Trust but verify: a deeper dive into the UAE’s latest business news

Etisalat’s preliminary 2016 financial statements are available at the Abu Dhabi Securities Exchange. Earnings per share for 2016 operations? Dh0.97. Proposed dividends per share? Dh0.80. This gives a payout ratio of 82 per cent. Rationally, your payout ratio is high when you do not believe that there are any opportunities to invest in and so return cash generated to the shareholders.

Etisalat’s dividend policy would suggest that it does not see growth opportunities and therefore expects to simply be a yield play. This refers to business operations and not market price movements. Whether Etisalat is being rational in expecting the economy to stagnate, or worse, and is therefore taking a defensive cash position, or on the other hand is in denial and simply continuing to pay a historical dividend even though the payout ratio is high will be revealed by its stated strategy that it presents at the shareholders’ meeting.

If the strategy is defensive, closing certain operations or at least remaining steady, then the stated strategy will be consistent with the dividend strategy. If, on the other hand, Etisalat presents a transformation strategy or even an expansionary strategy, then this will be inconsistent with its dividend policy.

The suspense is unbearable.


In this week’s banking roundup, a headline at thenational.ae last week was: “Dubai’s Mashreq bank looks beyond oil-rich countries for growth“. I’m not sure that these target countries allow security cheques. So either Mashreq has finally developed a credit department that can do its job without borrowers being at risk of imprisonment, or it is going to be in for a serious shock.

Zawya reports that Union National Bank’s chief executive has stated that there are no plans to merge with other banks. Given last November’s speculation that ADCB and UNB would merge and given that both banks are majority owned by the Abu Dhabi Investment Council, it would be useful to clarify whether this is the chief executive’s recommendation, the board’s recommendation or a clear shareholder decision.


Speaking of bank mergers, the FGB-NBAD merger goes into effect next month. The commercial reasoning behind the merger, including FGB’s efficiency in terms of its return on equity and its cost-to-income ratio, makes eminent sense. The challenge will be in organisational design, as I discussed last year. Looking at what has been announced so far, it seems that the merged bank is looking to take board directors and executives from each of the original banks. This is a mistake.

First, it is clear that FGB had the superior financial performance. It is therefore logical to conclude that FGB has the better-performing board and management. Why on Earth would you let go of members of the better-performing team? It makes absolutely no sense.

By contrast, the Mubadala-Ipic merger, although announced after FGB-NBAD, has already announced the full new board and management team, which is overwhelmingly from Mubadala. It is this type of bold decision-making that is needed to make a merger work. More timid approaches end up losing top performers and leading to far less cohesion, and possibly to costly confusion.


Talking about sovereign wealth funds (SWF), SoftBank’s Vision Fund, reportedly funded with a US$45 billion commitment from a Saudi SWF and in discussions with other regional SWFs, is a bit of a puzzler. You see, according to a Reuters report last week, SoftBank at that point was worth $80bn and was at a 60 per cent discount to the sum of its parts. In other words, the board and management of SoftBank destroyed $120bn in shareholder value. Why on Earth would you want to invest with them? The simplest due diligence analysis suggests that this is one investment to pass on.


I’d like to end with oil. There is a saying that if what you see and what you hear are not consistent, then believe what you see. I did exactly that last December when I wrote that Russia’s actions with regards to Rosneft were inconsistent with their promise to Opec to cut oil production. Last week, The National reported that Russia “has been slow to meet its commitment“. Thankfully, the UAE seems to be cutting based not only on its commitment but on how others are complying. The petrochemical equivalent of Reagan’s famous “trust but verify” maxim. It’s a Russian proverb.

This article was originally published in The National.

1 Comment

  1. […] few weeks ago I pointed out that Etisalat generated earnings of Dh0.97 per share and paid out Dh0.80 per share, which is a […]

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