Local Banks Increase Global Lending Slice
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Local Banks Increase Global Lending Slice

Local Banks Increase Global Lending Slice

The debt crises in the West has spurred an upsurge in lending for local banks.


Syndicated loans in the Gulf could rise in 2012 from the estimated $32.7 billion raised last year due to debt refinancing in the UAE as local banks continue to grab a bigger market share from their troubled European peers, bankers said.

Dubai could tap the bond and loan market in 2012 to refinance some $4 billion in debt for government-related entities, while big government spending and infrastructure projects in Saudi Arabia and Qatar could bring in project finance and contracting deals.

Bankers are holding out hope that government related entities and big corporations will also seek to snap up assets regionally and abroad if valuations are attractive enough.

“Qatar will get busier next year mainly on contracting for World cup infrastructure. The UAE will probably be the highest in terms of refinancing requirements for corporate transactions,” said Dubai-based Steve Perry, global head of Project, Aircraft and Shipping Finance Syndications for MENA at Standard Chartered Bank. “Saudi Arabia is a difficult market that is still locally driven.”

Syndicated loan financing in the six countries of the Gulf Cooperation Council dropped by about 40 per cent to $32.7 billion in 2011 from $53.9 billion a year earlier, according to data-provider Dealogic. Loans due to mature in the Gulf in 2012 are estimated at $48 billion.


Deal activity in 2011 slowed down after the Arab revolt swept the region and lending jitters spread over the shaky global economic recovery, particularly in debt-crippled Europe, which was slapped with several sovereign debt downgrades by credit rating agency Standard & Poor’s in January this year.

But Middle Eastern banks managed to wrestle a bigger slice of the syndicated loan pie in the Gulf last year as European banks retrenched to focus on their debt- ridden home markets. The worsening sovereign debt crisis in Europe and the introduction of tougher Basel III bank capital and liquidity requirements could drive European banks to take a further step back from the Middle East in 2012, giving regional banks even more wiggle room to increase their market share.

“Effectively there is a much more level playing field now and that’s going to get even more advantageous to the local regional banks because a lot of European banks will see an increase in the LPs (liquidity premiums) over the next 12 months,” said Perry. “So in fact, there is going to be a paradigm shift in liquidity moving from international banks to regional/local banks, be it through local currency or dollars.”

This shift began in 2011. Last year, 46 per cent of $32.7 billion syndicated loans in the Gulf region came from Middle Eastern banks, up from a market share of 37.4 per cent of the $53.9 billion raised in 2010, according to Dealogic.

Meanwhile, European banks’ share of the Gulf syndicated loans market in 2011 dropped to 31.3 per cent from 36.4 per cent a year earlier, based on Dealogic figures.

However, European banks remained the second largest group of lenders by region in 2011, followed by banks from Asia Pacific in third place and US banks in fourth place.

Gulf banks are flush with liquidity on the back of the oil wealth amassed over the last two years and their relative isolation from European sovereign debt.

Standard & Poor’s downgrade of top European economies, including France’s loss of the coveted AAA rating, will likely increase the cost of funding for European banks, thereby giving Middle Eastern banks a competitive pricing advantage as European banks grapple with rising funding costs.

“There is likely to be some impact on pricing as some European banks have been downgraded as a result of the sovereign downgrades which means that these banks’ cost of funds will likely rise,” said London-based Raouf Jundi, head of origination Middle East & Africa syndications group at Japan’s Bank of Tokyo-Mitsubishi UFJ. “However the impact will be limited as today most lenders in the MEA (Middle East & Africa) region are from non-Eurozone countries.”

One example of a Gulf corporation opting to use regional rather than international banks is Saudi Arabia’s number two mobile phone operator Eithad Etisalat, known as Mobily, which is a unit of UAE telecom firm Etisalat. It raised 10 billion Saudi riyals last year through an Islamic refinance loan involving Saudi banks.

Bankers expect other top corporates to pursue such deals with local banks, favouring local currency borrowings.

While top corporates and other government-related entities that deal mainly in foreign currency will continue to seek mainly dollar financing, smaller companies may be more inclined to borrow in local currency, whether from local or international banks.

“When you utilise local currency in a transaction, the liquidity cost is a lot lower due to the fact that there is a dirham deposit base here, with minimal cost attached whereas to borrow dollars we have to access the wholesale market in the same way every other bank does,” said Perry.


European banks are not expected to totally lose their foothold in the Gulf and the Middle East region, particularly if big deals are in the pipeline, given the small size of banks in the Middle East compared to their international rivals. Foreign banks have a larger capacity to arrange multi-billion loans, even if funding costs get higher.

“In the next six months, some European banks will be focusing more on the domestic market, but once the situation gets sorted out, European banks will not be out of the market for too long. I think they will be back within a 12 month period,” adds Jundi. “The regional banks seem to be in a much stronger position now. They have the liquidity, but if demand goes up, they can’t meet the demand of 50-60-70 billion dollars (of syndicated loans) and they will need international banks to be involved.”

Besides the unraveling of the European debt crisis, the rise in syndicated loans in 2012 depends to a large extent on the momentum of the Arab revolution, its impact on the regional economy and overall global economic recovery.

International banks in 2011 were counting on petrodollar rich Gulf government-related entities and big corporations to engage in mergers and acquisitions to help revive deal flow due to the modest refinancing deals that took place in 2011. But the failure of high profile deals such as Etisalat’s much- touted $12 billion purchase of a stake in Kuwait telecom firm Zain has thwarted international bank hopes for big ticket acquisition financing.

However, this didn’t stop global banks offering syndicated loans at low prices in order to maintain their relationship with big Gulf customers last year, counting on the their client’s ancillary business to make up the difference.

“Standby facilities will always be attractive because they basically carry relationship pricing and banks will look for ancillary business,” said Jundi. “For drawn facilities such as acquisition financing, market price will have to be paid, because there is real funding requirement and the banks’ funding costs are very high.”


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