CEO’s Note
A Year Like No Other
The year 2020 has truly been a year like no other. The dramatic nature of the historic events that took place in the past year has forced us all to think beyond financial results and operational achievements, and to focus on our core and on the value that we bring to the market.
At SICO, this began with ensuring the health and safety of our people and our broader community of stakeholders. We also made sure that we could remain fully operational under a completely new set of rules and guidelines. We kept a watchful eye on news and events that were beyond our control while managing the impacts and expectations for all our stakeholders. The efforts of our exceptional team ensured that our business remained on solid footing and that the evolving needs of our clients were addressed in the face of the unfolding crisis.
If there was one big thing that this year taught us, it’s how to be resilient. Resilience is a word that has been used extensively in the past, but this year it has taken on an entirely new meaning and new relevance. There are many factors that can make an organization resilient, but in our case, I believe that our resilience comes from our diversity.
We are widely recognized by institutional investors across the GCC as a top asset manager, as well as Bahrain’s leading broker. We are also regarded by private sector corporates in Bahrain and beyond as an investment bank, a custodial administrator, an advisor, and a co-investor. But as the saying goes, “the whole is greater than the sum of its parts.” I believe that we have proven that. SICO’s diversified business model is where we gain our strength and derive our resilience.
The fact that we were able to recover from a 20% drop in AUM in the first half when the market was first hit with the shock of COVID, to break even by the third quarter, and AUM gains by the end of the year, is proof of our resilience and our asset management team’s unparalleled ability to actively and successfully fund-raise and to quickly capitalize on improving conditions for both debt and equity. Our brokerage business also continued to fare well with a broadening of our client base and the rollout and expansion of our digital platform SICO LIVE and SICO LIVE Global.
This ability to maintain a diversified revenue stream that can bolster one end of the business when another is down, along with our liquid balance sheet kept us on track with our strategic expansion plans despite the pandemic. In last year’s annual report, we communicated our acquisition of an asset management license in the Kingdom of Saudi Arabia (KSA), which was our first step towards establishing a direct presence in the GCC’s largest market. Today we are proud to say that we have taken that license several steps further with a strategic acquisition that will fast-track our Saudi presence and allow us to hit the ground running with a full suite of financial services.
In December, SICO signed a landmark agreement with Bank Muscat to acquire a majority stake amounting to 72.7% in their subsidiary, Saudibased Muscat Capital. The acquisition shall be a share swap, with SICO swapping treasury shares for a majority stake in Muscat Capital, which will in turn give Bank Muscat a 9% stake in SICO. We naturally welcomed such a move as it is giving us immediate access to not only an asset management license, but also brokerage, investment banking and custody licenses. Instead of incrementally growing our business in KSA and stretching out our ROI over a period of 5 years, we opted to pursue this acquisition whereby we have a comprehensive established platform with AUM, a client base, a strong team on the ground, and a well-managed balance sheet that allows us to leverage on our strength from day one. With Saudi Arabia’s recent upgrade to emerging market status on the FTSE and MSCI indices and subsequent market growth, SICO is now poised to capture new opportunities as they arise across the Saudi market.
Market Background
Today we find ourselves in a low interest rate environment with plenty of liquidity in the market due to the government stimulus packages to combat the negative impact of COVID on the economy. However, asset valuations have increased and the outlook for 2021 will be dependent on factors like the speed and effectiveness of vaccine rollout and how quickly the economy recovers from COVID lockdowns. The full impact on certain hard-hit sectors of the economy like hospitality, airlines, and retail also remains to be seen.
I think the theme for next year in terms of equity investments will be about balance sheet resilience and a combination of value and growth. For fixed income, asset valuations are toppish. Going forward it will be a credit space, one should be looking at high yield and at where we have anomalies in terms of market pricing of certain credit.
Within the GCC region, we expect to see market traction in both Saudi Arabia and the UAE in the coming year. We have witnessed strong commodity prices, which combined with the gradual normalization of markets post-COVID, will see multiple sectors and themes which may benefit listed companies. Additionally, Dubai will see increased investor appetite in the wake of the revival of its travel and tourism sectors, which will create a ripple effect across other sectors nationwide.
