In the wake of the financial crisis and the debt problems of Dubai World and two Saudi Arabian conglomerates, it had been expected that foreign banks operating in the Gulf would downsize their operations in the region. Not so. In fact, many foreign banks are restating their commitment to the Middle East and refocusing their strategies in the Gulf.
One example is Standard Chartered, a Western bank that has been in the region for 90 years and is known to be exposed to the considerable debt obligations of Dubai World, the state investment company that sought a moratorium on its debt in November 2009.
"We will continue to focus on growing organically and, at the same time, to consider acquisition opportunities that fit our growth strategy," says Christos Papadopolous, Standard Chartered's regional CEO for the Middle East, north Africa and Pakistan.
At a delicate time, Standard Chartered is emphasising its commitment to the Gulf region by placing a board member in Dubai and entering the Saudi market, where it has already received a capital markets licence.
Meanwhile, HSBC's CEO for the Middle East and north Africa (MENA), Simon Cooper, says the bank has not scaled back any businesses but has adapted its strategy to respond to client needs such as raising capital in difficult markets.
Other banks say they are now prioritising basic business and wealth management. They are, however, approaching the market more cautiously and say that the real estate-led model of development that was once favoured, particularly in Dubai, is now likely to change.
Just a blip?
A number of foreign banks, among them HSBC and Standard Chartered, were exposed to Dubai World when it ran into difficulties in November last year. This came just six months after the default by two Saudi conglomerates, Saad Group and Ahmad Hamad Algosaibi and Brothers (AHAB).
In spite of these setbacks, foreign bankers recognise the Gulf's huge growth potential.
Total investment banking fees in the Middle East grew 65% in 2007 to $1.4bn but then fell back to $670m in 2009 as the effects of the global financial crisis took hold, according to analysis company Dealogic. With restructuring under way and a buoyant outlook for oil prices following a period of volatility, there is optimism that such high growth rates in investment banking fees can return. Mr Papadopolous says: "In the longer term, the business model in the Middle East will work as the economy diversifies. Stronger oil prices and expansionary fiscal policies will support growth and accelerate diversification efforts."
Confronting crises
For the time being, Western banks in the Gulf have to contend with a sector-wide slowdown. "It is clear that the Dubai World debt crisis and Saad/AHAB defaults have had a substantial impact on business confidence in the region, but it is difficult to define in exact terms," says Dr Jarmo Kotilaine, chief economist of NCB Capital, the investment banking arm of National Commercial Bank, Saudi Arabia's largest bank.
"There is a sense of anxiety and malaise in the region's market. For example, a lot of Gulf banks are not lending; they are still profitable in spite of higher provisions, but are sitting on cash," he adds.
Standard Chartered has not been immune to the malaise that has pervaded the region. For example, its consumer banking income declined by 3% in 2009 and the bank has had to undertake provisioning measures. "During the economic downturn, we anticipated the increase in loan impairments due to the general credit environment and took conservative provisioning, which strengthened the bank's balance sheet," says Mr Papadopolous.
Under scrutiny
HSBC's lending activities have recently come under scrutiny; Moody's Investor Service recently downgraded HSBC Bank Middle East's financial strength rating due to the bank's "ongoing credit issues in the Dubai corporate sector as well as specific troubled exposures within the Gulf region, which have impacted the bank's asset quality metrics".
In February this year, it was announced that Barclays' managing director of MENA operations, Michael Miebach, had resigned, prompting worries that senior foreign bankers were losing faith in the region.
BNP Paribas, which has been present in the Gulf for more than 35 years, has also had to contend with the effects of the slowdown in the Middle East. "As far as BNP Paribas is concerned, the main business impact was linked to the general slowdown in major projects and the 'wait and see' attitude adopted by some clients," says Jean Christophe Durand, the bank's managing director in the Gulf.
Mr Durand acknowledges the lessons to be drawn from the recent crises. "These situations did raise questions about corporate governance and financial transparency in the region," he says. "The perception concerning the strength of large and visible family-owned businesses and of the real-estate development model of Dubai has definitely changed among the banking community and has had an impact on the way the banks approach these markets."
HSBC's Mr Cooper is also frank about the changed conditions brought about by the crises of the past few years. "We have not actively scaled back any HSBC business in the MENA region," he says. "However, we have adapted our approach in order to match the requirements of clients in the new economic environment. For example, HSBC has helped clients to raise capital in the markets - both Islamic and conventional - in a difficult environment."
Christos Papadopolous, Standard Chartered's regional CEO for the Middle East, north Africa and Pakistan
Positive news
The difficult environment notwithstanding, Western banks in the region are reporting positive news. The Standard Chartered Group recorded a 13% rise in its operating profit for 2009, with the Middle East and Africa accounting for 16% of the bank's pre-tax profit.
Furthermore, in March it was announced that V Shankar, Standard Chartered's newly appointed CEO for the Middle East, Africa, the Americas and Europe, who is also a member of the bank's board, would be relocated to Dubai from the group's headquarters in London. Mr Shankar will be responsible for shaping the bank's strategy across all four regions and will work directly under the bank's London-based group chief executive. Moreover, in June, Standard Chartered announced that it intends to enter the Saudi market, the biggest in the Gulf, primarily to improve its Islamic banking revenue. The bank aims to place 30 executives in the country to generate new business.
