Fees are falling, oil prices are low, and the region’s economies are under threat. But the world’s biggest investment banks say they have no intention of pulling out of the Gulf.
Regional M&A, loan, debt and equity issuance fees fell 7% in the 10 months to the end of October, according to Refinitiv data. Globally, meanwhile, fees rose 17% over the same period as companies in the United States and Europe raised funds to cope with the impact of the pandemic.
Comparisons with the rest of the world will likely be worse for the year as a whole, as last December’s IPO of Saudi Aramco – the world’s highest listing – generated a one-time fee windfall for the Gulf during the last months of 2019.
The outlook for 2021 is less clear, as the pandemic stimulates activity in some areas, such as fundraising for relatively healthy companies and restructuring the balance sheets of struggling companies, while stifling other activity, such as fundraising, as investors fear that economies will deteriorate as well. many they will not get their money back.
But despite the uncertainty, top regional executives from JPMorgan Chase, Citigroup, Deutsche Bank and HSBC – among the most active global banks in the region – remain committed to the Gulf, with some even adding resources.
“Total investment banking fees in the Gulf region are on track to exceed $1 billion for only the second time in a decade and this is happening despite the uncertainty,” said Abdulfattah Sharaf, chief executive of HSBC in the United Arab Emirates.
M&A fees in the Gulf are outperforming, up 17% in the year to October versus a 10% decline globally, according to Refinitiv data. But Gulf borrowing costs were down 39%, compared to a 9% drop globally, while bond issuance costs were down 6% in the Gulf and up 29% in the world.
In fundraising client advisory activity, Refinitiv data shows a 43% increase in fees in the Gulf to $74.6 million year-to-date, versus a 76% increase worldwide. Mr Sharaf argues that the difference is “not surprising. . . especially given the record run we’ve had for US equities, which is a very different market.”
Miguel Azevedo, Citi’s head of investment banking for the Middle East and Africa, said the pandemic presented “significant opportunities” for investment banks in the region.
“Covid has brought the world to a standstill,” says Mr Azevedo. “Some industries that are very dependent on oil like travel, these will probably never come back. This sudden drop in oil prices is a wake-up call. . . It is becoming unsustainable to be 100% dependent on oil because other things can affect you like this.
This means the pandemic will be an “accelerator” of trends already underway, including a push by Gulf countries to diversify away from the oil industry.
This process will generate a significant work pipeline for investment banks.
The fall in oil prices, the result of both the Covid-19 crisis and a price war between major producers, is also creating challenges for Gulf sovereigns, which in turn are providing opportunities for banks. investment that help them tap into the funding markets.
“Global emissions (GCC) for the year to date were higher in 2020,” said Karim Tannir, JPMorgan’s co-head of Middle East and North Africa. “This is driven by the need for capital to shore up government balances.”
Mr Tannir says investors’ appetite for sovereign debt has been “very strong”, thanks to stable currencies and credit profiles, and the absence of capital controls. A $5 billion bond issue by Abu Dhabi was oversubscribed 4.8 times.
Bond issues are good news for another part of the investment banking business.
Ahmed Beydoun, regional head of fixed income sales at Deutsche Bank, says credit markets are having a “very strong” 2020, “helped by the issuance boom”.
However, not all the dynamics in the region work in favor of the banks. State ownership can mitigate the need to raise funds in public markets.
Aviation is an example: US-based airlines raised $10 billion in a single week in June; Gulf airlines have been active but not to the same extent as they have other sources of funding.
When Emirates was in trouble at the end of March, the Dubai government said it would inject equity to support the airline “in the current critical period”.
“Each market has its own characteristics,” says JPMorgan’s Tannir. “The MENA region has seen an abundant level of activity, both in the deployment of capital globally and in the monetization aspect and the privatization aspect (of government plans) which has seen some good successes.