By Shane McGinley
Top 20 lenders earned a combined total of US$234.8m in fees during the first half of 2012
The 20 biggest global banks earned a combined US$234.8m in fees from their Middle East businesses in the first half of this year, a rise of five percent year-on-year, but short of the US$450m earned in the same period during the peak of 2007, according to Thomson Reuters data.
Global banks flocked to the Gulf during the boom years of 2003 to 2007, aiming to make a quick buck from the oil-rich region, mostly catering to large Middle Eastern corporations and sovereign wealth funds.
The strategy has proved less lucrative in the past few years as the global financial crisis has forced those customers to refocus on their local markets.
But while global banks have retrenched in the region in the past few years, seasoned bankers say they are finding plenty of business opportunities because they understand the dynamics of doing business in the Middle East.
Setting up a business in Dubai or Abu Dhabi is more straightforward than in other large financial centres and the cities benefit from tax-free business zones.
Dubai issued 14,360 business licences in 2011, according to the Department of Economic Development data, a 14 percent increase on the previous year.
"Many of the institutions that came to the region during the boom time proved to have a short-term view, it was all about selling products and very little effort about understanding the regional requirements and building a longer-term presence," said Pushpak Damodar, who worked at Deutsche Bank's asset management arm before setting up consultancy Global Frontiers Advisors in Dubai in 2009.
Many global investors are now rethinking their strategy in the region and are looking for reliable partners to ensure they do not miss out on future growth prospects, he added.
"These markets are going to leapfrog in the years to come. If you don't get in now, then you will have a significant disadvantage five years down the line," Damodar said.
Earlier this month, ratings agency Standard and Poor's said Gulf banks are likely to continue their steady recovery from the 2008 crisis and remain isolated from eurozone turmoil for the rest of 2012 and 2013.
The agency said that despite slower balance sheet growth, most GCC banks have maintained healthy earnings generation before provisioning.
"We believe the trend of declining loan loss provisions will continue for most of the banks in the Gulf Cooperation Council, resulting in further recovery in reported net profits despite adverse conditions in the eurozone and international banking markets," said Standard & Poor's credit analyst Timucin Engin.
S&P said even though pockets of risk persist, asset quality continues to improve, and as a result banks do not need to set aside as many provisions to cover their loan losses.
This trend of better asset quality and lower loan loss provisions is fueling the improvement in earnings at most Gulf banks.
"We don't expect the eurozone turmoil to have a big direct impact on the GCC banks because their net funding dependence on European banks, and external funding in general, is largely limited and manageable, in our view," Engin added.
Standard & Poor's credit analyst Paul-Henri Pruvost added: "GCC banks' lending and investment exposures to the eurozone are also very limited and their high levels of capital are also a major strength, and provide an important cushion against unforeseen stress on asset quality."
S&P said in the report that apart from Bahrain, other GCC members have remained largely insulated from the spillover effects of the political turmoil in other parts of the Middle East and North Africa.
The outlook for lending growth in Kuwait and the UAE remained limited, S&P said, but was healthy for Saudi Arabia, Qatar, and Oman.
For most GCC banks, funding profiles have improved visibly in the past few years on the back of declining balance sheet growth, S&P added.