Investment banks in the Middle East will remain profitable in 2014 due to high growth rates and increasing competition, according to a Frost & Sullivan report.
“Investment banks in Africa and the Middle East are characterised by high capital ratios, low reliance on debt, high profitability margins and high return on equity in comparison to their global counterparts,” said Sheetal Kothari, business and financial services senior analyst at Frost & Sullivan.
“These banks prove to be safe avenue for investment with scope for high returns. The regional banks have huge growth potential despite increasing competition from multinational banks.”
Investment banking fees in the Middle East grew 20 per cent last year from $603 million in 2012 to $722 million in 2013, the highest since 2010, according to Thomson Reuters research.
Fees from completed mergers and acquisitions (M&A) climbed 22 per cent to $213 million, as the value of announced M&A deals rose seven per cent to $43.4 billion.
Despite a strong regional outlook, the report said that the global investment banking sector has largely remained stagnant following strong growth a decade earlier.
Investment banks that were considered too big to fail are currently facing litigation issues affecting profitability, the report said.
Most banks have either announced or are scheduled to announce strategic changes that will help to make their operations more profitable and productive.
The need to comply with multiple regulations has also added to the cost burden of investment banks globally.
Investment banks must adapt to new technology, penetrate emerging markets and revamp pricing mechanisms in order to cut costs and capture a bigger market share, the report said.
“We expect North American investment banks to face a flat growth period but they could still remain profitable while European investment banks are likely to struggle to remain stable and profitable,” said Kothari.
“Asia pacific investment banks are anticipated to continue remain profitable but may be considered more risky than investment banks in Latin America and the Caribbean that are more stable, risk averse and profitable.”
According to Frost & Sullivan, the global investment banking industry is expected to reach a total market size of $2.1 trillion in 2014, with a year-on-year growth of 2.3 per cent.