Swiss lead the GCC banking boom

The current boom in Gulf banking - with full-year profits for 2003 up by 20 percent to $7.1 billion, and profits at Saudi banks up 30 percent in the first half of the year - obviously has an awful lot to do with the soaring price of oil.

The recent rise in consumer banking also goes a long way toward explaining the renaissance for Gulf-based financial institutions. The Gulf is home to a nearly unique concentration of multimillionaire and billionaire clients.

This has all been fueled by higher oil prices and output - and by strong reconstruction-related economic activity in neighboring countries - that have led to robust corporate earnings across a variety of sectors.

The positive trickledown effect is visible in construction, services and tourism, and an unparalleled increase in the capitalization of Arab stock markets.

Soaring stocks

As evidence of the economic boom in the region, equity markets and real-estate prices have jumped. The best performing stock market is Saudi Arabia's Tadawul, which soared 76 percent in 2003 and is up 29 percent so far in 2004. The ongoing mini-booms in several countries have bankers courting the region's super wealthy.

Economic expansion in the region is not only spurring private banking and wealth management services at local and regional banks, but also attracting foreign entities that want to cash in on the untapped wealth in the Arab world.

Foreign banks such as Julius Baer Holding, Credit Suisse Group, UBS AG, Citigroup, HSBC and others have established offices in the Arab world and are competing with local players to attract a chunk of this growing supply of investable money.

According to a recent Merrill Lynch-Cap Gemini report, the number of people in the Middle East with more than $1 million in investable assets has increased 2.4 percent in the past year, on par with Europe and ahead of Latin America.

There have long been wealthy people in the oil-rich Arab world. In the past, most of them banked at US institutions. Of Citigroup's 25,000 high net worth private banking clients globally, 10,000 are from the Middle East and Asia-Pacific region, says Mark Morgan, Citigroup's private bank managing director and onshore head for the Arab Gulf region.

Now, bankers say, more of the money being generated in the region is staying here, helping to boost local economies and create additional wealth, especially after the September 11th attacks changed the game and convinced many Arab investors to bring their money home.

"Some of the wealthy are insecure because of measures such as freezing of accounts, being questioned too closely or being put in the spotlight. It's affecting people who have nothing to do with these problems," says Kamel Mukharesh, chairman of Clariden Middle East, a private-banking subsidiary of Credit Suisse.

Today, foreign banks, and particularly the Swiss, still fare better than their Arab counterparts. Swiss banks are more flexible, less intrusive and maintain their long tradition of client secrecy, says one prominent Arab banker. "We cannot compete with the Swiss banks.
Wealth management is a very complex area. You need good research, access to stock markets and a good back office."

Most Arab banks don't have the research departments to compete with foreign banks, nor the breadth of investment products that foreign banks do. Even National Bank of Kuwait - often referred to as the Goldman Sachs of the Arab world and managing some $7 billion in assets - is small in comparison to its Swiss counterparts.

Trust matters

Banking with European and Swiss banks has been on the rise for the last several years, particularly since the September 11th attacks. Following 9/11, Arab investors became wary about increased scrutiny of their offshore bank accounts and jittery about sharing information with US banks.

This is one of many reasons private bankers point to when putting forward what they say is a compelling argument as to why their services matter more than ever. "Simply, Arabs still trust the foreigner more," says the prominent Arab banker.

The indiscriminate freezing of Arab assets by US authorities in the wake of 9/11 led to a repatriation of Arab capital from American banks. While it may be hard to determine the outflow of Arab money, industry insiders say a good portion of the $1.5 trillion in assets held abroad in American banks has found its way to Bahrain, Saudi Arabia and Beirut, where investors are secure in the knowledge that their assets are safe.

Money being invested locally and regionally, coupled with an economic expansion, has benefited private banking and wealth management services. "There is new wealth that has been created by stock markets and the real estate boom," says Ibrahim Dabdoub, CEO of National Bank of Kuwait.

"There is a lot of liquidity in the Saudi, Kuwaiti and Qatari markets. There is new wealth - by some estimations as high as $1.5 trillion." The Boston Consulting Group, a leading management consulting firm, estimates that the affluent in the Asia-Pacific and Middle East regions are sitting on about $10.2 trillion of assets.

Meanwhile, Arab banks like National Bank of Abu Dhabi, National Bank of Dubai and Emirates Bank are catering to the local wealthy. But local banks are not the only entities vying for a piece of the pie.

Swiss banks, which have a longstanding tradition for safeguarding the identities of their clients, have realigned themselves; aggressively seeking to attract high net worth individuals, either setting up new regional offices in the Gulf or adding to their existing presence.

