ESG
SICO has always been a socially responsible organization that believes in creating shared value for its clients, shareholders, employees, and the community at large. Building trust and partnerships amongst all of our stakeholders is something that we value deeply, which is why this year we have taken the concept of corporate social responsibility a step further and started developing a more comprehensive Environmental, Social and Governance (ESG) framework that will help shape our growth and drive our corporate initiatives.
In 2019, we also started aligning our ESG strategy with the UN Sustainable Development Goals (SDGs) with special emphasis on health and well-being, education, gender equality, innovation and responsible consumption and production.
On the environmental front, we have already begun to limit our consumption of single use plastics with a company-wide push towards re-usable water bottles, and to minimize our overall environmental footprint by declaring no-print days. While these may be small steps, we believe that they create the necessary awareness that will eventually lead to a change in day to day consumption habits. Going forward, we will look to take on more internal and external green initiatives as a part of the collective action required to combat climate change.
We continue to demonstrate our commitment to education and mentorship through the sponsorship of our ongoing signature initiatives including TradeQuest (a simulated business education program in cooperation with the Bahrain Bourse), Bahrain Fintech Bay, and the CFA Society. We also continued with our sponsorship of the Crown Prince’s International Scholarship Program, an extremely worthwhile program that awards merit-based university scholarships to young Bahrainis from both public and private schools. A new education initiative that we also launched this year is a scholarship program that funds the undergraduate studies of one Bahraini student at Bangor University.
When it comes to corporate governance, we have always taken pride in the fact that we uphold the highest global standards in terms of compliance with regulatory requirements, the protection of the rights and interests of all stakeholders, the enhancement of shareholder value, and the achievement of organizational efficiency.
The Year Ahead
We are bullish about the prospects for the year ahead. SICO is now in a position that will allow us to take advantage of new opportunities and we are ready for bigger responsibilities and even better results as we look to grow outside Bahrain.
Our strategy for 2020 remains largely unchanged, but we will no doubt be more challenged as we enter new markets. I believe our number one goal will be to continue to grow our fee-based business in a manner that allows us to achieve a sustainable return on equity (ROE). Thus far, we have managed to achieve incremental growth on that front, and I believe we can continue to do so prudently and sustainably.
We will continue scaling up the business in 2020 so that SICO becomes more recognized as a name that is associated with regional capital markets, not just Bahrain. The lack of visibility that we have on the geopolitical front means that markets will remain volatile. Without clear direction on where things are headed, boutique firms will have trouble surviving. Key to our efforts to scale up and serve more clients in multiple markets will be the drive towards digitalization. We are currently investing in technology that will help us better serve our clients by expanding our reach to them and giving them better insight into their investments.
Simultaneous with our push towards digitalization will be a build-up of our advisory capability not only on asset management but also on portfolio allocation and monitoring. In short, we are seeking to expand our service offering so that we can provide end to end services including services for HNWI and family offices.
GCC-wide, we are looking forward to a positive 2020. I believe that there are ample opportunities for investors, and we can expect more deal flow into Saudi with the rebalancing of indices post the Aramco IPO. After a period of subdued growth in KSA, we are finally seeing promising movement in the consumer, healthcare, insurance, and banking sectors. Even with the doom and gloom for the real estate sector in the UAE, I believe that things will get better in the coming year with improving GDP growth, and we will be right there to capture the upside.
2019 may have gotten off to a slow start, but it has certainly ended on a high note for SICO with multiple transactions closing in the fourth quarter of the year. I am extremely proud of everything that we have achieved, and I am grateful for each and every member of our team who helped make those achievements possible. It has also been gratifying to receive recognition from our industry peers with a slew of awards. In addition to being named Best Investment Bank in Bahrain by Euromoney earlier this year, SICO has also been recognized for having the top equity and fixed income funds in Bahrain by the Global Banking and Finance Awards, the best broker and asset manager in the Kingdom by EMEA Finance Middle East Banking Awards, and the best research house by the Global Business Outlook Awards.
It is an honor to work with such a professional team and to have the continued support of our esteemed Board of Directors. I would like to give my heartfelt thanks to the Board, our shareholders, business partners, and clients as well as the Central Bank of Bahrain and the Bahrain Bourse. We truly value the confidence that you have placed in us as we prepare to enter a new chapter in our growth story.
