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Tough road ahead for ME investment banks

Dubai, June 10, 2011

For investment banks operating in the Middle East, the wounds inflicted by the global financial crisis have yet to heal. In fact, they are only getting worse, according to experts.

Investment banking league tables, already dominated by foreign players, show fees slumped to $48.8 million in the first three months of the year, less than half of the $116.3 million seen a year earlier, data from Thomson Reuters showed, hurt by the political unrest that engulfed the region.

With minimal deal activity, depressed stock markets and appetite for fresh capital at its lowest, the future of most banks remains bleak, and there is a lack of fresh ideas to navigate the downturn. Their survival is now at stake.

'The question is, how many of these investment banks can survive a tough period which we are seeing in the region?' Anthony Mallis, chief executive of Bahrain-based investment bank Securities & Investment Company. (Sico) said.

'Investment banking is a high risk, high return proposition,' he pointed out.

The Middle East is home to a number of local and international banks all eyeing a piece of the fee pool which has significantly diminished in the last three years.

While international banks have managed to stay afloat due to their large balance sheets and ability to adapt to changing business environment, the local ones, with heavy property exposure and stagnant business models, have been worst hit.

With no significant activity seen in the second-quarter either, the trend should remain similar for most of the year.

'We expect the subdued activity for investment banks to continue,' said Alexander von Pock, principal at A.T. Kearney in Dubai.

'The players have been taking action to reduce costs but that alone won't be enough. They will need to redefine playing fields and identify revenue streams.'

Dubai-based Shuaa Capital, once a leading bank in the region who took companies such as the London-listed port operator DP World to market, posted a recent $7.2 million quarterly loss and is cutting 10 percent of its workforce.

Egyptian bank EFG Hermes is also slashing bonuses to reduce costs by more than 20 percent.

Local banks have failed to innovate in the last few years and have kept waiting for initial public offerings (IPOs) or the property market to recover. In the past, they have also depended solely on private equity transactions for revenue.

The value of IPOs in the Middle East plunged 95 percent to $21.7 million, their lowest level in five years during the first quarter, Ernst & Young said in a recent report, and show little signs of a turnaround in the near future.

In waiting for a recovery in IPOs, many regional banks neglected to tap into growing opportunities such as the fixed income market, a space where the international banks have established a strong foothold already.

'The regional players lack the skills in advisory, M&A, bonds and sukuk market that will be needed,' said Jarmo Kotilaine, chief economist at National Commercial Bank in Riyadh.

To survive, local banks will have to shift strategy fast. 'What we need perhaps are players who can think out of the box and come up with different, more sustainable models,' says SICO's Mallis.

At the same time, some foreign players are also looking at cutting costs. British bank Barclays Plc plans to move its Africa headquarters in Dubai back to Johannesburg, leaving more than 120 employees with the option of relocating or quitting the bank.

'What we definitely see is that the conditions that would lead to consolidation in the sector are taking place. We are aware of situations where banks have explored merger opportunities,' said Von Pock.

Consolidation could also happen, but in the region that is often easier said than done. Mergers are not easy in this part of the world with management often unwilling to give up control.

Transparency and corporate disclosure requirements are also still not on a par with international standards.-Reuters




Tags: investment bank | ME | Tough road |

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