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Thu 9 Jun 2011 12:39 PM

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The hard road back

With heavy property exposure and stagnant models, the worst is yet to come for Middle East investment banks

The hard road back
The Middle East is home to a number of global banks all eyeing a piece of the diminishing fee pool

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.

Investment banking league tables, already dominated by foreign players, show fees slumped to $48.8m in the first three months of the year, less than half of the $116.3m 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 Co (SICO) said.

"Investment banking is a high risk, high return proposition."

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 AT 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 $7.2m 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 $21.7m, 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 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.

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KBS, Los Angeles, 8 years ago

Your article fails to mention that investment bankers are generally over-paid relative to the value they add by providing an abundant commodity - capital - to individuals and enterprises providing scarce investment opporuntities. The general persistance of their self-righteous culture and low-value business model is one of the key weaknesses of the capitalistic system. We've gotten to the point where the Hermes neck ties, French cuffs, gold cufflinks and over-priced suits look more like a clown costume than anything else.

There were three key causes to the crash of 2008... 1) a fixed Yuan during a period when China accounted for a huge share of incremental global GDP, 2) a manipulated spike in crude oil prices, and 3) a long-broken financial services industry. Unfortunately, the third is unlikely to go away.