Sunday, Apr 29, 2012

Dubai :  Investment banking business in the Middle East is expected to see a strong recovery this year following three difficult years. In the first quarter of 2012 debt issuance nearly doubled to $11 billion (Dh40.4 billion) and mergers and acquisitions (M&A) reached close to $5 billion, while equity capital market issuances and banking fees continued to fall.

With the regional economies making a strong come-back in recent months, Philip Southwell, president and country executive for Middle East and North Africa, Bank of America Merrill Lynch (BofA Merrill Lynch) says sunny days are ahead for investment banks.

Gulf News: In investment banking business, debt capital markets (DCM) have been the only business that seems to be making money. What has been BofA Merrill Lynch's experience in the region? What is your outlook for this year?

Philip Southwell: It is really easy to track the M&A volumes, equity capital markets (ECM) and loans capital market (LCM) volumes. But it is really difficult to track how much money you are making in equities. Obviously volumes help but transactions in structured products and Participatory Notes (P-Notes) are not visible.

One can't track cash management and trade finance volumes. It is the same with volumes of forex and fixed income trading and derivatives trading.

So if you look at all of the successful investment banks in the region, you need to focus on where the revenue comes from. In general terms I would agree that in M&A, ECM, loan capital market and DCM, the overall fee pools are subdued. I think the fee pools will be larger this year than last year but that is just one story.

So in addition to that story there is very significant revenue to be made in transaction banking, commodities, in equities and derivatives. That is where the core business of most leading investment banks comes from. I think the M&A, DCM and ECM volumes hit their lowest point last year and we expect them to revive this year.

Equities have been showing some signs of revival. Are there any signs of regional companies going for initial public offerings (IPO)?

There are clear signs of revival in the equities and IPO market. It depends on how one looks at the market activity. It is sad that some of the UAE companies are going to London or other overseas market to list their shares.

We saw NMC Health's IPO going to London, but I view it as regional business and expect some regional listings happening in the near future. I feel there is growing international interest in the local and regional equities.

Over the past few years, for example, there was a very low level of interest in the UAE equities. But over the past few months there has been a significant increase in demand for the local equities.

Likewise, in Saudi, equity volumes have doubled. We are seeing an increase in volumes this year largely driven by expectations of further opening up of the market and deeper research platforms from us and other banks.

BofA Merrill Lynch was one of the first banks to have talked about a potential funding gap for the Gulf companies due to the withdrawal of European banks from the long term funding from the market. Is that gap still a big concern?

I think, in the past, this region had relied too heavily on loan capital markets. And the regional debt capital markets have been very small. This region is very unique in that respect. I think the region is going through a long term trend where debt capital markets get more important and loan capital markets get less important. We may not go all the way down the spectrum to the US model where most long-term financing is sourced in the bond market.

An increasing number of companies from the region are tapping the bond markets for their long-term funding requirements. But the loan markets are likely to see some volumes because of the low interest rates and relatively lower costs because of the relationship-based banking deals.

Is there a structural shift happening from bank financing to bond financing because of the liquidity issues faced by the bank market? Is the big ticket loan syndication market in the region going to shrink in the context of European banking deleveraging?

Yes. There is a strong trend towards increasing dependence on debt capital market financing. There are other parallel trends happening. For example we are a dollar rich bank and are capable of providing long term dollar liquidity to local/regional banks on their portfolios.

So they have the option to get funding through public markets or through structured transactions. Regional banks have strong short term deposit bases resulting in medium to long term maturity mismatches. This could be mitigated through longer term bond financing or structured financing.

How has the regional turmoil impacted Gulf economies, particularly the UAE? There are some views that the region has benefited from the Arab Spring. What is your take on it?

There are obvious signs that the Gulf economies benefited from the regional political upheavals. Mid-last year it was difficult to get hotel rooms in the UAE. From an international perspective there is a better geographical understanding of the region and better differentiation of countries in terms of political and economic stability that has helped the Gulf economies. Obviously the significant surge in oil prices is also boosting the revenue streams of the Gulf oil exporters.

The impact of the sustained surge in oil revenues on the Gulf economies is something that has come in for lots of discussions in recent months. While there is no denying the fact that it helps to shore up government finances, historically a major share of this money is invested in assets abroad through sovereign wealth funds (SWF). As far as the domestic economy is concerned, how relevant is this money flow in the short to medium term?

There are different types of sovereign wealth funds. While some act like asset managers there are domestically focused investment vehicles like the Investment Corporation of Dubai (ICD) or Temasek of Singapore. They own significant stakes in domestic companies and make onshore investments.

Obviously all the income from oil exports can't be pumped into the domestic economies because of the relatively small size of the regional financial markets.

Such fund flows could result in asset price distortions and economic imbalances.

But overall, whether the oil money is invested domestically or abroad, it guarantees certain level of fiscal stability.

Debt overhang and refinancing pressures were big concerns for many regional government related entities, particularly some Dubai based entities since 2009. As a banker how do you assess the current situation?

It is true that in the past the region had relied heavily on bank loans to fund long term projects which had its consequences during the financial crisis when liquidity became scarce.

During the last three years most affected entities have either restructured their bank loans or switched to longer maturity debts. Now there are only a few entities that have issues with refinancing. In my view all these are within manageable limits.

By Babu Das Augustine, Deputy Business Editor

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