2013 The year of the renminbi

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1 2013 The year of the renminbi Handbook for Corporates and Financial Institutions Economic and regulatory conditions affecting the renminbi are unfolding quickly. This document reflects HSBC s views on how the development of the renminbi will unfold as of February 2013, based on research by our team of global experts and our extensive daily operations in renminbi.

2 Renminbi what s your strategy? The renminbi (RMB) China s currency is now part of day-to-day business for anyone trading with or investing in China. The RMB is already an important global trading currency and is set to become a top-three global trading currency by 2015, before becoming fully convertible in 2017 (i). As the world s second-largest economy, largest exporter and most popular destination for direct investment, China is seeking to internationalise its currency to match the country s global economic status. The Chinese government is internationalising the renminbi in three stages: developing it first as a trading currency, then an investment currency, and finally a reserve currency. Businesses and investors are already seizing huge opportunities by adopting the renminbi Are you ready to develop your renminbi strategy? Trade Finance Investing Risk management 2009 Registered Chinese companies can settle trade in RMB RMB internationalisation begins 2010 China permits the free circulation of RMB outside the Mainland. Offshore markets open in Hong Kong 2012 All Chinese companies with import/export licences can settle trade in RMB First RFQII offshore unit trusts that invest in mainland China securities QFII scheme broadened to include onshore interbank bond market** Daily deliverable RMB offshore FX contracts of USD8.7bn* China trade in RMB is more than 8% of all trade (CNH2.9trn as of 2012)**** CNH275bn Dim Sum bond issues*** RMB deposits in HK reach USD90bn E CNH280bn-CNH360bn Dim Sum bond issues 2015E 2017E 2020E 30% of China trade in RMB. Has estimated onshore daily forex volumes of USD1trn making it the third-most global traded currency after the euro and US dollar RMB becomes a top three global trading currency RMB is fully convertible China plans for Shanghai to be a global financial centre E: Estimate; QFII Qualified Institutional Investor ; RQFII Renminbi Qualified Institutional Investor. *Source: HSBC Emerging Markets Currency Guide 2013, combined deliverable RMB FX spot, forwards and options. ** Procedural guidance from PBoC is pending. ***Source: HSBC; includes dim sum bonds and certificates of deposits with one year or more maturity. ****Source: PBoC, includes goods and services trade and other current account items Your renminbi strategy for 2013 Corporates Financial Institutions Improve margins on China trade p6 Diversify funding p16 Grow onshore operations p8 Gain exposure to China's growth (Investment 'onshore and offshore') p18 Take risks out of China activities p10 Manage risks p20 Boost global liquidity p12 USD7.3trn China s GDP in 2011 (ii) USD1.6trn China s total exports in 2010 (iii) 3

3 Corporate strategy in renminbi Grow onshore operations Finance and fund in renminbi Corporates Improve margins on China trade Invoicing and working capital finance in renminbi Take risks out of China activities Renminbi for hedging Boost global liquidity Diversify balance sheet cash in renminbi p6 p8 p10 p12 8.6% - China's annual estimated GDP growth for 2013 (iv) 30% projected proportion of China trade in RMB in 2015 (v) 3rd expected position of RMB among currencies by turnover in 2015 (vi) 4 The renminbi landscape As the renminbi is not yet fully convertible, the Chinese government has promoted an offshore market currency designation CNH where renminbi can be bought and sold, borrowed and lent outside the Chinese mainland. It is separate from the onshore market currency designation CNY which is highly regulated and is used by domestic Chinese companies, Mainland residents and foreign companies with a China presence. China Hong Kong London Singapore, Taipei MENA** Trade 8% of all China crossborder goods trade settled in RMB in % of global RMB trade flows under letters of credit* HSBC signs first offshore RMB receivables finance deal to support HK-UK trade Taipei: 3% of cross-strait trade in RMB Can settle any trade transaction in RMB, subject to local rules Finance Loans and intra-company lending Dim Sum bond issues of CNH275bn in 2012 HSBC launches London s first RMB bond in 2012 Can raise RMB finance as permitted by local authorities Liquid assets CNY22trn interbank market Renminbi deposits CNH571bn (November 2012, Hong Kong Monetary Authority) Customer and interbank deposits CNH109bn (April 2012, City of London) Singapore customer deposits of CNH60bn; Taipei CNH15bn (November 2012, HSBC; May 2012, Xinhua) Accounts as permitted by local authorities Current Accounts Call Accounts Term Deposits *Source: SWIFT RMB Tracker May **UAE, Qatar, Bahrain, Lebanon and Kuwait. 5

