The merger of Gulf International Bank (GIB) and Saudi International Bank (SIB), completed last April, was a landmark event in Middle East banking. As the need for consolidation grows ever more urgent, it was a flagship deal, setting an example for other banks to follow. It also reinforced GIB's position as one of the dominant wholesale commercial banks in the region, and expanded its operational remit. Beyond this, the merger led to a restructured shareholder base, paving the way for GIB's greater penetration of the Saudi Arabian market.

Founded in 1975 and established as an offshore banking unit (OBU) in Bahrain, GIB was wholly owned by Gulf Investment Corporation (GIC) until last year's merger. For most of the last quarter of a century, it has been one of the prime players in the regional corporate and project financing market. The bank has developed full arranging, underwriting and syndication capabilities.

Few major deals in recent years have been done without GIB's participation at some level. Last year was no exception - despite the upheaval of corporate reshuffling - with GIB underwriting more than $450 million worth of project finance, and more than $150 million worth of corporate financing. Management seems pleased. 'GIB managed to achieve good results and lead/participate in the majority of deals in the region,' says Abdullah el-Kuwaiz, GIB's general manager. There is little reason to think that this dominance will change in the near future.

Lending on this scale has been supported by regular borrowing. GIB is one of the most active visitors to regional capital markets. 'GIB currently has $750 million in term financing outstanding,' says El-Kuwaiz. 'In all likelihood, GIB will be planning to raise term financing in the near future either through a syndicated loan or bond transaction.' As the only bank to be rated by all four major credit ratings agencies active in the region, GIB has a good profile in the debt market.

Following the merger, the bank's new identity has yet to fully emerge. Conscious of the fact that many mergers have been ruined by rushed integration, GIB has moved cautiously. '1999 was identified as 'the transition year' to allow the two institutions to get to know each other, to analyse in detail the degree of integration suitable for each of GIB's and SIB's businesses,' says Khaled al-Fayez, GIB's vice chairman. 'It was agreed that changes will be introduced in early 2000 to achieve the goal of managing the two institutions as an organisationally integrated 'one-bank'.'

One of the issues expected to be addressed sooner rather than later is that of group branding. So far, SIB has continued to trade under its own name. GIB managers are reluctant to be drawn on their plans. 'Careful consideration is being given to the issue of branding as part of an overall GIB-SIB integration plan likely to be announced shortly', says Al-Fayez.

Whatever name SIB gets, few dispute that its business will complement GIB's core activities, and that the merger is a good fit. London-based SIB is primarily an investment bank focusing on corporate finance, securities trading, corporate banking, capital markets, and asset management. Analysts say there is minimal overlap in the operations of the two institutions while the opportunities for synergies are strong.

The merger will be followed by a re-ordering of the bank's operations. 'GIB group's corporate finance and asset management businesses will continue to operate out of London,' says Al-Fayez. 'In the same manner, the hub of GIB's corporate banking business will remain in Bahrain. The objective is to allow the bank to be able to offer a full spectrum of corporate banking, asset management, corporate finance and global markets' products and services to its GCC customers.'

The bank expects the restructuring to bring a change to its revenue streams which have historically been split equally between treasury and banking activities. 'With the acquisition of SIB, the proportion of non-interest related revenue will increase as a percentage of consolidated gross revenue,' says El-Kuwaiz.

But there is more than just integration on the agenda. GIB is also looking to expand, and Saudi Arabia is the first target. The share swap and fresh capital issue that lay at the heart of the merger deal has brought about a radical shift in GIB's shareholder structure. The major owners of SIB, US investment bank JP Morgan & Company and the Saudi Arabian Monetary Agency (SAMA - central bank), now hold stakes in GIB of 5.3 per cent and 22.2 per cent respectively. The remaining 72.5 per cent continues to be owned by Kuwait-based GIC.

Reassured by its stake, SAMA has, for the first time since 1988, issued a new banking licence and GIB is expected to open a branch in Riyadh shortly.

'It is important for GIB to have a presence in its core market,' says El-Kuwaiz. '[The] Riyadh branch...will offer both commercial and investment banking services. Business activity will primarily focus on increasing our existing involvement with government institutions and top-tier corporations.'

The impact of World Trade Organisation (WTO) accession on the financial services sector in the Gulf will be radical. This is a message well understood. 'GIB is one of a handful of banks with a potential of competing effectively in such an environment,' says Al-Fayez. 'After increasing its capital base and the addition of investment banking capabilities, the development of a Gulf-wide footprint is a part of GIB's overall strategy to prepare itself to compete effectively with strong international players.'

There is more than one path to this larger footprint. 'Further organic growth opportunities are being evaluated,' says Al-Fayez. 'However, we do not exclude growth through acquisition. We have an open mind towards using all means in our quest to expand our business in the GCC region.' He adds that further regional expansion is not at the very top of the bank's agenda. 'We want to make sure that the Riyadh branch and the merger works first, but our aim is to get closer to our customers in the GCC. It is a gradual process and we've taken some important steps,' he says.

Not only is GIB changing. The nature of wholesale banking is in flux. Economic liberalisation, and the prospect of privatisation being used as a policy tool, will create an increased demand for private sector finance. '[GIB will] lead arrange the financing requirements for the large projects under privatisation programmes in co-ordination with large regional and international banks,' says El-Kuwaiz. 'On top of the list is naturally the power sector, the telecommunications sector and the transportation sector.'

New business

There are also promising signs that a new area of business could emerge soon. Last May, GIB was among four co-arrangers of one of the first leveraged buy-outs (LBOs) in the region. A $125 million syndicated loan was provided for Ahmed Mannai & Company for the acquisition of two-thirds of the equity of Mannai Corporation. 'This was a very interesting deal,' says El-Kuwaiz. 'And there will soon be a lot of similar ones in the region. There are currently a number under discussion in Saudi Arabia, Kuwait and the UAE, and we can expect more.' He says the growth of LBOs could be the beginning of a larger process. 'When the financing and the acquisitions have been completed, the companies will be taken to the market,' he says. 'The opportunities will grow as the regional capital markets develop.'

New business could bring higher profits. In 1999, GIB's reported net earnings of $67.6 million, an 18 per cent decline on the previous year. 'Most of the costs of the merger were booked in last year, which had an impact on profits,' says El-Kuwaiz. 'But we are looking forward to feeling the benefits of the synergy this year and next.'

The immediate effect of the merger, and the promise it holds for the future, can be seen on the bank's balance sheet. Total assets of $15,679.4 million were recorded at the end of the year, up more than 50 per cent on the year, making GIB the fifth largest financial institution in the Gulf. The inclusion of SIB's assets and liabilities brought a near doubling of customer deposits and a 69 per cent rise in investment securities.

'We are well placed for next year,' saysEl-Kuwaiz. 'As the full integration of the business moves ahead, the bank will move from strength to strength.'

TEH