The Gulf is an attractive option for international banks.
The Gulf region is currently one of the most attractive for international banks. This is due to oil-related economic growth, the development of a real, free-market economy in the region, and the deregulation of strict local bank and property laws.
Oil prices are the main catalyst triggering the change, having risen by more than 170 per cent in the past five years, while world oil demand has increased by 10 per cent. As a result, oil revenues have tripled in the Gulf region since the 1990s, reaching over $300 billion in 2005.
This major surplus revenue has been reinvested rapidly in the Gulf, which is a relative novelty. Unlike in the 1970s, the Gulf countries' cash is currently being used mostly to develop local infrastructure, invest in new services, create world-class financial institutions and attract international investors.
Beyond oil
The aim is to expand local economies beyond the sole focus on oil. As a result, investments in infrastructure projects have quadrupled since 2003 to $150 billion in 2005.
This shift from focusing mainly on oil exports to expanding the local economies has started to trigger significant changes in the overall economic landscape, such as the tendency towards free enterprise, increase in privatisations and takeovers, as well as international business contacts.
In turn, this has resulted in alterations in local laws and regulations, e.g. Sharia-compliant banking services, allowing more international market standards. For instance, the UAE has reduced the minimum stake requirement of local citizens in a joint venture with foreigners, and created an independent financial service regulator. This development allows international banks to offer tailor-made financial solutions and services to Gulf residents, in both private banking and investment banking.
The private banking sector is likely to benefit from the current development in the Gulf countries.
Firstly, because of the growth and size of private wealth in the region: according to the Cap Gemini Merrill Lynch World Report 2005, the total wealth of high net worth individuals (HNWI) increased by 20 per cent year-on-year in 2005 to $1.2 trillion. This is by far the highest growth rate in the world for this segment, and is expected to continue in coming years.
Sophisticated clientele
Secondly, the level of sophistication of the local elite is high, with most local HNWI having an international educational background and running family foundations or trusts. Hence, their investment behaviour is similar to institutional investors.
Those clients require a wide spectrum of asset class coverage and advanced investment methodologies. As a result, structured products have one of the best of development potentials, further reinforced by recent regulatory changes allowing Sharia-compatible structured products like Arboun (Islamic version of options) and Murabaha (futures contracts on commodities).
Large international banks with experience of ultra high net worth individuals, a large range of structured products, and the ability to offer tailor-made financial products based on comprehensive research and structured products teams, are most likely to reap the fruit of this new market. It is one reason why Credit Suisse, amongst other global banks, has significantly increased its private banking operations in Dubai.
Equally, investment banking divisions from large international banks are also likely to benefit significantly from Gulf countries' expansion. The massive return of local stock exchanges since 2001 (for example, Dubai +355 per cent, and Saudi Arabia +408 per cent in local currencies) is generating an increasing demand for the stock coverage of local companies by worldwide institutional investors.
Privatisations are flourishing in Gulf countries as a result of more business-friendly regulations. As usual, big names in the banking business are called upon to insure the success of the first major wave of privatisations. Also, corporate banking advisory (e.g. recommendations for M&A, expansion and company restructuring) is a direct consequence of market-friendly bank laws and economic development, and is expected to progress in line with the high equity valuations of local companies and privatisations.
Furthermore, the development of services, industries and tourism in a rapid timeframe requires short-term loans, bridge loans, and business development advice. Banks with a global offering of equity and debt research, a top ranked M&A department, corporate banking and excess cash to invest in local projects have the best chance to benefit from the current revolution.
Banks are no longer only a deposit for private or company cash. Large international banks are beginning to offer packages of equity research, M&A advice, business development partnership, and structured product offering in all asset classes. Global banks with expertise in all these areas will find it easer to adapt to the rapidly changing system and are likely to emerge as leading, local advisors.
- Lars Kalbreier is Global Head of Equity and Alternatives Research, Credit Suisse, and Walid Fattah is Head of Investment Services & Products, Credit Suisse, UAE
