The Middle East has been a market for Britain’s major banks for at least a century, although today it forms only a small part of their world-wide businesses. Like their counterparts elsewhere, UK institutions with their roots in commercial banking are now trying to move beyond straightforward lending and trade finance to capture more lucrative business in areas such as structured finance and securities underwriting.
Some British banks conduct all their Middle East business from the UK, while others have networks on the ground in the area. NatWest Markets – the corporate and investment banking arm of the NatWest Group – has regional and product specialists based in London. Royal Bank of Scotland, a smaller institution which is a relative newcomer to the Middle East, also works from London.
By contrast, Barclays Bank has a dedicated Middle East and North Africa Group in London, offices in the UAE and Egypt, and a minority shareholding in Egypt’s Banque du Caire Barclays International as well. Barclays is currently considering whether to buy majority control of the Egyptian joint venture bank, which would then concentrate on local corporate and investment banking business. Flemings, a merchant bank which has been active in arranging equity issues from Egypt and Lebanon, has a regional office in Beirut.
HSBC Holdings, a British institution with its roots in the Far East, has by far the biggest network in the Middle East. In addition to investment banking staff in London, the group has a commercial banking subsidiary – British Bank of the Middle East – and two affiliates, Saudi British Bank and Egyptian British Bank (see box). HSBC has a financial services company in Dubai and is setting up another in Egypt. It also owns 46.5 per cent of the London-based British Arab Commercial Bank.
With the exception of HSBC and Standard Chartered Bank, British commercial banks tend to eschew the small and unsophisticated retail market in the Middle East. Some provide loans to governments and companies in the region: this is often with the aim of winning other business from the borrowers, though Barclays says it has a lucrative corporate lending business in the Gulf and Egypt. As elsewhere in the world, the banks are likely to focus their energies on winning fee-based business. In the Middle East this falls into three main categories: project finance, debt and equity underwriting and corporate advisory services. Private banking and asset management are also growth areas.
The project finance market in the Gulf is blossoming as governments seek to raise money for petrochemicals projects, liquefied natural gas (LNG) export schemes and new power plants. ‘In an environment of low-ish oil prices, governments under budget constraints look to outside sources of capital,’ says Steven Edgley, senior manager of project and export finance at Royal Bank of Scotland.
At the moment, foreign banks dominate the market. However, a few banks from the Gulf itself, often owned by regional governments, are becoming more experienced at arranging deals. ‘The main competition is from US investment banks, but increasingly you’ve got people like Gulf International Bank and Apicorp (Arab Petroleum Investments Corporation) who’ve got the expertise,’ says Bob Harris, assistant director of project and export finance at HSBC Investment Bank in London.
All the British banks involved in project finance are keen to move up from subordinate positions in deals to the more lucrative role of lead arranger. ‘We are increasingly playing a lead arranger position. There is a concerted effort by the bank,’ says Eli Khouri, head of Barclays’ regional team, which works in tandem with the bank’s investment banking arm Barclays de Zoete Wedd (BZW). ‘We also have a number of unpublicised bilateral deals, more corporate than structured,’ says Khouri. Barclays is developing its existing relationship with Saudi Basic Industries Corporation (Sabic), the giant industrial conglomerate which is one of the world’s largest petrochemicals producers. Last year the bank recruited Jason Peers, formerly a senior executive at Saudi International Bank, to help it win business in the kingdom.
Perceptions of political risk in the Gulf have improved markedly in the last two years, as evidenced by the unprecedented success of the $1,200 million Ras Laffan bond issue, and borrowers are finding new ways of getting the funds they need (see page 14). The financing of the Equate petrochemical plant in Kuwait, which closed last year, shows that a major project financing in the Gulf can now be done without the involvement of export credit agencies – local banks provided political risk insurance instead.
With so many banks entering the market, lending margins are coming under pressure. ”Most deals are a hybrid of project and corporate finance. Because they are hybrids, some banks are starting to price them as corporate deals, which they are not,’ says Khouri. Royal Bank of Scotland’s Edgley expects that local banks will eventually start to ease out the foreign competition. ‘Increasingly, local banks are seen as major providers of finance for projects and I expect this trend to continue.’
The second of the three growth areas is the arranging and underwriting of securities issues. The number of international issues from the Middle East, excluding the more developed Turkish economy, is still small by emerging market standards. Yet it has risen sharply in the last year as enterprises in Egypt and Lebanon, most of them banks, have strengthened their capital and issued bonds to raise money for expansion. Several governments are also tapping the capital markets – Oman has just launched a $150 million Eurobond, Lebanon has issued several and Morocco may go to the markets in the near future.
‘We see increasing possibilities for companies in the region to tap equity markets,’ says Duncan Agar of HSBC Investment Bank. British banks that have been prominent in many of the recent equity issues from the Middle East include HSBC, Flemings and ING Barings, which is now technically Dutch, since it was taken over by the ING group after the Nick Leeson debacle. By contrast, US banks have tended to concentrate on bond issues. ‘All the Americans have become more broad-based, but they don’t have the same focus on research-led distribution as (British banks),’ says John Seal, director of Investment Banking at NatWest Markets. He adds that in equities, the big US banks tend only to look at the largest deals on offer.
The Gulf may be a growth area for project finance, but it offers thin pickings for foreign equity investors. ‘Gulf companies tend not to need the money, and if they do, they have restrictions on ownership,’ says HSBC’s Agar. This is slowly changing: Oman has let in some investment from outside and the GCC states and other countries may follow suit. ‘One of the most interesting developments for us would be if the UAE stock market is set up. It could turn into a regional centre,’ Agar adds. The UAE, like Qatar, does not have an official stock exchange yet.
One way to try and win mandates for share issues is to set up a domestic brokerage business. HSBC’s new investment banking unit in Egypt will have a brokerage operation attached. ‘We’re interested in the market on an ongoing basis,’ says Agar. ‘Our experience elsewhere in the world tells us that if we don’t have a local presence we’ll be edged out (by local brokers).’
NatWest, one of the largest foreign brokers in Turkey, is hoping that being in the secondary market will lead on to mandates to arrange primary issues by Turkish companies. The bank is looking at Egypt, but is not pursuing Lebanese equity issues at the moment. ‘Everyone dabbles in Turkey, but we have one of the strongest teams. With our position in the secondary market, we’d hope to play a leading role (in new issues),’ says Seal.
Barclays is also keen to get in on the action: last year BZW recruited Ian Kennedy, who worked on the global depository receipt (GDR) issue for Morocco’s BMCE Bank by Nomura International, to help it win new equity business. BZW has just been shortlisted to bid for a GDR by a leading Egyptian bank.
The third main focus for British banks is advice on corporate finance. Privatisation in North Africa, Egypt and Jordan creates a lot of new demand for advisory services from governments and privatised companies- in the wealthy states of the Gulf this process is less advanced. British banks, with their experience of privatisation in the UK in the 1980s, should be well-equipped to compete for this business.
Another spur to Middle East companies to consider their corporate and capital structures is the prospect that tariff barriers and other obstacles to competition from the outside world are likely to come down as regional states join the World Trade Organisation or, as in the case of countries bordering the Mediterranean, sign association agreements with the EU.
Many of the region’s larger firms are unwieldy conglomerates built up by a single family or even a single man. When the founder retires or dies, his children may decide to reorganise the conglomerate or sell it off in lots. Mergers, however, are few and far between in the Middle East and hostile take-overs unknown. ‘People rarely pay for pure advice,’ says NatWest’s Seal. ‘There are opportunities for advisory business, but they’ll probably be transaction-driven.’