4 Improve margins on China trade Moving an invoicing cycle for Chinese trade into renminbi could boost margins dramatically by improving terms and reducing forex transaction costs. Did you know that 41 per cent of Chinese companies are willing to offer better terms of up to 3 per cent to transact in renminbi? (HSBC's RMB Cross Border Trade Settlement Survey, October 2012) The renminbi is already widely used in cross-border transactions with China, accounting for around 8 per cent of total goods trade settlement in China in HSBC projects it will reach 30 per cent by Total offshore cross-border trade settlement in renminbi reached CNH2.9 trillion in 2012, representing 40 per cent year-on-year growth. How can HSBC help you seize it? HSBC can help set up the accounts needed to settle China trade in renminbi and set the stage to negotiate better terms and reduce foreign exchange. We can also help back invoices with trade and receivables finance, all in renminbi. 11.8% China s year-on-year import growth in December 2012 (vii) 6 Trade in renminbi with HSBC Cross-border settlement Invoicing renminbi for trade with China is now unrestricted. Your business can conduct almost all cross-border trade transactions with mainland Chinese companies in renminbi, using accounts and documentation support from HSBC. Trade has been fully open since June 2012, when all companies in mainland China with import and export qualifications were permitted to make and receive payments in renminbi for goods, services and other account items under China s Renminbi Trade Settlement Scheme. Move your trade on to the Mainland As the largest foreign bank in China, we can help establish and manage operations on the Mainland. HSBC will help execute an expansion strategy, providing services to help with capital injection and reduction, payments, investments, and shareholder loans all compliant with Mainland authorities. We can help repatriate profits by paying and receiving dividends in renminbi. There is no restriction on the maximum amount of individual renminbi payments you can make on your trade or capital accounts. Trade financing and funding HSBC provides a full range of offshore renminbi trade finance products in MENA: RMB Export Documentary Credit (DC) Advising RMB Export Collections RMB Export Financing RMB Import Documentary Credit (DC) Issuance RMB Import Collections RMB Import Financing RMB Shipping Guarantees RMB Guarantees 7

5 Grow onshore operations Ensure your business participates in the growth of the Chinese economy projected at an average annual GDP growth rate of 7.5 per cent until 2015 to the fullest extent by building your operations in China with finance in renminbi. You can finance your China operations using renminbi raised offshore or on the Mainland. Injections of renminbi into China foreign-invested enterprises, wholly owned foreign enterprises and joint ventures have been permitted since October In 2012, international companies, banks and other organisations raised CNH275 billion in renminbi funds using the offshore Dim Sum bond market in Hong Kong. Or fund operations directly in China international organisations can borrow from Mainland lending organisations. USD112bn inward direct investment into China in 2012 (viii) We re Chinese in China We offer a full range of funding for your business in China. HSBC provides renminbi trade financing facilities, loans and the capability to raise bonds in Hong Kong, London and other offshore markets as they develop. Onshore too, HSBC is there to help with financing solutions as a registered bank on the Mainland. 8 Build in renminbi with HSBC Offshore RMB borrowing and funding We are the leading underwriter and lead manager in the offshore Dim Sum market, ranked first in the league table of lead managers by Bloomberg in 2012 by amount and number of issues. Additionally, we offer a full range of short- and medium-term financing solutions in renminbi for more immediate funding requirements. Alstom, América Móvil, Ford and Tesco are among the issuers that have raised renminbi funds at competitive rates through Dim Sum bonds. Companies can also raise capital through renminbi-denominated initial public offerings in London, Hong Kong and other financial centres with HSBC. All working capital, trade and receivables finance can be used outside China while bonds and loans raised offshore can be remitted onshore to finance business activities in China subject to approvals by the Chinese authorities. Onshore RMB financing As the largest foreign bank in mainland China, you can turn to HSBC for loans, bonds and trade financing facilities tailored to fit your requirements. We are the only foreign bank approved by the People s Bank of China to underwrite and clear non-financial corporate bonds in interbank bond markets, and underwrite commercial paper and medium-term notes. HSBC also provides full trade and receivables financing in China as well as domestic lending and cross-border intercompany funds transfers. HSBC is also the leading foreign bank for access to China s interbank bond market. 9

