Why local is trumping global in the Middle East banking game

Regional banks have seen their fortunes soar as global banks trim down their operations in emerging markets, says Ed Attwood
Why local is trumping global in the Middle East banking game
By Ed Attwood
Fri 24 Apr 2015 02:05 PM

Last week was a good one for Shayne Nelson. The head of Dubai’s Emirates NBD oversaw a set of results that saw the lender leapfrog Abu Dhabi’s First Gulf Bank to become the most profitable bank in the UAE once more.

Its first-quarter profits soared by 60 percent, helped by — among other things — its prudent strategy over provisions and the reclassification of its Dubai World debt from non-performing onto the cleaner side of the balance sheet. Other banks in the region have followed suit: Qatar National Bank posted a useful 10 percent gain in profits; Abu Dhabi Commercial Bank saw its net income rise by 31 percent; while FGB announced slightly smaller profit growth at 7 percent.

The good fortunes of Emirates NBD and others has only served to highlight the growing gap between homegrown lenders and the global banks that have based subsidiaries here in the UAE. Ever since the financial crisis, there has been a steady roll-call of big-name banks trimming down their operations in emerging markets as they attempt to cut out a legacy of expansion during the boom years and refocus onto more profitable core operations.

Last week, two of the world’s largest lenders ran into regulatory trouble in the region. First up was Deutsche Bank, which was hit by the Dubai Financial Services Authority’s largest ever fine — $8.4m — for “serious contraventions” by its wealth management businesses, and subsequently misleading the regulator over its actions. The sum itself will hardly bother the bean-counters back home in Deutsche Bank’s Frankfurt headquarters. After all, the DFSA fine amounts to less than the bank paid co-CEO Anshuman Jain in salary and bonuses during 2013 and is paltry in comparison to the $3.4bn Deutsche Bank has set aside to cover costs related to an expected fine for rigging the benchmark Libor interest rate.

Next up was HSBC, for which 2015 is becoming something of an annus horribilis. As well as the fiasco surrounding the bank over its Swiss unit’s involvement in tax evasion, HSBC is also dealing with — or has paid fines related to — money laundering, allegations over currency rigging, hedge fund leaks and overcharging clients in the Middle East (among other places) for foreign currency fee transactions.

The latest addition to the charge sheet came in the form of a ban imposed by Saudi Arabia’s Capital Market Authority, which prevents HSBC’s Saudi unit from taking on new funds in its asset management business, after it was adjudged to have breached local regulations.

Again, this is small fry compared to the wider travails HSBC is currently going through, but it isn’t great PR for the bank, especially as it attempts to become a gateway for the flood of foreign investors seeking to take advantage of the opening of the Tadawul in June.

The news isn’t much better for another big name plying its trade in the region. Standard Chartered still hasn’t announced a new CEO for its UAE operations, after Mohsin Nathani quit early last month after only just over a year in the role. Again, the bank has bigger problems elsewhere; in the space of just a few months, it has announced the departures of its chairman, its CEO, its head of Asia, its head of Europe, Middle East, Africa and Americas — not to mention the loss of its international Islamic business head and its CEO in Bahrain.

As the global banks are forced to put out fires elsewhere, local lenders have been able to move into the gap, cherry-picking talent and moving into areas of expertise that were previously the domain of the international players. As the bad news keeps breaking, and the heads keep tumbling, it’s a trend that is only set to continue.

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