Global lenders to continue cutbacks in the Middle East

25 April 2013

Fewer banks can afford strong presence in the region, says senior executive

The number of global banks with a strong local presence in the Middle East will drop in the coming years, according to Daniel Pinto, co-chief executive officer of the Corporate and Investment Bank (CIB) at JP Morgan Chase & Company.

It will be too expensive for marginal global banks to have a strong local presence in regions such as the Middle East because of higher regulatory costs and stricter capital and liquidity requirements, according to Pinto.

“Some of the European banks – not just in the region, but everywhere in the world – are retrenching to their core markets. If you were a marginal global player trying to do what Citi does or what we do, or in some parts what HSBC does, that will require a big investment over a number of years. They don’t have the money to do it. They have to pick their fights and drop the more marginal places,” he says.

Financial crisis

In Dubai, the UK’s Barclays Bank, Switzerland’s Credit Suisse, Japan’s Nomura Holdings, Germany’s Deutsche Bank and the UK’s HSBC cut hundreds of jobs, primarily in investment banking and in private banking over the course of 2012. Some lenders even relocated their top-level investment and private bankers.

JP Morgan has moved in to try and win market share, doubling its regional headcount in the past three years to approximately 250 people across the business.

“Corporate banking is our main driver of expansion in this region,” says Pinto. “Multinational companies need services such as trade finance, payments, foreign exchange, treasury services and lending. The region is also accumulating a lot of wealth, which means there are also opportunities for asset management and private banking to grow.

“Investment banking in this region still tends to be relatively small when you look at the bigger banking picture.”

Middle Eastern investment banking fees reached $536.1m during 2012, according to financial newswire Thomson Reuters.

Globally, investment banking revenue in the first three months of the year was about $13.8bn, down 31 per cent on a year-on-year basis, with stock underwriting seeing the largest decline. Investment banks earned only $436m from initial public offerings (IPOs).

“There haven’t been many IPOs, but a lot of companies, globally, are buying back stock. In terms of economic growth, we’re looking at 2-2.5 per cent globally, with potential for 3 per cent. It’s slow growth and may be for a period of time,” says Pinto.

Sjoerd Leenart, senior country officer for the Middle East and North Africa (Mena) region at JP Morgan, adds local capital markets will develop, particularly in Saudi Arabia.

“But this will take time in Saudi Arabia and across the region, both because of the need for further rules and regulations, and because the region lacks the institutional investor base of pension funds, life insurance companies and asset managers,” he says.

Mena capital markets

The development of capital markets poses the main challenge for emerging economies, including the Mena region, which account for around 50 per cent of global growth.

Equity capital markets issuance in the Middle East reached $9.4bn during 2012, down 5 per cent from 2011, while debt issuance reached $38.6bn last year, a 26 increase compared with the previous year, according to Thomson Reuters. Companies in the Mena region increasingly issue bonds to fund growth.

Infrastructure lending, on the other hand, has become more expensive for banks as a result of Basel III, a global regulatory standard that will more than triple the core capital that lenders must hold to at least seven per cent of their assets, weighted for risk.

“Banks lending into infrastructure using their own balance sheet is a very, very tough proposition because of the capital consume and the returns,” says Pinto.

“It requires a long-term view and the involvement of funds that are specialised. When it comes to important infrastructure projects specifically, we usually act as an adviser, matching issuers with investors.”

Pinto said synergies and the bank’s strong balance sheet – with $2 trillion in assets (JP Morgan is currently the US’ largest bank) – form significant advantages for international growth.

While that may put the bank in a better position than some of its competitors, there have been concerns about the bank’s overall business model and transparency when it comes to its financial figures.

Casino banking

Regulators, investors and lawmakers have been heavily debating whether ‘casino banking’, where banks engage in risky or speculative financial activities, needs to be separated from the more traditional banking side of operations. Among questions that have been raised are whether JP Morgan is too big and too complex to manage.

In July 2012, the bank’s main regulator, the Office of the Comptroller of the Currency, downgraded JP Morgan’s management following a loss of $6.2bn by a trader nicknamed the London Whale, which led to a US Senate report condemning the bank for manipulating figures, as well as ignoring warnings from regulators about risks.

In addition, JP Morgan may potentially have to pay billions to US government-owned mortgage financier Freddie Mac, which is suing more than a dozen banks over alleged manipulation of London interbank offered rates that it claims have led to substantial losses.

Asked about the recent issues facing the bank, Pinto says: “Few banks can help a growing company in the Middle East do local business, while also helping them do an acquisition in Latin America, or manage money that they are making in Asia. Our scale and diversification allows us to serve the global needs for our clients. Those qualities also contributed to our profitability, even during the recent crisis.”

“’Too big to fail’ is, however, something we all want to eliminate. While more work needs to be done, new regulatory authorities and living wills go a long way to making sure that big banks can go bankrupt without harming economies and taxpayers.

“We are very committed to ensuring that we have such a system, and are working hard with our regulators towards that goal. We have also deployed a tremendous amount of time, resources, and effort to focus on enhancing oversight, practices and procedures inside the bank - it’s our number one priority at the moment.”

He adds that JP Morgan’s view of international growth is “extremely long term”, with the Middle East a profitable and growing region. However, he is cautious about risk in certain areas.

“The geopolitical situation in the region is quite concerning altogether and remains one of the main concerns for investors, although the situation in Europe tops the list.

“At the moment, geopolitics are not dramatically affecting oil prices because commodity prices have been coming down. If instability does spill beyond the region, oil prices would likely rise, creating volatility.”

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