Gulf investment banks in crisis, need to innovate

The Gulf's sharp fall in real estate values and drying up of initial public offerings (IPOs) -- staples for local investment banks -- and competition from global players such HSBC is pushing them into niches, such as infrastructure funding and foreign exchange, to survive.

 

And in a region where outright acquisitions are rare, analysts say deals are on the medium-term horizon. Those Gulf investment banks that make the transition to successful specialist players are likely to become attractive takeover targets or joint venture partners for international banks, such as Credit Suisse, Morgan Stanley or Citigroup.

 

While local banks are unable to revive their investment banking businesses may be forced into a merger with a peer to stay afloat.

 

Shuaa Capital, Dubai's biggest investment bank, has seen its shares plummet almost 90 per cent since the property boom imploded in 2008, sparking an economic crisis.

 

It's pinning its hopes on a greater focus on asset management after its core income from IPOs dried up.

 

"Corporate lending and the capital markets continue to be relatively subdued," said Natalie Boyd, partner in financial markets at law firm Simmons & Simmons.

 

"Local banks are making the most of opportunities arising from an increasing number of infrastructure projects across the region, foreign exchange and advisory for sovereign funds."

 

Governments have pledged to invest billions in roadways, hospitals and other infrastructure projects to attract more foreign investment and as their populations grow rapidly.

 

The bigger local banks in the UAE as well as Qatar are looking to retail operations to grow.

 

Investment firms in Kuwait such as Investment Dar and International Investment Group are struggling, again largely because of the sharp fall in real estate values, while debt troubles at Bahrain's Gulf Finance House and Arcapita underscore the region's heavy exposure to real estate.

 

Investment banking league tables show that international banks dominate all traditional sectors such as syndicated loans, M&A, equity and debt offerings which is reflected in the banks' fee income.

The Gulf investment banking market grew 17 per cent per year in all segments except brokerage from 2005 to 2007, but after peaking at $5.5 billion in 2007 investment banking revenues shrank to $4.2bn in 2009, a report from consultancy firm AT Kearney said.

 

"It is worth noting that almost no local banks have expanded or in most cases just maintained any kind of securities businesses,” said a banker with an investment bank in the Gulf who did not want to be identified, referring to products such as bonds or exchange traded funds.

 

Analysts said those local banks that create the right niche and profitably reinvent themselves could become attractive emerging market takeover targets, while weak players would likely draw little interest from foreign firms.

 

"International investment banks will look to expand their presence in the emerging markets. An accelerated way of doing this would be through partial acquisition of a regional firm," said Phil Gandier, Ernst & Young's head of Transaction Advisory Services Leader for the Middle East and North Africa.

 

Consolidation could also be driven by regional retail banks looking for an investment banking presence.

 

Despite the large number of regional players, there is ample room for growth in most segments, as indicated by low penetration compared with more developed markets, an AT Kearney report said.