6 Take risks out of China activities Manage the costs of hedging your trade and operations on the ground in China by using renminbi foreign exchange forwards, options and swaps in an offshore regional treasury centre or on the Mainland. Renminbi foreign exchange markets onshore and offshore have developed rapidly and are now supported by risk management tools. About USD8.7 billion in deliverable foreign exchange contracts are issued every day in Hong Kong, while USD3 billion in contracts are traded daily in China. USD3.31 trillion value of China s forex reserves, December 2012 (ix) How can HSBC help you seize it? We provide risk management instruments for trade, financing and investment protection. HSBC is among the most active participants in the offshore renminbi foreign exchange market and one of only a few international banks registered to deal on the Mainland as well. 10 Mitigate in renminbi with HSBC Complete offshore hedging tools Hedge your offshore renminbi trade flows and assets with HSBC. We provide deliverable forwards, options and swaps as well as access to the active non-deliverable market, which predates liberalisation of the renminbi. Prices between deliverables and non-deliverables are converging and deliverables have already become the tool of choice for many investors seeking to hedge renminbi volatility. Manage risks on the Mainland We are the leading foreign bank in the interbank FX spot, forward and swap markets. HSBC provides deliverable currency and interest rate hedging tools, including swaps, options and forwards. We can help hedge all the transactions and transfers permitted by Chinese regulators, including debt and working capital repayment; income and expenses; capital injections and income remittance. 11

7 Boost global liquidity Renminbi short-term securities provide a new avenue to diversify balance-sheet cash positions and accumulated funds, often offering liquidity at more attractive real yields than traditional assets in US dollars, euro and sterling. The rise of renminbi deposits in Hong Kong, London and other centres to more than CNH700 billion means you can manage offshore renminbi funds in the same way as other global currencies. Plus, with regulators opening access to key securities markets on the Mainland, such as China s CNY22 trillion interbank bond market, there are plenty of options for onshore cash too. How can HSBC help you seize it? HSBC's Global Liquidity Solutions (GLS) connects China to your offshore treasury centres delivering additional values in optimising internal funding and interest income. We are there to help you manage onshore renminbi generated by your business in China too as a registered bank on the Mainland, and an active participant in liquid local securities markets. 3.2% yield on five-year Chinese government bonds in Shanghai (x) 12 Add liquidity in renminbi with HSBC Diversify your international cash in renminbi Diversify international cash holdings among a growing range of renminbi-denominated investment products in offshore markets. We can help you invest foreign currency into renminbi or find a home for existing holdings of renminbi accumulated offshore. HSBC's RMB investment products include: Time deposits Primary and secondary renminbi bonds issued offshore FX-linked structured notes Interest-rate linked structured deposits Equity-linked structured notes Precious-metal linked structured notes RMB funds RMB foreign exchange options RMB Equity Index Baskets Diversify your cash holdings in China Companies that generate surplus cash from operations on the Chinese mainland can turn to HSBC for competitive yields on their funds. Our onshore renminbi fund offers attractive returns, and we can tailor allocations to meet different liquidity and operating requirements. Manage cross-border flows Optimise the flow of renminbi funds and mitigate issues of trapped cash in China with HSBC. Our wide range of cash and treasury management solutions help improve working capital and operational efficiency through cash pooling, netting of intra-group flows, and centralisation of payments processing and risk management. Remitting cash in to and out from China has never been more simple and safe with HSBC's online banking system - HSBCnet. 13

