Western bankers are moving east at ever faster rates, but revenues from the region have so far disappointed
The migration of western financial talent to the Middle East is accelerating. Almost every day brings news of a top banker moving to Dubai or Bahrain, a new country office being opened in the region, or a banking licence being awarded. For investment banks, the Middle East has very quickly become the place to be – and be seen.
But serious doubts about the timing of the banks’ expansions in the GCC are beginning to emerge. Indeed, the global financial crisis reared its ugly head in the Middle East at the end of September as banks found themselves facing a liquidity crisis, forcing the United Arab Emirates’ central bank to pump Dh50 billion into the system.
Dispelling any doubts as to whether any region could remain immune to the global financial crisis, the emergency funding package was made available to banks in the UAE in an attempt to kick-start the local interbank lending market.
The government’s intervention follows increasing concerns about local banks’ ability to fund themselves internationally – especially in dollars – which has also led to an increase in domestic funding costs. “We can debunk this notion of decoupling. No country can remain isolated,” says Arnab Das, head of emerging markets research at Dresdner Kleinwort in London.
Research analysts at Citigroup point out that with interbank rates on the rise, “overstretched” local banks are “finding it difficult to finance the massive real estate and infrastructure projects that lie at the heart of the massive economic boom in the region... Unable to secure financing from outside the GCC because of the credit crunch and now finding little in domestic markets, [local] banks are clamouring for relief.”
There are also widespread concerns about many local banks’ exposure to the real estate market, which has grown at an extraordinary rate in the last years – especially in Dubai – and which many believe could be heading for a crash.
One banker at a Gulf financial institution outside the UAE said that ratings agencies had been doing the rounds of the financial institutions in the region in recent weeks, asking banks to disclose their real estate exposure. A new fraud investigation ordered by the ruler of Dubai into several government-backed companies, including property groups, has also fuelled concerns among lenders to the region about the real-estate sector.
Bees round the honey pot
Questions are also being raised about the true motive for western banks’ dramatically increased presence in the GCC. Observers point out that overall volumes and revenues for the region have been extremely disappointing of late: although combined bond, loan and equity issuance for Middle Eastern institutions soared from $112 billion in 2005 to $181 billion in 2006, it dipped last year to $102 billion. As for fees, investment banks have earned $1.1 billion (E754 million) in the Middle East from mergers and acquisitions, syndicated loans and debt and equity capital markets in the year to the end of August, a decline of 27% compared with $1.5 billion during the same period last year.
Instead, many believe that the main reason for the increased presence of western banks in the region is their desire for proximity to a vast capital base: the plethora of sovereign wealth funds, government investment companies such as Dubai International Capital and Mubadala of Abu Dhabi and the region’s central banks.
Many global banks have created dedicated groups to cover sovereign wealth funds, saying that SWFs have evolved from being passive money managers to players on the global mergers and acquisitions (M&A) stage.
One senior US bank executive based in the region admits that the growth of SWF coverage groups has the whiff of a fad. After all, Middle Eastern governments have been investing their foreign currency reserves for years, providing good business to the asset management arms of investment banks.
Many of those banks have now tapped funds such as Dubai International Capital, the Saudi Arabian Monetary Agency and others to shore up their balance sheets following the credit crisis, making sovereigns clients of particular importance.
Moving senior bankers out to Dubai is an attempt to show those funds the status they have been accorded as clients. As one banker in the region at a US house explains: “This is about firms showing their clients in the Middle East how important they are. It’s a good marketing exercise.”
In April, HSBC sent the head of its principal investments unit, Mukhtar Hussain, back to Dubai after two years in London to serve as chief executive of HSBC Amanah. The bank, which is the biggest fee earner in the Middle East, took the step purely because its rivals were redeploying so many of their senior staff, insiders have said. “Our rivals were moving high-profile people over there, so we followed suit just to match them for seniority. It’s purely tactical to send a message to our clients,” an HSBC source says.
Banks segment their clients in terms of priority and importance, with the most valuable dubbed ‘platinum’ accounts. They then devote the best coverage resources to those clients. The birth of the sovereign wealth coverage team shows that investment banks are attaching platinum importance to SWFs – even though the SWFs are not yet paying big fees because of in-house deal-making expertise to do deals or a rotation policy on using banks.
Tomorrow’s riches for today’s pains
However, western banks will argue that to complain about disappointing investment banking revenue figures and to question banks’ true motives for being in the region is missing the point. Instead, they say, the Gulf land grab that they began in 2005 when the Dubai International Financial Services Centre opened to foreign institutions is essential foundation work that will enable them to build franchises in a region that some believe will enjoy the fastest capital market expansion in the emerging world between now and 2010.
The same bankers will also claim that the extreme problems that the GCC banking system is experiencing today are merely temporary and pale into insignificance against the vast potential of the region’s capital markets.
There is, of course, a lot to be excited about. Latest estimates put the inflow of petrodollars to the region at $300 billion a year. McKinsey Global Institute, the economics research arm of McKinsey & Co, the consultancy, estimates that the total value of the Gulf states’ foreign assets reached $1.9 trillion by the end of 2006 – more than double their level in 2003 and nearly equal to the GDP of India and Brazil combined, or the market value of the top 10 Fortune 500 companies. But this is nothing compared to the wealth generation expected over the next decade and half.
“The coming oil windfall will dwarf anything we have seen yet,” says McKinsey in a research note. “At an oil price of $70 a barrel... Gulf oil export revenues will add up to $6.2 trillion over the next 14 years – more than triple the amount they earned over the past 14 years. At $100 oil, this will rise to almost $9 trillion.”
McKinsey also estimates that alongside this boom in wealth and foreign assets will come sharp growth in local capital markets. Although small at present ($3 billion of revenues in 2007), McKinsey expects revenues to grow between 16% and 25% a year between 2007 and 2010, despite global and local economic problems. “The sheer magnitude of the wealth accumulated over the past few years should help support these markets if a protracted economic recession ever chokes global demand for oil and slows the flow of capital into the GCC,” says McKinsey.—T.F.
“The coming oil windfall will dwarf anything we have seen yet”
—McKinsey Global Institute