Mergers and Acquisitions between Gulf Banks: Any Hope?

Mergers and Acquisition between the Gulf Banks: Any Hope?
There has been little mergers and acquisition deals between the Gulf banks in recent years and there are several reasons for this. The size of banks within the Gulf region has remained small and unfortunately they have been unable to compete on the same level as more international banks around the world. There have been calls to create a global player within the region, however, this has been hindered by the fact that banks in the region are faced with hurdles of legislative requirements for any merger to take place with another bank. There are usually differences between shareholder and board of director’s interests over the issue of merging and acquiring another bank and this has led to limitations in corporate activities.
Acquisition and mergers between banks in the GCC region is estimated to be around $15 billion, which really is a small amount. However, much of this estimate has come from the merger between the National bank of Dubai and Emirates bank international in 2007. Since then, no other bank in the region has bought a competitor or merged with another.
The Bahrain Islamic Bank and its smaller rival, the AL Salam Bank has proposed to merge to create a $4.5 billion bank. If the merger goes ahead, it will become the largest Islamic lender in the Gulf Arab Kingdom and could pave the way for more consolidation, mergers and acquisitions within the region. The two Bahraini lenders have stated that they received approval from the central bank for their planned merger. If successful, the merger will be the first for the GCC based Islamic institutions. Many challenges remain however not least bank valuation, board and senior management appointments, and strategic direction.
When taking an overview of the banking markets in the region, including the larger systems found in the UAE, it is easy to see that there are many financial institutions chasing too few customers with in the region. This can especially be seen the Qatar markets, where many institutions are really chasing and search for new customers. In the UAE there are over 50 banks including both local banks and foreign banks. This together with the current banking conditions and the weak asset growth, suggests that the market is ripe for a corporate activity.
Emirates NBD took over the troubled Dubai Bank in October 2011. It was a take over that was initiated by the authorities and doesn’t signal any change in the attitude towards mergers or take overs. The Dubai Bank suffered tremendously from the local financial downturn and it recorded a loss in 2009. After this, it was taken over by the Dubai Government before being transferred to Emirates NBD
Foreign ownership rules have made it difficult for foreign banks to acquire banks in the region. In fact, a number of foreign banks are beginning to scale back their operations within the region. This can be attributed to several reasons. The first of which is the fact that global crisis has had a knock on effect on the banks and secondly there has been a significant fall in the volume of financial activity in the region. The pace of IPOs in the GCC region has halved to $400 million this year from $800 million in the same period in 2010 and $10 billion in 2008. The volume of deals in the Gulf state has also fallen 60 percent to $25 billion this year from $40 billion in the year earlier period.

GCC Retail Banking Expands

The retail and the SME sectors in the Gulf Banking sectors are  in slightly better shape that the corporate and commercial sectors. The reason for this is that the commercial sector has been hit hard by the regional and global downturn. This is due to the correction in the real estate sector and the investment sectors respectively. Having said this, there are still significant challenges facing the retail sectors in the GCC regions.
The retail banking sector in the Gulf is still developing despite the advanced level of sophistication at many banks.  The retail banking sector has be affected by regulatory frameworks and new guidelines which has led to the development within the sector. It is expected that the retail banking services by the Gulf banks will become more innovative as the regulatory framework for retail banking in the region is expanded or broadened.
Banks in all gulf banking markets will readily comment that one of the main stumbling blocks for the true development of retail banking in the Gulf is the problematic bankruptcy laws. Banks are positive that changes in the laws by the government will spur growth in the sector with banks given more confidence in financing retail and SME clients.
The current Euro debt crisis and the downturn in the global economy has had a negative knock on effect on the UAE banking sector. Investor confidence and sentiment has weakened due to the problems facing the world economy. As a result of this, the retail asset growth has been weaker than expected.
Given these conditions, the GCC banks have become more circumspect in retail banking loans. They are unwilling to lend more and have put in place more stringent rules and guidelines. Competition for customers is tough among the banks and most banks have put in place strategies that will distinguish them from the rest of the pack. High competition for customers has led to banks becoming more customer- oriented. Mashreq Bank, for example, is following a more integrated approach and providing end to end service  and so are most of the regions other banks.
How about Asset quality with in the retail banking sector? Well the fact is that asset quality within the retail banking sector has become more stabilized over the past year. This is the result of more a more conservative path taken by the banks. Banks within the region have put in place more conservative policies to watch over customer borrowing and loans. During the boom periods of the GCC economies, the banks were not watchful or vigilant about the number of credit cards and personal loans that each customer took out. This made it easy for customers to get loans and credit cards at the time. However, the rules have changed and the risk appetite has fallen and banks and regulators have introduced far more stringent lending criteria and monitoring processes. But having said that, the banks have remained in a very vulnerable position because there is a lack of credit bureau to aggregate risk information and exposures. Basically, there is a lack of proper risk assessment for each customer, which has led the banks into a more risk exposed position.
So what are the predictions for the UAE retail banking sector? Retail revenue for the UAE banks is expected to be weaker for 2011 and this is because of the personal loans limits that were introduced by the central bank at the start of 2011. Stricter lending policies by the bank and personal loan limits have led to subdued loan asset growth. The UAE retail banking revenues are expected to be lower by between 15-20 percent in 2011.
In contrast, the Saudi retail loans are expected to remain strong on positive demographics. The Saudi retail sector is favored by good liquidity and asset quality which are both factors that are expected to keep the countries retail loan growth healthy in 2012. According to SAMA data, retail lending is currently increasing by around 11 percent year on year, social welfare spending by the government along with bonus salaries will keep demand retail loans high.
The Gulf region has a low interest rate environment and the result of this is that banks has been compressed at the margins. However, in the growing retail sectors- where margins are much higher, banks have been supported with significant retail loan books on the balance sheet.

