Middle Eastern Awards for Excellence

Banks in the Middle East know how to cope with a crisis: Lebanese banks’ profit as the country teeters on civil war; Iranian institutions deftly avoid US financial sanctions.

The ability of National Bank of Kuwait to operate during the Gulf war of 1990-91 is another case in point. And in 2008, across the NBK group, as some of the biggest Middle Eastern financial institutions teetered on bankruptcy, almost $1 billion in profit was made.

No bank in the region, though, has more experience of living through crises than Arab Bank. This is an institution that honoured its liabilities even as the bank and its customers fled their Palestinian homeland in 1948. No wonder its prime goal is to maintain a high level of liquidity. This is an approach people appreciate in bad times.

The Jordan-based group saw total customer deposits grow 27% in 2008, helping the bank grow assets by a relatively conservative 19%. By comparison, deposit growth at NBK in 2008 was just 0.7% while assets increased 3.8%.

What seals the award for Arab Bank this year, though, is its bottom line performance. In 2008, the bank’s profit before tax and after provisions hit $1.06 billion, up 10% on the previous year. Its net profit went up 8.4% in the year.

This strong performance has been harder to maintain in the first quarter of 2009, with net profits down 8% year-on-year, excluding exceptional items, though that is still much better than many global competitors.

NBK – Arab Bank’s closest competitor for the award – has found life tough. Its first quarter profits fell 22.6% year-on-year. For the calendar year 2008, the Kuwaiti bank saw its profits decline by 6.7%.

Arab Bank is also increasing its network in such countries as Egypt, Jordan, and Libya and even Sudan, where it acquired a license to open an Islamic subsidiary.

In the second part of 2008, almost everything that possibly could go wrong did go wrong in the Middle East’s financial sector. The idea of the Gulf as a haven from the credit crunch was destroyed, especially as the oil price tumbled to below $50.

Arab states were forced to push through measures to shore up liquidity and investor confidence. Saudi Arabia, for example, made its first direct injection of US dollars into the economy in a decade. The Qatari and Abu Dhabi governments recapitalized their banking systems; the UAE central bank set up a $13.6 billion emergency bank lending facility.

Financial institutions in the region have struggled, none more so than in Kuwait where Gulf Bank, Global Investment House and Investment Dar all faced serious problems as credit conditions tightened. The last two became the first Gulf banks to default on their debt since the crisis began.

As such investment banking in the Middle East over the past 12 months has encompassed more than just the basics of capital markets underwriting or M&A advisory. The very best were also leading the way in debt restructurings and advising governments on their response to the financial crisis.

Although no one can beat the breadth of products and geographies covered by HSBC, this year JPMorgan had the momentum in investment banking; its franchise was the growth story. Apart from structuring and arranging the $10 billion government recapitalization of Abu Dhabi banks in February, JPMorgan was involved in a number of bond offerings and 13 M&A transactions, including the $4.5 billion stake that the Qataris took in Barclays in June last year. It was also sole bookrunner for the biggest equity deal of the past 12 months: the $2.5 billion IPO for Saudi Arabia’s national mining company, Ma’aden, at the end of July.

The liquidity crisis in the Gulf’s banking system has spurred governments to access the debt markets to create benchmarks. In March Abu Dhabi issued a $3 billion bond, the biggest sovereign debt issue ever from the Middle East, arranged by Citi, Deutsche Bank and JPMorgan. A bond for $1.75 billion from state-owned Abu Dhabi investment vehicle Mubadala followed, arranged by Citi, Goldman Sachs and Royal Bank of Scotland. Other state bodies in Abu Dhabi also looked to the bond market. Qatar too issued, a $2 billion bond arranged by Barclays, BNP Paribas, and JPMorgan.

However, HSBC is the region’s best debt house, with its work for Global Investment House standing out. This is, so far, the region’s most important restructuring mandate.

HSBC has also helped arrange loans for entities as diverse as Egypt’s Orascom Telecom, state property company Qatari Diar, Abu Dhabi’s International Petroleum Investment Company (Ipic) and the government of Sharjah in the UAE. Its sukuks included an innovative $267 million local currency deal for the Saudi Bin Laden Group, an unrated deal that HSBC distributed entirely within Saudi Arabia.

Few deals

In the region’s equity markets, IPOs all but dried up, although a few small deals have priced. Morgan Stanley was the most impressive equity house, even if the majority of its work was, as might be expected, before Lehman Brothers’ bankruptcy. It was sole bookrunner or co-ordinator on a variety of IPOs, rights issues, local and international currency deals, and more complicated transactions. A good example is the dirham exchangeable sukuk for an equivalent of just under $500 million for Abu Dhabi district cooling firm Tabreed. The bank was also a joint financial advisor, co-bookrunner and co-underwriter for the May 2008 rights issue for Riyad Bank, a deal for a local currency equivalent of $3.5 billion.

In M&A, transaction volumes were down by about 40% in the 12 months from April 2008 compared with the sane period a year earlier. Still, some notable deals have been done over the past year. For example, Goldman Sachs advised Abu Dhabi’s Aabar Investments on its $2.7 billion purchase of 9.1% of German car manufacturer Daimler in March 2009.

Indeed the US bank was particularly strong in M&A activity in Abu Dhabi, but it’s Credit Suisse that takes the award this year with its geographic reach standing out. Credit Suisse’s Middle East M&A team completed deals in Abu Dhabi, Dubai, Egypt, Qatar and Saudi Arabia. Notable transactions included Saudi jeweller L’Azurde’s sale of a 70% stake to Bahraini private equity firm Investcorp in March; advising Weather Investments run by Naguib Sawiris in both sales and acquisitions of assets; and Qtel in its purchase of Indosat for $2.6 billion.

Falling commodity and real-estate prices and the increasing lack of international credit have meant Gulf projects worth several hundreds of billions of dollars have been cancelled or put on hold since the crisis began. But states such as Saudi Arabia still have the capital to push their plans, and here, perhaps the region’s most important project finance market, local banks have become increasingly proficient in advising and arranging finance for projects.

But over the past year no local Saudi banks could beat the volume of project finance deals completed by Al Rajhi, the Kingdom’s biggest Islamic bank. This year its achievements include contributing to the financial close of the $10 billion Saudi Kayan petrochemical project, for which it was initial mandated lead arranger (30% of this project was done on an Islamic basis). Al Rajhi was also mandated lead arranger for the $6 billion fertiliser joint venture (which reached financial close in mid May last year) between Saudi state-owned firms Sabic and Ma’aden.

Al Rajhi Bank is expected to contribute finance to vital water, power and railway projects in Saudi Arabia and elsewhere. Aside from that, the Al Rajhi group plays an important role in Saudi projects through a partial and indirect ownership of Acwa Power International – one of the kingdom’s most important developers.

In cash management, HSBC is the undisputed leader – a position that might be shown, for example, in its project with the Dubai International Financial Centre to support the development of a new settlement system for dollar clearing in the UAE. This year HSBC instigated a number of new cash management products and systems, and gained a number of important new clients based in the region, including Air Arabia, Halliburton and Unicorn Investment Bank.

As Gulf Bank’s troubles demonstrated, this year highlighted the importance of good foreign exchange risk management. Thus Deutsche Bank wins the award again. The German firm does more foreign exchange trades in the Middle East than any other bank. It has also won praise as one of the best banks at helping clients insure against credit defaults, commodity price falls, and other event risks.

		THE MIDDLE EAST AWARDS FOR EXCELLENCE 2009