Investment banks bring money home (page 1 of 3)

One trillion dollars of Gulf wealth, give or take a few billion, is currently invested overseas. And that is thanks in no small measure to the work of Gulf-based investment banks, which made windfall profits in the process of depriving the region of the capital it so desperately needed to invest in a broad-based, diversified economy.

Today, the tide appears to be turning. A new breed of Gulf investment banks is emerging, whose main, or only, focus is the Gulf. Their asset management divisions invest exclusively in Gulf markets - mainly equity, but also real estate and fixed income. And their corporate finance divisions are staffed by analysts and bankers who help local businesses tap into local markets for equity and debt funding, as well as advising on mergers and acquisitions (M&A).

None of the main local players is more than eight years old. Of the international banks, HSBC is one of a tiny handful with a significant investment banking presence in the region.

"If you look at what was the case three or four years ago, we hardly had any investment banks dedicated to the region," says Anthony Mallis, CEO of Securities and Investment Company (SICO), a Bahrain-based investment bank that focuses on the Gulf. "Investment banks were very much focused on ex-GCC [Gulf Cooperation Council]. Today, there are few more players like ourselves."

Others agree that a sea change is occurring. "We are at a very interesting time for financial markets and investment banking in the region," says Ziad Makkawi, executive managing director of Shuaa Capital, a Dubai-based investment bank. "We have seen many false starts to investment banking over the past decade. I really feel that this is the real thing."

Maha al-Ghunaim, CEO of Global Investment House, a Kuwaiti investment bank, is similarly bullish. "When we established ourselves five years ago, we realized there was a huge need for investment banking in every sense of the word. Today, demand for our services is very high."

A quick look at the recent financial performance of these three banks makes a compelling case for their optimism: all reported triple-digit profit growth last year. Crucially, this has come at a time when many of their more established counterparts investing in mature markets have seen earnings nosedive.

Take the case of Shuaa, the Dubai-based investment bank listed on the Dubai Financial Market. Profits for the six months to September 30, 2003, were 34.3 million dirhams ($9.3 million), compared to 8 million dirhams for the same period in 2002. That's an increase of some 329 percent, albeit from a low base. It's a similar story elsewhere in the Gulf.

Contrast that with the fortunes of Bahrain International Bank (BIB) and BMB Investment Bank in Bahrain. Both have been established for decades, both have focused on investing Gulf money in the United States, Europe and Japan - and both are on the verge of extinction after recording huge losses in the three-year bear market that began with the bursting of the US dotcom bubble in March 2000.

The stellar performance of the "new" Gulf investment banks throws up a series of important questions. Where have their profits come from? Are they sustainable? And what are the prospects for the sector over the coming three to five years?

The first question is the easiest to answer. Regional stock markets have been booming in the last 12 months - the Saudi market rose by more than 80 percent by the beginning of December 2003, while the Shuaa Capital GCC index was up some 50 percent for the year in the first 11 months.