Operational Highlights
Despite the adverse market conditions, we are proud of the results that SICO has achieved in 2020 against a backdrop that has perhaps presented the biggest global challenge of our lifetime. If we look at SICO’s financial performance during the course of the year, it clearly illustrates the rollercoaster ride that has been 2020. We went from recording a BD 159,000 in consolidated net profit for the first six months of the year, a decrease of 94% y-o-y, to a consolidated net profit BD 1.6 million for the third quarter of 2020, marking a 119% increase compared the same period in the previous year. The upward trajectory continued into the fourth quarter, which saw us close out the year with a total net profit of BD 3 million, proof of our talented team’s ability to steer SICO through the volatility, develop agile solutions to meet our clients’ needs and our operational resilience, which has demonstrated our flexibility and efficiency as an institution.
While we were not alone on the rollercoaster ride, I feel that we managed to differentiate ourselves through significant achievements throughout the year. Our biggest achievement is that our AUM has increased y-o-y even though we had a dip during the first quarter. Total assets under management currently stand at USD 2.3 billion compared to USD 2.1 billion at the end of 2019. This stands as a testament to both our clients’ confidence in our capabilities as well as the stellar performance of our fixed income and equities asset management team during these challenging times. They have not only maintained their client base through diligent and consistent communication, they have also won new mandates in the GCC and beyond achieving one of our strategic initiatives to turn SICO into a MENA asset manager with winning funds and mandates in MENA.
We continued to make progress in terms of our ambition for a Saudi presence with the acquisition of Muscat Capital, which will soon be rebranded as SICO Capital. The acquisition is unique as it will constitute a share swap of treasury shares purchased by SICO in 2018, rather than a cash acquisition, with the objective of bringing in a strategic shareholder. This in itself marks a success for SICO representing forward thinking and allowing us to preserve cash, which is key in the current environment.
Our overall brokerage trading capabilities both regional and international have increased significantly this year. The growth in our client base has been supported by our electronic trading platform where we have added developed, emerging, and frontier markets for all asset classes. These plans to expand and enhance our online trading services continued with the successful launch of Global Markets, a service that gives our clients access to more than 30 international markets and 125 exchanges through a platform called SICO LIVE Global. With SICO LIVE Global, clients are now able to trade multiple asset classes from fixed income, to money market, to equities, to ETFs in regional and international markets through their SICO account. We have also launched corporate services and services for newly established SPVs and Funds through our subsidiary SICO Fund Services (SFS).
We are extremely proud of the turnaround of SICO UAE, our brokerage subsidiary in the Emirates. For the first time since its establishment in 2012, SICO UAE is profitable and has made good progress in terms of gaining market share in a very challenging market. Despite an overall drop in market volumes, our volumes have increased.
Our Investment Banking division has perhaps had the most challenging year with a number of public market transactions being put on hold due to adverse market conditions. In spite of this, however, we have at least three active mandates including one which has been postponed until the market recovers.
Our Research division’s model portfolio or top picks continue to perform remarkably well. SICO Research has also enhanced its ability to host company calls and to provide access to newly listed companies, such as BBK. In an effort to always remain ahead of the curve and provide value added services for our clients, we will also begin embedding IdealRatings’ ESG data as part of SICO’s Research platform, making us among the first in the MENA region to highlight ESG performance in company reports in response to increasing demand for ESG data by clients. The idea is to create more regional awareness on ESG reporting through our Research Portal and this is just the beginning. From there we hope to move on and look at other products where we can apply the same concept. For example, as we look to expand to wealth management services, we can create ESG compliant sustainable portfolios.
Perhaps this year more than any other, SICO’s support and control functions have played a tremendous role in keeping the business intact and fully functional throughout the COVID crisis. If we had not progressed in terms of automation, reporting and internal policies and procedures, the seamless transition to ‘Work from Home’ and ‘Virtual Everything’ would not have been possible. When COVID came, we were ready for it. We had already automated the onboarding of clients, including the KYC capability. HR stepped up to ensure that both internal and external face-to-face meetings were migrated to virtual meetings from day one so that staff could remain safe and not take any unnecessary risks. We were able to conduct contact tracing and provide technical support for each and every staff member to work from home.
Institutional Capability
As we expand into new markets and launch new products, we have made several key additions to our management team at SICO, including a Head for our newly established Global Markets division and a new Acting Head of Distribution and Business Development. Both gentlemen are regional industry veterans with diversified skillsets that will be of immense value to SICO in the years to come.
This year, we are also proud to announce that we have a new Board of Directors that includes three new female board members; Tala Fakhro, an Independent Director and Chairperson of the SICO Board Audit and Risk committee, Dana Raees, representing the Social Insurance Organization, and Naseema Haider, representing Ahli United.