BNP Paribas has also been able to record positive results related to its activities in the region. For example, it achieved a 25% increase in revenues in its wealth management business in the Gulf last year.
Credit Suisse, which first set up a representative office in the Middle East in 1967, was among the best mergers and acquisitions (M&A) performers in the region last year, according to Mergermarket, an M&A information service. Credit Suisse came second in 2009 in terms of Middle East M&A volume, registering eight deals worth $4.45bn.
"We are seeing strong interest from our international clients in the MENA growth story. As the capital markets continue to develop, they provide the ideal conditions to boost our business significantly," says Bassam Yammine, co-CEO of Credit Suisse Middle East and head of investment banking and asset management for the MENA region.
HSBC's Mr Cooper also speaks highly of the region's prospects. "The impact of the Middle East downturn was felt acutely in the region and beyond, but it's important to note that the market is relatively young and grew quickly," he says.
"The downturn has not changed our commitment to the region, and we were the first bank to make that clear during the Dubai World negotiations. The Middle East clearly contributed less to the group's profit in 2009 than in 2008, but we do not see investment as a short-term issue."
Barclays, a bank that has established itself in the Gulf region more recently than many of its global rivals, shares this sense of optimism in spite of recent difficulties. "We remain confident about the long-term economic potential of the region," says Fergus McDonald, managing director and country head for the United Arab Emirates at Barclays Corporate.
"The UAE is becoming a truly diversified economy, from the hydrocarbon sector at one end of the spectrum through to small entrepreneurial companies at the other. The opportunities for the financial services industry are, we believe, very strong too."
Charting a path
Moving forward, a number of Western banks in the region are plotting growth strategies. BNP Paribas has signalled its intention to build its local product capabilities, such as Islamic banking, local currencies and asset management. It also recently publicised its aim to promote project bond financing to meet increased demand for finance across a range of infrastructure and energy-related sectors. In addition, Standard Chartered aims to double its revenue in the Middle East.
There is also good reason to believe that Credit Suisse will increase its focus on the Gulf. In March, the bank announced the opening of its Bahrain office, which will be focused on serving wealthy individuals, families and corporations in the country; the new office is Credit Suisse's eighth in the MENA region.
It is clear that Credit Suisse sees a strong future in developing its wealth management capabilities in the region. "Emerging markets have been the most important drivers of growth in the past 20 or 25 years, and will remain so in the future," says Bruno Daher, co-CEO of Credit Suisse Middle East and its head of private banking for the Middle East and the Indian subcontinent.
"Dynamic markets such as the Middle East are clearly one of the most important strategic priorities for Credit Suisse. Our experience in recent years has shown that the growth is driven by wealthy clients from emerging markets such as the Middle East, eastern Europe or Asia," he adds.
Wealth management
Like Credit Suisse, UBS and others, Barclays is also stepping up its wealth management activities in the Middle East. The Barclays board recently approved a five-year £350m ($531m) investment plan with the objective of moving Barclays Wealth into the top tier of wealth-management players worldwide. Soha Nashaat, CEO of Barclays Wealth for the MENA region, believes the Middle East will be a significant beneficiary of this plan. "The investment plan will further enhance our position in the Middle East, a region that is an important part of our business and contributes noticeably to our operations," she says.
The focus on wealth management is a notable feature of the Middle East situation following the various crises, according to Mr Kotilaine. "One of the main developments following the recent crises is that many of the Western banks have gone back to basics; they have concluded that the easiest thing in the region is wealth management work. It is generally an easier market as it involves transferable skills and can be serviced from a distance. It will be an important part of operations going forward," he says.
Soha Nashaat, CEO of Barclays Wealth for the MENA region
Areas of growth
As foreign banks aim to combat the stagnation in the initial public offering (IPO) market and the decline in equity capital markets issuance, they would be well advised to look at other areas of potential growth, according to Mr Kotilaine. "While the most logical near-term opportunity for foreign banks is wealth/asset management, I believe advisory work also has great potential," he says.
"There is a crying need for banks to advise the region's companies so as to help them restructure, develop strategies, consolidate where possible and eventually perhaps become primed for IPOs. Local expertise in this regard is quite limited, so Western banks can transfer their expertise to the Gulf region."
Positive news is restoring faith in the region and should encourage foreign banks. Bond issuance in the Middle East last year reached a record $45bn while the value of M&A rose by $5bn. Perhaps more crucially, a debt restructuring deal for Dubai World was agreed in May, with foreign creditors such as HSBC reportedly agreeing to extend issued loans over a longer period of time. Many in the Gulf region hope that this will mean that banks will now be more confident of lending and therefore more willing to play a bigger role in reviving the region's economies.
Another potential growth area is enabling small and medium-sized companies to set up and grow. The question remains as to whether Western banks are able to compete in this area of banking. "Fundamentally, it will require focus and a long-term commitment that many of these institutions may be unwilling or unable to undertake at this point," says Mr Kotilaine. The question of commitment remains but it seems that Western banks in the region are beginning to provide an answer.
