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Thu 22 Dec 2011 10:32 AM

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EU banks' retreat creates gap for Arabian Gulf borrowers

GCC firms may struggle to refinance almost $90bn of loans maturing through 2013

EU banks' retreat creates gap for Arabian Gulf borrowers
Half of the top 10 mandated banks this year are lenders based in the Arab world

Arabian Gulf companies may struggle to refinance almost $90bn of borrowings maturing through 2013 as the sovereign-debt crisis forces European banks to retreat, leaving a gap that local lenders may be unable to fill.

Syndicated lending in the Middle East and North Africa has fallen to the lowest since 2004, data compiled by Bloomberg show. Banks arranged $26bn in loans this year, less than half the $60bn raised in 2010 and less than a quarter of the 2007 peak of $109.2bn. European banks arranged about 42 percent of loans compared with about 39 percent in 2010.

Half of the top 10 mandated banks this year are lenders based in the Arab world, such as National Bank of Egypt, up from three in 2010 and 2009. France’s Credit Agricole SA and BNP Paribas SA have dropped out of the top 10, the data show.

They’re “pulling out of the region because they want to shore up their liquidity and capital,” said Murad Ansari, a Riyadh-based analyst at EFG-Hermes, the biggest publicly traded Arab investment bank. Gulf lenders “don’t have the capacity to completely fill the US-dollar financing gap. The cost of funding for European banks has also gone up significantly. Their ability to competitively price loans is diminished.”

Borrowing costs for European banks have climbed as European governments struggled to contain the sovereign-debt crisis. The three-month London interbank offered rate, or Libor, has jumped 33 basis points from a low of 0.245 percent on June 15 to 0.57125 percent on Dec. 21.

By contrast, the three-month Emirates interbank offered rate, the rate at which banks in the UAE lend to each other, fell to 1.47 percent on Aug. 8, the lowest level since Bloomberg began collecting data in September 2006. It has since risen four basis points to 1.51125 percent on Dec. 21.

National Bank of Egypt, the Arab country’s biggest lender by assets, is the largest underwriter in the Middle East and North Africa so far this year, arranging seven loans worth $2.2bn, according to Bloomberg data. HSBC Holdings Plc, which arranged the most loans in 2010 with $5.1bn of deals, slipped to third place this year with $1.4bn.

Hassan Ali, head of global project and structured finance at National Bank of Abu Dhabi, the United Arab Emirates’ second-biggest bank by assets, said his lender is aiming to top the league table next year as European banks withdraw. His bank was the fifth-largest arranger of syndicated loans this year, up from 14th in 2010.

 “Local and regional banks should be able to fill the gap to some extent,” said Ali. “The constraints of long-term funding and relatively low underwriting capacity means that we will not be able to fill the gap in its entirety.”

Regulators are forcing European banks to shrink their balance sheets, reduce risk and raise capital as the region’s debt crisis worsens. France’s two largest banks, Credit Agricole and BNP, were among the so-called MENA region’s top ten lenders in 2010 and rank 11th and 14th this year.

Both have been downgraded this month by Moody’s Investors Service, which cited funding constraints and a deteriorating economy. Ansari said that means Credit Agricole may be less able to retain previous clients such as Dubai-based Majid Al Futtaim Holding, a retail developer.

A Credit Agricole spokesman declined to comment. No-one was available to comment at BNP Paribas.

 “The fact that some European banks have had to go to their governments and taxpayers to ask for a bailout means that they’ve got to be more inward-looking,” said Daniele Vecchi, treasurer of Majid Al Futtaim. “As long as you have a good disclosure policy and a good credit story, money will be there, but it will be more expensive and short-term oriented.”

Majid Al Futtaim, which operates Carrefour SA supermarkets in the Middle East, raised $1bn in July from a group of banks including Barclays Plc, Credit Agricole and Standard Chartered Plc.