Having female representation on our Board is in line with both international governance best practices and best practices in the Bahrain banking sector. The Bahrain Bankers Association are officially endorsing equal opportunities and the empowerment of women. Women currently represent 30% of our Board and 30% of the total workforce at SICO, but our goal is to eventually have more than 30% female representation on our management team. We are not quite there yet, particularly on the trading and asset management sides of the business, but I am confident that we will reach our goal. In the meantime, it is my great honor to be moving the needle in the right direction and to lead by example.
ESG
COVID and the year 2020 has made one thing clear: the way forward is through inclusive growth that provides equal opportunities to all without further damage to the environment. The best way to ensure that we are moving towards a more inclusive path is through adherence to environmental, social and governance principles. COVID 19 has raised the stakes and shown the entire world that we are interconnected and that damage to the environment can lead to the emergence of new viruses, which leads to the tragic loss of life and a negative impact on the global economy and on our bottom line.
Last year we began 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. The push to embed ESG principles into the fabric of our operation has already borne fruit. We are very proud to have improved our ESG Ranking with ESG Invest, an organization that quantifies the ESG performance of companies in the Arab world. We moved up in the ratings to first place in the diversified financial services sector and fourth place overall in Bahrain from 13th the previous year. We will continue to do more in order to become a more sustainable organization in every sense of the word.
When all is said and done companies will be judged not just on whether they generated profits for their shareholders during COVID but for how they stood by their people and supported their communities. At SICO we are trying to push forward on both fronts. This year we made a number of donations to charitable organizations across the Kingdom such as the Fina Khair campaign and the Supreme Council of Women in order to alleviate the worst impacts of COVID, and we continued our efforts to support young Bahraini students with academic scholarships.
The Year Ahead
Hope of a better 2021 rests on the successful rollout of COVID vaccines and a gradual return to normality. However, the recent spike in cases as a result of new COVID variants has introduced yet another element of uncertainty to the equation. Accordingly, market volatility is likely to remain elevated until a clear end to the pandemic post vaccine is in sight. Nevertheless, the recent strength in oil prices and the continuation of OPEC+ cooperation is a positive sign.
Oil price recovery coupled with low interest rates presents an opportune time for GCC sovereigns to borrow at attractive rates to bridge their fiscal deficit. We have already seen multiple issuances in the first month of the year and expect the momentum to continue in the near future. We also expect Equity markets to see robust action as participants look for higher returns. Unless we witness a scenario where the current COVID vaccines fail to be effective against the new variants, we can expect a steady return of investor appetite in beaten-down sectors that have been directly hit by travel restrictions and lockdowns. Where else but emerging markets? We have the red carpet ready.
No matter what the coming year brings, whether or not we are forced to live with the pandemic for several more months or another year, I can safely say that we have learned a lot. We have learned that ‘work from home’ is not only possible but sometimes more efficient. Giving people, particularly working mothers, the flexibility to work from home at least partially can and will continue. We have learned that technology can give us broader reach, through things like webinars and virtual conferences, than business travel ever could. But most of all we have learned that we can rely on each other and work together as a team to continue achieving superior results, and for that I am very grateful. It is an honor and a privilege to work with such a talented and dedicated team of professionals at SICO.
I would like to take this opportunity to thank our Chairman, Sheikh Abdullah bin Khalifa Al Khalifa for his steadfast support. I would like to thank our previous Board, who ended their three-year tenure in 2020, for their tireless efforts and service to SICO, and I would like to welcome each and every member of our new Board of Directors. We look forward to working with you and making use of your invaluable experience. As always, special thanks also goes out to all our partners, shareholders, and clients as well as the Central Bank of Bahrain and the Bahrain Bourse.
On behalf of the entire team at SICO, we would like to offer our deepest condolences to the Kingdom of Bahrain and the Royal Family on the passing of Prime Minister Sheikh Khalifa Bin Salman Al Khalifa. Sheikh Khalifa’s legacy as the Kingdom’s Prime Minister has been a key part of our country’s modern history ushering in the development of our economy.
We honor his legacy and mourn his loss alongside the entirety of the Kingdom.
Finally, we would like to extend our congratulations to Crown Prince Sheikh Salman bin Hamad Al Khalifa on his appointment as the Kingdom of Bahrain’s new Prime Minister. We are confident that he will build on the late Prime Minister’s legacy and continue to lead our great country into prosperity.
