Unlike some of its international rivals, HSBC Group's commitment to the Middle East cannot be doubted. It has been active in the region before many of the Middle East's countries were born, it has consistently expanded its presence and it has committed considerable capital. Historically, however, HSBC has not always punched its weight in the investment banking ring. But over the last 18 months, a new heavyweight has emerged.
Most international banks operating in the region go through periodic bouts of internal restructuring. The process usually coincides with the appointment of new management, creates a short period of confusion and has little positive impact on the bank's regional operations. HSBC is in danger of proving itself the exception. This year, on a global basis, the formal fusion of the corporate banking, investment banking and markets businesses of the group into the CIBM division has been completed.
'All business is aligned on this model and run as one business. By bringing the investment bankers and the corporate bankers closer together some of the best deals are created: the investment bank brings product and the corporate bank brings customers,' says Iqbal Khan, chief executive officer of HSBC Amanah Finance, the group's Islamic banking operation. 'This translates into the ability to offer clients holistic solutions based on all-round strengths. We have a seamless, full-service proposition.'
Although formally finalised this summer, the creation of CIBM has been a work in progress for some time and the regional benefits have already been felt. There is more than just willingness in the transformation of the group's Middle Eastern investment banking activities: the success of the bank's more aggressive strategy has been built on the intimate corporate banking relationships already in place, and a strong regional presence.
'Our Middle East focus continues to be on the GCC, due to the volume and the value of business there. We have a presence in Egypt and the Levant and a view of North Africa from BACB [British Arab Commercial Bank] and we work in these markets on a case-by-case basis,' says Mukhtar Hussain, chief executive of investment banking & markets Middle East & North Africa. 'The key sectors for us will be oil and gas, the utilities and transport.'
There is plenty of evidence suggesting the new approach is working. As the table on page 26 shows, deal flow has increased dramatically, and the quality of the mandates won has also improved. Significantly, it has not just been more of the same: the volume of Islamically-structured transactions has risen as HSBC Amanah Finance has established its credentials. Launched in July 1998 and housed within the investment bank, Amanah Finance operates as a form of Islamic financial adviser to the whole HSBC Group. Its investment banking curriculum vitae is already impressive and includes the issue of Malaysian sovereign sukuk instruments, three aircraft deals with Islamic structures for Dubai-based Emirates airline and the introduction of Islamically-structured tranches to GCC project finance.
'The Islamic financial market is probably worth north of $250 billion, though a large part of this goes into real estate and short-term liquid instruments,' says Amanah Finance's Khan. 'There is an investible pool of about $35 billion-40 billion in Islamically-structured products, and it is increasing rapidly. It is a growth industry that is asset deficient and full of opportunity. We want to provide assets in the form of solutions and leverage HSBC's strong franchise.'
The Middle East is not the only market for Amanah Finance, but it is a key area. Similarly, the region has become increasingly important for the rest of HSBC's emerging market CIBM activities. 'There are qualitative differences between the Middle East and other emerging markets,' says Hussain. 'First, the region is essentially a net creditor to the banking system: it still exports more capital than it imports. Second, it is not an over-borrowed region: it has the best leverage levels among emerging markets. There are no exchange rate fluctuations and this brings stability. The region is stronger and less volatile than elsewhere.'
HSBC now finds itself at the cutting edge of Middle East investment banking, as has been illustrated by its role in the recent flurry of capital market activity. A number of bond issues have been staged over the last year that might mark the first green shoots in the development of regional debt markets. And HSBC has been involved in almost all of them. The first to launch this year was the $450 million floating rate note (FRN) by National Bank of Kuwait (NBK), which HSBC joined as a senior co-lead. Other regional banks have been quick to follow NBK's lead, and HSBC has been there to assist. It acted as joint lead manager on Gulf International Bank's debut FRN issue and as sole lead arranger for the debut of its affiliate, BACB, and took other co-lead positions on issues from Gulf Investment Corporation and Emirates Bank International.
HSBC has also played a key role in developing local capital markets. It advised and joint arranged the seminal AED 1,500 million ($409 million) bond for Emirates airline. This was the first dirham-denominated bond issued by a local corporate, the first bond listed on the Dubai Financial Market, and the largest of three dirham bonds to come to market.
'The development of regional capital markets is strategically important and good news for everyone,' says Hussain. 'We want to bring our global experience to bear and be part of the development. New markets allow new products and this is of all-round benefit to our clients, be they corporates, banks or governments.'
HSBC has also upgraded itself from being a reliable, if somewhat selective, participant in regional project finance transactions to being an aggressive lead arranger. It has proved innovative, as was illustrated by the financing package for the expansion of Bahrain's Al-Hidd power plant. The $255 million transaction involved the Middle East's first export credits-backed Islamic structuring.
Project finance deal flow has increased dramatically over the last 18 months to the point at which it is rare to see a major transaction completed without HSBC's involvement. In fact, the change in character has been so dramatic that rivals have begun to mutter about a new strategy of 'buying market share'.
'I would totally refute that,' says Hussain. 'We are still cautious, but we have become more visible because we have become more capable of offering clients what they want: structuring, advice and underwriting. We are beginning to realise our potential.'
The point is well made. Few would challenge the bank's structuring capacity and, with Amanah Finance growing in stature, the full suite of capabilities is proven. Equally, with the investment bank having access to the group's massive balance sheet and being able to leverage off HSBC Bank Middle East's long-established corporate banking relationships, there is no capacity constraint on underwriting, nor doubts over distribution skills.
However, keen critics point to one weakness: HSBC has displayed only a limited ability to win the top financial advisory mandates, with banks such as Credit Suisse First Boston, Citibank, BNP Paribas and Royal Bank of Scotland consistently being more successful. If the heavyweight lacks one punch, it is probably in the gym working hard to remedy the situation.
Certainly, the foundations have been well laid over a long period. 'Of the global banks we're the most connected to the region,' says Hussain. 'Of the banks in the region, we're the most international. Neither of these identities comes at the expense of the other.'