OFFSHORE: Future lies in search for a new niche

20 December 1996

The change in Bahrain's financial role since the oil boom years is best illustrated by the changing fortunes of the island state's smaller offshore conventional banks. Based in Manama and owned by government or private investors in the Gulf, such banks were set up after the second oil price hike of 1979 to channel new-found wealth into overseas investments. Cash- rich but inexperienced, many lost money in the Third World debt crisis of the 1980s or were caught out by the Iraqi invasion of Kuwait in 1990.

The banks have responded by cutting back spread lending and trying to develop specialised investment banking skills. In several cases they have brought in new management. Most still rely heavily on the interbank market for funding, which could create problems in the event of another regional crisis. However, most are trying to lengthen the tenor of their borrowings through term loans or debt issues.

Many have been influenced by the example of Investcorp, which has made large amounts of money for its Gulf Arab shareholders and clients by buying underperforming companies in the US and Europe, turning them around, and selling them on. However, few aim to emulate what most bankers concede is the secret of Investcorp's success - its dedication to one specialised kind of investment activity. Instead, they tend to be involved in a range of activities from real estate investment to brokerage and corporate finance.

The US market is a favourite with Arab offshore banks, for investment in private and listed companies, and in real estate. Property, as one banker points out, is popular with the banks' Gulf Arab clients because it is a tangible investment which provides an immediate income from rental payments. Another reason for its appeal is that it is familiar to Gulf businessmen who made their fortunes in the region's construction boom in the 1980s. Foreign exchange and securities trading is another popular area, though some banks have lost money from it in the past and are now much more cautious.

The banks also manage a variety of investment funds targeting both developed and emerging markets. Several are building up their capital markets expertise in the Gulf in the expectation that the next few years will see a growing stream of privatisations, capital increases and possible mergers or take- overs. If their forecast proves to be correct, then the market for this kind of activity is potentially huge. Few institutions do this kind of business at the moment, and those which are quick off the mark could carve out lucrative niches for themselves.

As these profiles of selected banks suggest, the smaller offshore units pursue a variety of strategies:

Bahrain International Bank (BIB) made an $8 million loss in 1990. In the five years since then, new management has steadily improved the bank's profitability - last year it made a net profit of $18.7 million on assets of $600 million. About 40 per cent of its liabilities have a maturity of more than one year, following a series of floating-rate bond issues since 1993. BIB is traded on the stock exchanges of Bahrain and Kuwait and received a B rating from credit ratings agency IBCA, implying that the bank performs well and does not have any significant problems.

BIB has a two-pronged strategy of buying companies in the US and Europe for its own account and those of its clients, following the Investcorp model, and offering advice to corporate clients in the Gulf. In the last year the bank has spent $86.5 million to buy a US company that runs Burger King fast-food restaurants and sold part of another that distributes leisure wear. Future acquisitions are likely to be in the US and Europe. BIB is planning to sell an oil field services company it controls in the UAE.

In the Gulf, BIB is building up its corporate finance and fund management business. This year it acted as adviser and underwriter for the public offering and listing of Renaissance Services, an Omani company with industrial and media interests. Although corporate finance is not very lucrative for the bank at the moment, it should become so if the market takes off as hoped in the next few years. It also spreads BIB's name in the Gulf.

Bahrain Middle East Bank (BMB) was making losses as recently as 1992. Albert Kittaneh, formerly the regional chief of what was then Chemical Bank of the US, was hired as general manager to turn the bank around in 1993 . The evidence of 1995 is encouraging - net profits nearly doubled to $5.6 million, on assets of $461 million. Kuwait's Burgan Bank owns 28 per cent of BMB and the rest is held by investors around the Gulf.

BMB cut its paid-in capital by 40 per cent at the end of last year to get rid of accumulated losses, and its shares soared on Bahrain's small stock exchange as a result. The bank has reduced its loan portfolio and built up fee-earning business, though loans still account for about a quarter of total assets.

'We're not trying to become Investcorp,' says Kittaneh. 'We're trying to become an all-round investment bank concentrating on a few areas.' He outlines these as fund management, treasury, selling collateralised mortgage obligations (CMO) - high-yielding securities backed by mortgages in the US - and buying private equity. 'We're starting to look at the US but we don't believe in going after big companies,' says Kittaneh. BMB is planning to introduce new unquoted equity and global bond funds in 1997 as well as more CMOs. It began trading bonds at the start of 1996.

United Gulf Bank (UGB) started life in the early 1980s as a commercial bank and like many of its peers, got into trouble in the second half of that decade. In 1988 it was bought by Kuwait Investment Projects Company (KIPCO) and a new board was installed in 1990.

Since then UGB has focused on fund management, direct investment and venture capital activity, mainly in North America and in the Middle East itself. Profitability has fluctuated in the last five years: net profits hit a high of $19 million in 1993, then fell to $11 million in 1994, when UGB made losses on the bond markets. Sales of US real estate in 1995 helped the bank to report profits of $16 million on assets of $373 million and earned it a pool of cash, much of which is still sitting in bank deposits.

UGB's return on end-year assets since 1991 has averaged 5.27 per cent, one of the highest in the Gulf. With shareholders' funds equal to about 60 per cent of assets, its capital adequacy is rock-solid. 'We remain very conservative in expanding our asset base,' says a bank spokesman. 'Our focus has been on keeping a clean balance sheet.'

On the liability side, UGB still depends on short-term deposits and interbank loans. However, the bank is raising $30 million of five-year money in its first syndicated borrowing. 'If we succeed, we'll try for maybe 20 to 30 per cent in medium-term funding,' the spokesman says.

The bank is planning to use its pool of liquid assets for cautious expansion. It has considered Islamic banking but has decided against it for now because of the difficulty of competing with much larger institutions. Instead, it is likely to build up its presence in the Gulf, effectively acting as the merchant banking arm of KIPCO.

TAIB Bank has opted for a different geographical focus from the other banks. Set up in 1979 as Trans-Arabian Investment Bank, it was an active player in syndicated loans for the first 10 years but then went through a rethink. 'We'd never been faithful to the word 'investment' in our name,' says Ibrahim Sharif al-Sayed, senior vice-president. The bank's return on assets in 1995 was a healthy 3.07 per cent, though its operating profits fell slightly on the year and only lower provisions enabled it to report higher net profits of $9.7 million.

TAIB Bank's main activities are corporate finance and equity investment, trading and advisory services. It has a presence in the US, UK and Hong Kong and about half of its 1995 income came from assets in the West, but it is now focusing on the countries between Turkey and India. TAIB Bank has subsidiaries in these two countries as well as representative offices across the region and is applying for a banking licence in Kazakhstan. 'This is as far east and as far west as we'll go. The West and Japan are probably not markets where we can compete,' says al-Sayed. He adds that Egypt and the UAE may also offer opportunities The bank has also built up its brokerage and equity research in the Gulf.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications