Gulf regional banks challenge global competitors for bond fees

Banks operating in the GCC earned $124.2m in fees from bond sales in 2010
TOP EARNER NBAD topped the regional banks in fees from bond advisory deals last year, with $14.1m, up from $4m a year earlier (Bloomberg Images)
By Bloomberg
Thu 03 Feb 2011 11:43 AM

Gulf Arab banks, long trailing international lenders in managing bond sales in the region, are hiring from their global competitors and looking to partner with them in an effort to build fee income.

With their experience, history in the region, greater ability to lend and access to global investors, international banks such as HSBC Holdings and Standard Chartered ]regularly top the Gulf’s bond league tables, a list that ranks banks by the amount of money they helped clients raise. Still, regional lenders are showing gains: Samba Financial Group climbed to Number 8 last year from 13th in 2009 and National Bank of Abu Dhabi moved up two places to Number 9, according to data compiled by Bloomberg.

Even as the value of bond sales fell 24 percent last year in the region, Gulf bankers say they have progressed by building trading in the secondary market necessary to support prices after the securities are sold. An announcement last month by the United Arab Emirates to borrow money may also be a step toward creating a domestic bond market, where local banks would likely be favored by Gulf governments over foreign competitors.

“The ascent up the league tables doesn’t happen overnight,” Robert Mohamed, NBAD’s senior vice president and co-head of investment banking, said in a telephone interview. “In an ideal world, I would like to see NBAD within the next 18 months within the top five and within the next three years within perhaps the top two and within five years, number one.”

Governments and companies in the six-nation Gulf Cooperation Council, which includes oil-rich Saudi Arabia, the UAE and Kuwait, raised $32.6bn from 58 bond sales in 2010, down from $42.8bn from 57 sales in the previous year, according to Bloomberg data. The decline mirrored a global drop and the uncertainty surrounding Dubai World’s $24.9bn debt restructuring, which hurt credit markets. Regional banks participated in 22 deals in 2010, the same as in 2009.

Banks operating in the GCC countries earned an average of 0.53 percent of the value of the deals, or $124.2m in fees from bond sales in 2010, according New York-based consulting firm Freeman & Co. That is up from an average of 0.25 percent of the value of the deals, or $86m earned by the banks in 2009, the data showed.

NBAD, the UAE’s second-biggest lender by assets, topped the regional banks in fees from bond advisory deals last year, with $14.1m, up from $4m a year earlier, according to Freeman. Samba was second at $8.2m compared with $8.5m in 2009, the data show. HSBC, which has been in the region for more than a century, earned $22.3m in fees last year. Standard Chartered, which has been doing business in the Gulf since 1923, earned $19.8m.

The Gulf lenders still can’t match the international banks in reaching bond investors around the world, bankers say. International banks such as Royal Bank of Scotland Group also lead the league tables because of their greater capacity to lend, Makram Kubeisy, head of investment banking at Dubai-based Shuaa Capital, said in an interview.

“It is distribution where the global banks have a big advantage,” Shahzad Shahbaz, chief executive of QInvest, a Doha-based Islamic investment bank, said in a telephone interview. “They have a global platform so they can distribute all over the world and which takes a very long time to build.”

Samba and NBAD together managed nine bond sales last year. Qatar National Bank, the Arabian Gulf country’s biggest bank by assets, worked on three transactions, including the $3.5bn bond offering of Qatari Diar Finance in July, the region’s biggest issue last year.

“Regional banks are going to struggle to drive transactions because these are focused at the global investor base,” Abdul Kadir Hussain, CEO at fixed-income fund manager Mashreq Capital DIFC Ltd, said in an interview from Dubai. “If the local investor base became key, so if you had large pension funds in this region or insurance companies, then I think the regional banks would have a much larger role to play.”

NBAD is considering striking partnerships with some of the top five global debt advisers as it seeks to reach investors outside the Gulf. The bank will focus on debt origination, capital restructuring, liability management and hybrid products and this year plans to expand its fixed-income business across the Middle East and North Africa, Mohamed said.

“What we have tried to do is complement the international banks in terms of regional expertise by giving them a more granular view on pricing,” he said.

The lender was one of the arrangers of the $1bn bond offering of Dubai Electricity & Water Authority in April and its $2bn sale in October. Samba managed SAR7bn ($2bn) offering of state-owned Saudi Electricity Co in April.

Regional banks could sell issues across the Middle East, although larger deals require a wider international investor base to ensure efficient pricing, Shahzad at QInvest said

Local institutions like Arqaam Capital Ltd, EFG-Hermes Holding, Shuaa, Qatar National Bank and National Bank of Abu Dhabi “will have investors with whom they deal with on a daily basis that the others won’t have,” said Paul Reynolds, head of debt and equity capital markets advisory at Rothschild. “One of the benefits of bringing in pretty diversified competition is that the local brokers will try that much harder to sell.”

Twenty-four percent of the investors of Qatari Diar’s $1bn, five-year bond were from the Middle East, 33 percent were from Europe, 33 percent from the US and 10 percent from Asia, according to data provided by book runner RBS. Thirty five percent of the Government of Dubai’s $750m, ten-year bond sold in September was placed in the Middle East, 30 percent in Europe and 35 percent was distributed in Asia, figures from Standard Chartered show.

Placement opportunities within the region are likely to remain restricted as there isn’t a vibrant domestic debt market because governments in these countries don’t need to borrow. This could change as the UAE federal government said last month it may sell a bond at the end of this year.

“They have been working over the last two years to establish a bond programme and we would expect this to be very local-currency focused,” said Jacco Keijzer, Gulf head of debt capital markets at RBS. “This is definitely going to be dominated by the local banks, which is in line with the wider strategy of further empowering the local banks.”

To increase their competitiveness, regional banks have recruited from foreign banks over the past three years. NBAD’s Mohamed was previously at Merrill Lynch and Deutsche Bank AG, while QInvest’s Shahbaz spent years at Bank of America Corp. Arul Kandasamy, head of investment banking and debt capital markets at state-controlled Abu Dhabi Commercial Bank PJSC worked at both Barclays Capital and Calyon.

NBAD’s debt capital markets’ client team will expand to six bankers by April from three in 2008. Its fixed-income business also employs about 25 professionals across the debt syndicate and sales desk. Another five cover secondary-market trading and the repurchase business, which supports prices and makes markets in the securities.

“Without good secondary spreads and good secondary flows, the pricing of primary debt is going to be somewhat skewed,” Mohamed said. “You need a bank with a credible balance sheet that can actually absorb the flows and volume in the market without too much trouble, which we can do.”

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