Scottish banks prepare for the upturn

05 October 2009

It has been a tough year for Scotland’s largest banks, but the country’s financial system remains intact, and its institutions continue to target the lucrative Gulf market.

“Twelve months ago, I would have talked about the strength of the banking and finance sector in Scotland,” says Alan Shanks, a partner in the Dubai office of Edinburgh-headquartered law firm HBJ Wareing Gateley. “Now things look a little different.”

The past year has not been kind to Scotland’s two banking giants, Halifax Bank of Scotland (HBOS) and Royal Bank of Scotland (RBS).

HBOS was taken over by fellow UK banking group Lloyds in September 2008 following repeated runs on HBOS shares.

RBS posted a net loss of $40bn for 2008 after writing down $33bn on its assets, the biggest corporate loss in the UK’s history. The bank was hit hard by the sub-prime mortgages in which it had invested heavily and its purchase of part of Dutch bank ABN Amro. In January 2009, the UK government took a 70 per cent stake in RBS, effectively nationalising it.

The bank had spent much of the previous five years aggressively pursuing growth in the Gulf region, in particular taking a 14 per cent share of the local credit card market. Including ABN Amro’s 35-year-old banking division, RBS has three retail banking branches in the UAE and one in Qatar, and a leading position as a project finance and debt refinan-cing adviser. It was the number one project finance arranger in the world in 2008, writing $7.9bn worth of business.

Sell-off strategy

In April, MEED reported that the bank, the second largest in Europe, planned to dispose of its Gulf retail branches to shore up its balance sheet. One month earlier, the decision had been made to exit project finance.

This does not spell the end of the bank in the Gulf, however. RBS will continue to operate in the region through its corporate banking division and the highly successful private bank RBS Coutts, which it operates in Abu Dhabi, Dubai and Qatar. This has remained profitable, turning a profit of $190m in 2008.

It also remains the lead project finance adviser on the $20bn Ras Tanura petrochemicals megacomplex being developed in Saudi Arabia by state energy giant Saudi Aramco and the US’ Dow Chemical Company, one of the largest chemical companies in the world.

Almost a year on from the acquisition of HBOS, Lena Wilson, chief executive officer of Scottish business development agency Scottish Development International, says the worst is over. “It has been a tough year, but we have to start looking to the future,” she says. “There are some great finance businesses in Scotland, and we have a reputation for asset management.”

“The two big banks have not disappeared,” says Shanks. “RBS is still an enormous bank, and there is more to Scottish finance than just that and HBOS. Edinburgh has a huge financial services sector. Financial advisory services in Scotland are very strong and still have a great reputation.”

“What is impressive is that such a small country had financial institutions like these in the first place,” says one senior Dubai-based financial adviser. “Scotland has punched above its weight consistently for a long time, and I am sure it will continue to do so in the future.”

Scottish financial institutions currently manage about $900bn worth of funds, while the country’s pension funds, life assurance, and general insurance companies manage a further $1 trillion in assets worldwide.

The Scottish government would like Gulf institutions to invest in Scottish funds, while some of the country’s asset managers are quietly moving into the region.

In February 2009, Scottish Widows Investment Partnership (Swip), the fund management arm of Edinburgh-headquartered investment and pension fund Scottish Widows, set up a joint venture asset management company with Saudi Arabia’s Manar Financial Investment in the kingdom. Swip Saudi Asset Management started with SR50m ($13.3m) in paid-up capital.

Islamic finance

Scotland is also proving an unlikely pioneer of Islamic finance. RBS has offered sharia-compliant commercial and private loans since 2008, and in its 2009 finance bill, the Scottish government made provisions for Islamic finance for the first time.

The not-for-profit Islamic Finance Council (IFC), based in Dubai, wants more of Scotland’s banks and financial institutions to enter the lucrative, and relatively risk free, market. The IFC says $3-4 trillion in wealth will be created in the Gulf by 2015, and that Scotland should be doing its utmost to tap into this market.

The council has been appointed to advise the Scottish government on creating a universal strategy to move into the sector. One of its key proposals is for an Islamic finance house, a middle-man between the Muslim world of the Gulf and Scottish businesses.

Elsewhere, the Dundee-based Al-Maktoum Institute hopes to offer a course in Islamic finance and business from 2010, in partnership with Aberdeen University.

“We are looking for people who are experts in both finance and sharia law, who have real hands-on experience with the market and with day-to-day business,” says Mallory Nye, -principal of the institute. “It is a really unique proposal.”

If Nye’s long-term plan of an MBA degree based on Islamic business and finance pays off, Scotland will be well positioned to capit-al-ise on the Gulf’s growing wealth in the years to come.

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