8 Financial Institutions strategy in renminbi Diversify funding Invest in renminbi Financial Institutions p16 10 January 2013 first exchange traded bond fund permitted in China (xi) Gain exposure to China's growth ('onshore' and 'offshore' investment) Raise finance in offshore and onshore renminbi Manage risks Risk management tools in renminbi p18 p20 3% proportion of onshore equities markets owned by non-mainland investors, December 2012 (xii) USD37.4 billion QFII quotas approved for foreign and offshore investors as of 31 December 2012 (xiii) 14 Redback reform Options to finance and invest in renminbi continue to expand. Growing liquidity and regulatory freedom propel development in offshore markets. Onshore, easing of rules and expansion of regulatory quotas are broadening investing and financing options for international participants. Market size Investment possibilities Financing possibilities Offshore accounts/payments and cash management More than CNH700bn in deposits* Offshore unrestricted Offshore unrestricted Dim sum bond market CNH275bn issues in 2012, CNH280bn-CNH360bn expected for 2012** Offshore unrestricted Offshore unrestricted RMB IPOs in Hong Kong CNH12bn to date from Hui Xian REIT*** Offshore unrestricted Offshore unrestricted Onshore bond market CNY50trn issued since % of market is interbank**** China Interbank Bond Market (CIBM) eligible investors: foreign central banks or monetary authorities, Hong Kong, Macau and Taiwan RMB clearing banks designated by PBoC, overseas RMB participant banks, insurance companies, QFII, RQFII funds Restricted China A-share market (Listed shares, bond and warrants; interbank fixed income products; funds, and index futures traded in China) USD3.3trn market, average daily trading volume of 11 billion shares***** QFII RQFII exchange traded funds in Hong Kong *Source: HKMA, City of London, HSBC, Xinhua. **Source: HSBC, Forecast by Crystal Zhou. ***Source: HSBC, RMB market development. ****Source: HSBC, RMB market development. *****Source: Shanghai/Shenzen Stock Exchange, HSBC, RMB market development Restricted 15

9 Diversify funding The growing liquidity of renminbi debt capital markets represents new avenues for financial institutions to diversify funding. The Dim Sum bond market has come of age as a way of diversifying funding into renminbi. All categories of issuers are represented with about CNH275 billion raised in 2012 and between CNH280 billion and CNH360 billion projected for 2013 according to our forecasts. Onshore funding options continue to broaden with regular announcements of regulatory easing by Chinese authorities. How can HSBC help you seize it? We have a leading position for renminbi funding, from offshore Dim Sum issues and IPOs in London and Hong Kong through to onshore funding options via our position as the leading foreign bank on the Mainland. USD101 billion new loans by banks in mainland China in December 2012 (xiv) 16 Finance in renminbi with HSBC Diversify with Dim Sum If you want to raise renminbi offshore, look to HSBC. We are the top-ranked underwriter and lead manager in the Hong Kong Dim Sum market, holding first position in Bloomberg s league table in January 2012, with 130 issues at CNY42 billion total issuance value. Our ranking reflects our extensive relationships and placement power among investors who want to lend in renminbi. Offshore channels Financial institutions looking for other offshore funding channels can work with HSBC to raise bilateral and syndicated term loans, certificates of deposit, notes and funds. After the launch of the Hong Kong renminbi repo market in June 2012, HSBC can also help financial institutions borrow renminbi against a variety of collateral offshore such as government securities, equities and gold held with Euroclear. After Hong Kong, London is the leading offshore centre for Dim Sum issuers and after a pioneering issue by HSBC in 2012, the market s profile and liquidity has been raised by issues from both international and Chinese banks. Financial institutions looking to raise their profile in Asia can also raise capital through renminbi-denominated IPOs in London and Hong Kong with HSBC. Funding onshore and panda market As a registered bank on the Chinese mainland, HSBC offers financial institutions funding onshore with access to loans and arrangement of intercompany domestic loans. Although rates are converging, funds raised onshore are generally more expensive than offshore and face more extensive regulatory requirements set by domestic authorities. We provide a tailored solution to fit the needs of your institution. 17

10 Gain exposure to China s growth Access to China s strong economic growth is available through a growing range of renminbi-denominated products from HSBC, available onshore on the Chinese mainland and in offshore markets worldwide. The growing pool of renminbi held outside China has spurred the development of offshore investment products while the easing of regulatory controls continues to broaden options onshore. Offshore deposits now exceed CNH700 billion worldwide while regulators continue to expand access to China s CNY22 trillion interbank bond market and USD3.3 trillion A-share market. We expect that China s bond market is likely to double in size in the next five years and that the PBoC will gradually create a single interest rate benchmark in the next three years, leaving all other rates to be freely determined by the market. How can HSBC help you seize it? We provide access to the complete range of investments in offshore renminbi in Hong Kong, London and other financial centres, which can be made with no restrictions from Chinese regulators. HSBC is also a leader in onshore investment, which is limited to particular investors and channelled through the QFII and CIBM regulatory schemes. 11,600 number of participants in China s interbank bond market (xv) 18 Build your China portfolio with HSBC Investing offshore HSBC provides financial institutions wishing to invest offshore with renminbi deposit products, Dim Sum bonds, structured products and money-market funds. Renminbi-denominated equities are also becoming available in Hong Kong. Our solutions include: Time deposits Primary and secondary renminbi bonds issued offshore FX-linked structured notes Interest-rate linked structured deposits Equity-linked structured notes Precious-metal linked structured notes RMB funds RMB foreign exchange options RMB Equity Index Baskets Investing onshore HSBC helps investors take positions in onshore capital markets in a variety of assets through the QFII and CIBM schemes. We can help a wide range of investors gain QFII status and then support their onshore renminbi investment strategy. HSBC provides a one-stop package through our Mainland sub-custodian banking services. Our solution includes global custody, FX arrangement, bond trading and execution, and related investment services. We also guide and advise financial institutions on the path to gaining CIBM investor status, which allows access to the fixed-income products traded in China s interbank bond market. The CIBM scheme is open to foreign central banks or monetary authorities, Hong Kong, Macau and Taiwan RMB clearing banks designated by PBoC, overseas RMB participant banks, insurance companies, QFII, RQFII funds. 19

11 Manage risks Financial institutions can mitigate the risks and manage the costs of their finance and investment in China with a growing range of renminbi currency and interest-rate hedges. Deliverable renminbi hedging tools have proliferated as volumes in forex markets have risen and now total USD8.7 billion every day in Hong Kong and USD25 billion daily in mainland China. How can HSBC help you seize it? One of the most active participants in offshore renminbi foreign exchange and a registered dealer on the Mainland, HSBC provides financial institutions a complete set of risk management instruments. USD6 billion daily turnover in offshore RMB foreign exchange forwards and swaps (xvi) 20 Protect your renminbi with HSBC Offshore risk management Offshore, HSBC quotes deliverable forwards and options up to five years with further tenors available on a case-by-case basis. Liquidity has risen significantly with daily turnover of USD6bn for forwards and USD1bn for options. HSBC offers renminbi cross-currency swaps, liquid up to five years or maximum tenor of ten years. After strong growth, daily turnover in cross-border swaps is now USD200m. US dollar non-deliverable market HSBC offers instruments on the US dollar non-deliverable market which predates liberalisation of the renminbi. The prices of deliverable and non-deliverable instruments are converging rapidly as the deliverable market develops and becomes the tool of choice for hedging renminbi volatility. Daily volumes of non-deliverables forwards were estimated at USD3bn in December 2012 and options at USD2.5bn in the same month. Onshore foreign exchange HSBC serves financial institutions who wish to transact on the onshore foreign exchange market which has an estimated daily volume of USD25bn for spots and USD3bn for forwards with deliverable currency and interest-rate hedging tools, including swaps, options and forwards. The bank offers interest-rate swaps with floating-rate benchmarks based on the seven-day repo rate and Shanghai Interbank Offered Rate (Shibor). 21