Business opportunities and the financial services industry in the GCC region

The Gulf Cooperation Council (GCC) region brings together the oil-rich states of Saudi Arabia, Oman, Qatar, Kuwait, Bahrain and the United Arab Emirates (UAE). The GCC economies have been growing rapidly on the back of rising energy prices and economic diversification that includes some $700 billion worth of development projects either under way or in the pipeline. The potential for international financial services groups is vast, in areas ranging from project finance to fast-expanding mortgage, consumer finance and private banking markets. Rapid economic growth and commercial diversification within the GCC region offer valuable opportunities for international financial services groups. GCC markets are increasingly being opened up to foreign investment and ownership. With $700 billion worth of developments either under way or in the pipeline, the GCC is now the world’s largest project finance market. The investment spans leisure, residential, infrastructure and industrial developments as the GCC seeks to forge a stronger and more diversified economic future. The real estate boom in Dubai and other emirates of the UAE is being increasingly mirrored across the GCC region. This includes Saudi Arabia, where the scale of new and planned developments is expected to overtake Dubai in the next five years. While some naturally question whether the boom is sustainable, demand continues to outstrip supply in most real estate sectors for now. Expatriates in most GCC countries can now own property, which is helping to open up a new mass market in mortgages. Owning property can also provide the right of abode and, from this, the attraction of low taxation and the right to set up businesses in the country of residence. Consumer finance is expanding as a relatively young and fast-growing population increasingly embraces consumerism. Key growth sectors include credit cards and vehicle financing. Islamic financial services are growing faster than the sector as a whole.
International groups are seeking to extend the range and sophistication of Sharia-compliant products and services into areas such as project finance and alternative investment funds. Recent milestones include the $3.5 billion sukuk (Islamic bond) issue in November 2006 by the Nakheel Group, the developers of Dubai’s Palm Islands and other landmark projects. This was the most valuable sukuk issue ever. The population of the GCC has accumulated $1.5 trillion in personal wealth. Clients increasingly prefer wealth and asset management services provided locally rather than offshore, which is leading to strong growth in these sectors. Dubai, an emirate of the federal UAE, has been hailed as an excellent example of economic diversification by the World Bank and has become a model for development in other parts of the GCC region. As such, Dubai highlights the opportunities this diversification and development could open up for the international financial services industry. Oil and gas represent only 6% of Dubai’s GDP and are due to run out in ten years. The emirate has therefore sought to become a leading regional and global service and trading centre – 1.5 billion people are within two hours’ flying time of Dubai. The first key opportunity for financial services groups lies in project finance. The International Monetary Fund estimates that there are some $700 billion worth of developments underway or in the pipeline in the GCC, making it the world’s largest project finance market. The transformation of Dubai’s waterfront exemplifies the ambition of this construction boom. It includes the near doubling of capacity at the Jebel Ali container port as the emirate seeks to develop shipping facilities comparable to Singapore’s. Other high-profile projects include the world’s tallest building and a series of man-made ‘Palm Islands’, one of which will be larger than Manhattan. Planned projects such as Qatar’s Lusail Marina and Kuwait’s Silk Island suggest that other GCC states are keen to emulate the Palm Island blueprint. Projects like the Palm Islands are providing thousands of new homes at a time when expatriates, who make up a majority of the population of the UAE, can now own property. Other GCC states have followed suit. This is leading to the emergence of a valuable new mass market in mortgages. As the liberalization of property ownership spreads across the GCC, the potential customers not only include the many millions of people from Asia and other parts of the Middle East who have come to work in the GCC, but also the increasing numbers of people from around the world who are choosing to take up residence in the region. Owning property can provide the right of abode and, from this, the attraction of low taxation and the right to set up businesses locally.