"With the maturing American and European markets, all the Swiss banks and their competitors are looking for growth opportunities and have to go overseas. Wealth is being created and that's why they are going to the Middle East region," says Brij Singh, managing director and regional head of the Middle East and Indian subcontinent for Julius Baer, a Swiss private bank.

Consider that, at the end of June, some 300 high-profile individuals, including chief executives, princes and princesses, descended on Beirut, once the banking hub of the Arab world, for a lavish dinner celebrating the arrival of Clariden.

Base building

"People in the Arab world need private banking now more than ever," says Kamel Mukharesh, a Saudi graduate of the Massachusetts Institute of Technology. "But they need the Swiss formula." He says he wants to raise Clariden's Arab client base from between two and five percent to between 15-20 percent.

"In times of turmoil, the Swiss formula is responsive to fulfilling the needs of today's wealthy Arab family," says Mukharesh, who was previously with Deutsche Bank, State Street Bank and Citicorp. The old style of private banking is gone, says Mukharesh.

Unlike the traditional Swiss private banks, which wait for clients to come knocking on their door, Clariden is coming to the market to extract business by being on the ground, a break from the traditional way of doing business through the traveling salesman, often referred to as suitcase banking.

"We decided to set up a permanent presence in the heart of the Middle East, in Beirut. We are acting as a referral in a way and our ongoing presence depends on the relationship that we have," says Mukharesh.

Singh of Julius Baer agrees. "If someone comes [to the region] with the old style private banking model, they will not succeed," he says, citing the downsizing of American brokerage houses. For Singh, the legal and regulatory environment in Dubai makes it an ideal base from which to tap into the continuing rapid growth of wealth in the region.

"Dubai-based investors are increasingly interested in internationally oriented wealth management solutions - an area in which Switzerland has a long tradition," he says. Singh points out that, over the last decade, wealth concentration among both private individuals and institutions has grown significantly.

This trend has been accompanied by an increasing demand for financial products and services of international caliber - which regional financial centers and banks have been unable to meet to the full satisfaction of investors, says Singh. So why did the US brokerage houses not succeed?

"These houses were very focused by sector on the private client, through a brokerage and transaction-oriented approach," says Singh.

"That is not the future. The future is largely relationship driven. It is providing a one-stop answer for the client; where the client doesn't just get his private banking needs but all kinds of advice from a financial adviser. If you are here, you have to offer more than what can be provided in a suitcase."

Mukharesh at Clariden agrees, at least partly. "Relationships are good, and we are culturally sensitive. But on that basis alone we cannot survive," he says.

"You have to be responsive to people who are smart but don't have the time to worry about what to do with their money. You need a bank that understands the dynamics of the world and offers ideas and services on the trust area. Old banks are boxed in certain jurisdictions and invested in areas like Guernsey and don't necessarily answer the needs of Arab families."

Clariden has around $26 billion in assets under management that it intends to target to what it defines as the ultra-high net worth individuals, those with assets in excess of $5-10 million. There are a number of prospective investors that are not being serviced, and Clariden intends to focus on areas that a traditional private bank cannot reach.

Consider a new generation of young Saudi graduates of local universities, who are less traveled in the West and whose fortunes are being made from the real estate boom, as opposed to their predecessors who went to US colleges and made their wealth from partnerships and projects with multinational firms.

"These people are shrewd, intelligent and instinctive but less worldly and often limited in language skills," Mukharesh says. "We intend to bring the world of global investing and private banking to them right at home."

Women's wealth

Wealthy women are also a target. According to Nahed Taher, a senior economist at National Commercial Bank, the largest bank in Saudi Arabia, women in the kingdom account for $7 billion in deposits - around 17 percent of total accounts in the Saudi monetary system - and hold about 20 percent of mutual-fund assets.

In real estate, it's estimated that women hold 40 percent of total assets in that sector. That, analysts say, should be enough to set pulses racing among private bankers. "There are [Saudi] women that are sitting on $100-500 million," says Mukharesh.

"We want to make our mark in the region in terms of size and exposure. We want to provide a service and product that have not yet been offered - in terms of quality and level of commitment - by any bank in the region."

While Saudi Arabia may be the fastest growing market for private bankers because of its size and its vast oil reserves, other markets are ripe to be tapped. For instance, Mukharesh says, there are many "old fortunes" in Yemen, which is hardly known for generating wealth.

"There are old fortunes in Yemen," says Mukharesh. "A lot of people that have accumulated wealth over the years. There is a lot of money sitting in current accounts that shouldn't be there."