12 Develop your renminbi strategy with HSBC With the renminbi internationalising rapidly, now is the time to make it part of your business. And at HSBC, we have got the field covered: Offshore We are the number one bookrunner in Dim Sum bonds according to Bloomberg (January 2013) HSBC is a key member of the steering group that is developing the City of London into an offshore financial centre for renminbi. In 2012, we launched London s first ever renminbi bond First to provide continuous streaming of FX rates for six direct offshore RMB crosses on an interbank platform First to conduct the Tri-party RMB repo with Euroclear (3 Dec 2012) Won RMB House of Year 2012 by Asia Risk (for all RMB products and services) Investing We hold QFII and CIBM status and have demonstrated expertise in Chinese securities investment First and only foreign custodian bank for RQFIIs We work variety of Dim Sum bond issuers to our investors for diversification Onshore Leading foreign bank in China, present on the Mainland since st foreign bank to underwrite Chinese government bonds First and only foreign bank allowed to underwrite commercial paper and mediumterm notes First foreign bank to provide interbank RMB bond clearing / custody services in China First foreign bank as market maker of RMB- Ringgit direct quotation in China your renminbi business opportunity in your year of the renminbi Get in touch Set out your thoughts on how 2013 will be your year of the renminbi, and get in touch to make renminbi part of your business. Get informed You can find in-depth views, interviews and news on the state of play for the renminbi at For trade related enquiries: Please contact / 25 (in Bahrain) or / 25 (outside Bahrain) For other enquiries, please contact your Relationship Manager Renminbi ( RMB ) is currently not freely convertible and is subject to certain restrictions. The amount of offshore RMB (deliverable outside Mainland China, informally known as CNH ) may be limited, which may affect the liquidity of offshore RMB products. The market for offshore RMB is a different market to that of onshore RMB (deliverable in Mainland China, known as CNY ).Apart from its own supply and demand, the offshore RMB exchange rate may be influenced by the onshore exchange rate (which currently trades within a band set by authorities in the onshore interbank market) and the two rates may converge with or diverge from each other. The Offshore RMB market may become illiquid, or offshore RMB may become inconvertible or non-transferable; the standard ISDA provisions for offshore RMB incorporated into this transaction provides that RMB payments in this transaction may be delayed until such disruption event ceases, or if it persists, settled by converting and making the payment in another currency. 23

13 Source references (i) Source, HSBC, China's Big Bang, November 2012 (ii) Source, World Bank, (iii) Source, CIA World Factbook, (iv) Source, HSBC, (v) Source, HSBC, (vi) Source, HSBC, China's Big Bang, November 2012 (vii) Source, Bloomberg, (viii) Source, MOFCOM, (ix) Source, PBoC, (x) Source, Bloomberg, (xi) Source, Reuters, (xii) Source, Citywire, (xiii) Source, Z-BEN, (xiv) Source, Bloomberg, ists-estimates.html (xv) Source, Chinabond, June 2012 (xvi) Source, HSBC Emerging Markets Currency Guide 2012, CNH is the name used in the market to refer to offshore deliverable RMB This document is issued jointly by HSBC Bank plc, regulated by the Financial Services Authority ( FSA ) and HSBC Bank Middle East Limited, which is regulated by the Jersey Financial Services Commission. HSBC Bank plc and HSBC Bank Middle East Limited are members of the HSBC Group of companies ( HSBC Group ). HSBC has based this document on information obtained from sources it believes to be reliable but which have not been independently verified. Any charts and graphs included are from publicly available sources or proprietary data. Except in the case of fraudulent misrepresentation, no liability is accepted whatsoever for any direct, indirect or consequential loss arising from the use of this document. HSBC is under no obligation to keep current the information in this document. You are solely responsible for making your own independent appraisal of and investigations into the products, investments and transactions referred to in this document and you should not rely on any information in this document as constituting investment advice. Neither HSBC nor any of its affiliates are responsible for providing you with legal, tax or other specialist advice and you should make your own arrangements in respect of this accordingly. The issuance of and details contained in this document, which is not for public circulation, does not constitute an offer or solicitation for, or advice that you should enter into, the purchase or sale of any security, commodity or other investment product or investment agreement, or any other contract, agreement or structure whatsoever. This document is intended for the use of clients who are professional clients or eligible counterparties under the rules of the FSA only and is not intended for retail clients. This document is intended to be distributed in its entirety. Reproduction of this document, in whole or in part, or disclosure of any of its contents, without prior consent of HSBC or any associate, is prohibited. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. Nothing herein excludes or restricts any duty or liability of HSBC to a customer under the Financial Services and Markets Act 2000 or the rules of the FSA. This presentation is a financial promotion within the scope of the rules of the FSA. HSBC Bank Middle East Limited Copyright. HSBC Bank Middle East Limited 2013 ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank Middle East Limited. Issued by HSBC Bank Middle East Limited, PO Box 57, Manama, Bahrain. Incorporated in Jersey, Channel Islands. Regulated by the Jersey Financial Services Commission. Licensed and regulated by the Central Bank of Bahrain as a Conventional Retail Bank, in the Kingdom of Bahrain. CRN130401/BAH

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