Retail Banking: The retail banking sector has expanded rapidly over the past five years and continues to gather momentum for expansion. The main focus of growth has been the higher end of the market – estimates show that customers with financial assets of more than $25,000 contribute more than two-thirds of retail banking profits. The mortgage market, which had until recently been relatively under-developed on account of restrictive property ownership laws, is now showing considerable potential as these restrictions are gradually relaxed.
Islamic Banking: Islamic banking is expanding faster than its mainstream counterpart. For example, the cumulative annual growth rate (CAGR) for deposits in Saudi Islamic banks was 17.4% between 2002 and 2005, compared to 12.9% for the kingdom’s banking sector as a whole. Growth comes from both new customers and those switching to Sharia-compliant products and services. Leading players in the GCC include Al Rajhi, the Kuwait Finance House and the Dubai Islamic Bank. 2005 and 2006 saw a wave of dedicated start-ups including the Al Rayan Bank in Qatar, which is already one of the largest Islamic banks in the world with capital of more than $2 billion. In addition, many local and international banks have or are in the process of introducing Islamic options for their customers. Banks offering dual conventional and Islamic products include HSBC and Citigroup. However, there are particular challenges in this market, including the different interpretations of Sharia compliance. Some customers may also wish to use a pure Islamic bank in preference to a ‘hybrid’ institution that also offers conventional products
Corporate Banking: Demand for corporate finance services in the GCC has grown significantly in the last two years and is expected to increase further in the future. Developments in the region are creating ever-greater demand for project finance. This demand could create openings for foreign institutions able to offer competitive financing. It is also likely to spur the continued growth in Islamic finance as exemplified by the Nakheel sukuk. Sukuks are Sharia-compliant asset-backed trust certificates. The Nakheel sukuk issue, which was underwritten by Barclays Capital and the Dubai Islamic Bank, was more than two-times oversubscribed.15 European investors acquired 40% of the issue, subscribers from the Middle East took 38% and the remaining 22% went to Asia and the US. Developments in the region are also increasing the number of business clients.
Private Banking and Asset Management: A GCC population of just 38 million has accumulated some $1.5 trillion in private wealth. In the UAE, for example, one in 80 of the population is a dollar millionaire. The high-net-worth individuals include both Arabs and expatriates. Around two-thirds of people with investment assets of more than $400,000 in the UAE are non-resident Indians, for example. This concentration of wealth is leading to intense competition among both regional and international corporations. Rothschild’s17 is one of the latest entrants, joining the private banking arms of such leading names as Citigroup and Deutsche Bank
Insurance: Insurance penetration is extremely low in the GCC by international standards. Growth has now picked up in the retail insurance market, albeit from a low start. Life insurance premiums are in particular likely to follow the generally upward trend in affluence. Recent years have also seen acceleration in demand for Takaful Sharia-compliant insurance services. Nevertheless, the small populations of these countries mean that the primary source of insurance business and focus of near-term market growth will continue to be the corporate sector

Economy: How will the Euro Zone crisis affect the Gulf - can the gulf avoid a Greek tragedy?