Companies in the six-nation Gulf Cooperation Council, which includes the UAE and Saudi Arabia, have almost $90bn of foreign-currency debt maturing through the end of 2013, according to a Dec. 19 estimate by Barclays Capital analysts. Syndicated loans in the MENA region will probably rise to about $30bn or $40bn next year, helped by the need to refinance loans and fund infrastructure spending in countries like Qatar, Standard Chartered said Dec. 13.

Gulf banks have so far largely relied on interbank loans, and have little or no US dollar deposits, EFG’s Ansari said. This means that they are largely limited to lending in their domestic market, he said.

Analysts at Emirates NBD PJSC, the United Arab Emirates’ largest bank, said Dec. 19 that while European credit to the GCC countries amounts to only about 7 percent of the region’s gross domestic product, or $100bn, “it may be challenging to replace if credit lines from Europe were reduced substantially over the coming years.”

French banks were absent from Qatar Petroleum and Exxon Mobil Corp.’s $7.2bn financing package for their Barzan gas project, announced on Dec. 13.

The project received commitments from 31 lenders, mainly local and Asian banks. BNP Paribas had participated in a $1.6bn loan to Qatar Petroleum in 2007, while Credit Agricole provided the company with a $380m loan in 2006.

Banks across Europe have announced they will trim more than €775bn from their balance sheets in the next two years to reduce short-term funding needs and achieve the Basel Committee on Banking Supervision’s 9 percent target ratio of regulatory capital to risk-weighted assets ahead of schedule, according to data compiled by Bloomberg.

They may be required by policy makers to meet this ratio by the end of June, two people with knowledge of the talks said on Oct 25. Policy makers are also urging banks not to cut lending within the European Union.

Meanwhile, France’s biggest banks, including BNP and Credit Agricole, are struggling to fund about €37bn of debt payments due in the first quarter.

The decline in liquidity and a shortage of US dollars at some European banks may create “tensions” for some Middle East companies as they seek to refinance debt over the next 12 to 36 months, according to Viswanathan Shankar, chief executive officer for the Middle East, Africa, Europe and the Americas at Standard Chartered.

“Some of the regional banks from the UAE, Kuwait, Qatar or Saudi can play a role in filling that dollar void, although the question is whether they can fill that entire void,” Shankar said in a Dec. 14 interview.

Standard Chartered, the British bank that makes most of its revenue in Asia, hasn’t been hurt significantly by Europe’s crisis. The bank’s revenue was $2.2bn from the Middle East and South Asia in 2010, its most recent results show, though it slipped from being the second-largest arranger of loans in the MENA region in 2010 to seventh this year.

In the UAE, local banks are becoming more active lenders as they recover from the emirate’s property crash and Dubai- based borrowers’ loans come due. Loans have risen 4.1 percent this year to AED1.073 trillion ($292bn) at the end of October, data from the country’s central bank shows.

Still, Emirati lenders may be constrained by a shrinking deposit base, as investors elsewhere in the Arab world are repatriating safe-haven flows stemming from political unrest earlier this year. Loans exceeded deposits for the first time in a year as deposits dropped AED 11.1bn in September from August, the UAE central bank said.

“It will be more difficult, especially for bigger-ticket, longer-tenure loans,” said Khalid Howladar, a senior credit analyst at Moody’s in Dubai. “Local banks will need to step up, but without significant growth on the liability side it could constrain credit.”

Dubai, the Arabian Gulf’s trade and tourist hub, has about $13.8bn in bank loans and bonds coming due from the fourth quarter of 2011 and until the end of 2012, Moody’s said Dec 6. The emirate was on the brink of a default in 2009 and is recovering after a $20bn cash injection from the UAE’s central bank, the Abu Dhabi government and its banks.

“Local banks certainly have the capability of filling this gap, provided domestic liquidity doesn’t dry up,” said Raj Madha, an analyst at Rasmala Investment Bank Ltd. in Dubai.

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