The debt crisis in the Eurozone, centered on Greece’s inability to service its liabilities of around $500 billion, is moving at a rapid pace which –given its potential impact on the global economy is no surprise and no bad thing. France and Germany closed a deal that saw the Eurozones rescue fund, the European Financial Stability Facility (EFSF), boosted to more than $2.5 Trillion, the banking system recapitalized and further hair cuts by the Greek bondholders.
So what does this mean for the nations in the Arabian Gulf? After the financial meltdown of 2008/9, which is still fresh in the minds of most Dubai property owners, who saw the value of their homes more than halve in barely a year? The UAE and Kuwait both witnessed negative Gross Domestic Product (GDP) growth in 2009 of 1.4% and 2.2% respectively, while the worlds largest oil producer, Saudi Arabia, almost flat-lined as its economy grew at 0.6 percent, according to the BofA Merrill Lynch Global Research.
Most regional financial experts don’t believe that a Greek default on its debt would have any immediate effect on the Gulf region. This is because they don’t believe that the Gulf region has any significant exposure to the any potential Greek default. However, if the Greek debt crisis were to impact the Gulf region, it would be through an increase in risk aversion by international investors and a potential reduction in lending to the region by international banks.
In 2008, Saudi Arabia enjoyed foreign direct investment of $39.4 billion but in 2012 the figure is projected to be barely a quarter of this at $10 billion, according to HSBC Global Research in its Middle East Economics Quarterly. Hydrocarbon sales are an intrinsic source of revenue for the Gulf states and the possibility of a global recession which usually results in the drop in demand for oil and thus, its price, is another major worry for the Gulf region. In January 2008, the oil price exceeded $145 a barrel but by February 2009 it was about $35 a barrel. A number of Gulf nations such as Qatar, Saudi Arabia are trying to establish strategic plans to diversify their economies. There is nothing inevitable about the world falling into a global recession. It is far more likely that we are in for a period of low growth in the major global economies.
In the event of a recession, oil prices will fall, but the impact on the government spending depends on how far they fall and how long they stay low. It is important that governments keep on track with their commitments and not cut back on projects. Governments should increase projects in the face of global downturns especially as the region faces off to a global slowdown, the government should step in to help the economy be increasing spending .if the world falls into negative growth, the eyes of the world will turn to Dubai which at the moment carries a staggering debt burden of over $100 billion. However, Dubai is in a better position to absorb economic downturns.
The country that will suffer the most from an economic recession is inevitably going to be Bahrain. Bahrain is one of the main hotspots for political unrest in the Arab Spring and has seen its hospitality sector decline 17 per cent in the first six months of the year and its GDP growth was 0.8 percent in Q2 2011, according to HSBC Global Research. Bahrain’s full year growth is forecasted to be less than a third of the 4.5 percent it managed in 2010. The Gulf States are expected to continue their ties with China and India and maybe accelerate them as the crisis in the G7 countries takes hold. However, bear in mind that China and India face their own problem

Fools Gold

Usually, when there is a gold strike in any part of the world, people would travel and flock to that area like moths to a flame. People flocked because they thought that they could change their fortunes or trade their current hardships for a life of luxury. However, it was unfortunate to find that it was only the finders who were the keepers of the treasures. In other words, it was usually those who were first on the spot, who were the ones that benefited from the gold strike, leaving the rest to pick up scraps and pieces of left over’s.  There were two kinds of people that made money: the ones who sold products and services to the gold diggers and the ones who sold a story. The second type of person was the one who sold hopes and fantasies to those who were looking for them. One of such stories was that pyrite was actually gold. If you don’t know what pyrite is, then here are some facts! Pyrite is a mineral that looks deceptively like gold in colour but is usually flatter and sharper in construction than the precious metal which is rounder and softer in shape. Pyrite is also duller than gold. Unfortunately, many people are blinded by greed and are unable to see the difference between the two. This is why pyrite is commonly referred to as fool’s gold. Over the past four years, the price of gold has nearly quadrupled as a result of hoarding and increases in prices. Prior to 2007, it is easy to note that gold only doubled its price within six years, again prior to 2007. So why has the price of gold skyrocketed the way that it has? The price of gold skyrocketed for two reasons; the first reason is that the two drivers of markets, fear and greed combined to fuel the rise in price of gold. What usually causes a market to move up is greed and what usually causes the market to move down is fear. In the case of gold, both these factors are in effect except that they are both moving the price of gold up. However, this doesn’t mean that the price of gold is going to keep rising! Like all bubbles, several factors will come into play to end the bubble. The problem is that we don’t know when these factors will come together to end the rise in the price of gold. The gold price hit an all time high in September of 2011 and the bubble burst as a result of profit taking. Many Financial experts have argued that gold is a safe haven in these trouble times and that investors should invest in the precious metal. Actually, food is the only safe haven but unlike food, gold doesn’t perish and you can’t eat it. They argue that fiat money is worthless. Really? Money backed by gold? The simple truth remains that there isn’t enough gold in the world to support the financial and economic and commercial activity that we are currently enjoying. Even if we took all the gold in the world and melted it into coins, we would still have to create paper money to support our transactions. These financial experts are playing on people’s fears and their greed only leads to more greed. Simply put, seeing the price of gold go up for no reason at all is usually a sign of greed. What we are witnessing is that fact that financial companies are buying and selling gold futures to each other, on a huge scale, and pocketing a commission for every trade.