DUBAI: As European banks withdraw from the Gulf loan market, they are leaving a gap which other banks are unlikely to fill completely – ushering in an era of fewer, smaller and more expensive loans even as companies’ need to refinance their debt grows.
Lending in the region, which was already down on levels seen in the boom before Lehman Brothers collapsed in 2008, has been curtailed severely in the second half of this year by the eurozone debt crisis.
European banks have been forced to shrink balance sheets, reduce risk and re-evaluate the amount of capital they can deploy into foreign markets such as the Gulf. V. Shankar, Standard Chartered’s chief executive for Europe, the Middle East, Africa and the Americas, estimates about 50 percent of cross-border syndicated lending in the Middle East and North Africa has come from European institutions in recent years.
As a result, bankers say the Gulf loan market could regress to the state it was in before the arrival of large amounts of foreign capital early last decade.
“I’m sure we’ll get smaller deals than we have been used to in the last few years,” said one regional loan banker, who declined to be named because he was not authorized to speak publicly to media.
“Up to 2004, most deal sizes were modest, but the market took off from then as lots more banks got involved from outside the region. While some of these banks will continue to support key relationships, this correction will mean smaller deals as the local players can only make up so much.”
A smaller loan market may complicate the efforts of Gulf companies over the next three years to refinance large amounts of maturing debt that they took out before the boom; Moody’s Investors Service, for example, estimates that more than $10 billion of debt owed by state-owned companies will mature in Dubai next year.
The volume of loan deals in the Gulf Cooperation Council – Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman – has fallen off dramatically, with $5.5 billion of loans written so far in the second half of 2011, compared to $15.8 billion in the first half and $26.9 billion in the last six months of 2010, according to Thomson Reuters LPC data.
The figure for the first half of 2008, the high-water mark for the GCC loan market, was $44.2 billion, with $28.5 billion for the UAE alone.
The withdrawal of European banks, especially French institutions, is a major factor in the reduced volume. Project finance has been a particularly strong area for French banks but none will be involved in the planned loan for Qatar’s giant Barzan gas project, bankers said; that loan, which was expected earlier this year to total $4.7 billion, is now set to be signed in early December.
Meanwhile, fast-growing airlines in the region have to look for other ways to finance aircraft purchases after French banks scaled back lending in this area.
Since October, big Gulf companies have been rushing to issue bonds; Abu Dhabi’s International Petroleum Investment Co. raised $3.75 billion in this way and Abu Dhabi National Energy Co. (TAQA) sold $1.5 billion in bonds this week. But the mass of smaller companies cannot count on bond issues, especially with global debt markets so unstable. They will continue to seek loans.
Asian banks are likely to fill part of the void left by European banks. “Everyone is interested in exploring the Asian angle as we start to see the withdrawal of European banks,” said Stuart Anderson, managing director and regional head for the Middle East at Standard & Poor’s.
Asia has largely escaped the Western debt crisis, so its banks would seem a perfect source of loan capital for the GCC, especially since Malaysia has a well-developed Islamic finance sector. Growing Asian activity is suggested by the presence of Malayan Banking Bhd at third place in the GCC loan bookrunners table for 2011 year-to-date.
But it is the potential of Chinese banks, which have grown in recent years to become some of the world’s largest financial institutions by market capitalization, which gets most attention. While the number of GCC deals with Chinese participation has been limited so far, much of the hype, according to a European banker, is because Chinese banks tend to commit large amounts of money when they do get involved.
An important caveat, however, is that much Chinese money is only deployed when the financing has a direct link to China, the banker said.
“You won’t see a Chinese actor stumping up hundreds of millions of dollars, even to the likes of Etisalat, unless they are buying Chinese parts or there is a strong Chinese angle,” he said. Etisalat is the UAE’s blue-chip telecommunications giant.
A spokesperson for Industrial and Commercial Bank of China said Chinese banks naturally focused on lending to Chinese companies because of longstanding links between them.
“There is no preference with who we want to lend to but it’s just a natural effect of Chinese companies looking for Chinese banks, just as French companies look to French banks to do their funding,” said the spokesperson, who did not want to be identified because of company policy.
“If they are a client of one of our branches in China, it’s very easy to ship that relationship here and continue with it. That being said, we’ve been working hard locally to deal with key players in different industries and they are part of our clientele as well.”
ICBC has in the past looked at telecommunications, aviation, petrochemicals and infrastructure in the Gulf, the spokesperson said. But while it continued to expand in the region from its current bases in the UAE and Qatar, there would not be a significant departure from its cautious lending strategy.
“We are not aggressive in this region and we choose our clients carefully.”
Japanese banks may extend their already-sizeable presence in the GCC, especially in project finance, but beyond that, there are not many options for Asia to come to the rescue of the GCC loan market. This is because banks from other countries do not have the scale, according to the European banker.
Referring to a $3 billion loan signed by TAQA last year, he said: “While there were lots of Taiwanese banks in the syndicate, they were only committing $5-10 million tickets when others were putting up $200 million.”
S&P’s Anderson said: “Asian banks filling the funding gap in the region is an interesting idea … [but] at this juncture I don’t think they have the strategic interest or credit appetite to do so in any meaningful way.”
Citigroup is at the top of the 2011 bookrunners table for the region, pointing to banks from the United States as potential replacements for European institutions.
“It’s a very important market for us and there are plenty of opportunities to do business,” said a loan banker at a U.S. lender. “It’s not just what is happening in Europe but the fact that U.S. banks have got through a tough period at home and are coming back into areas like the Gulf.”
However, the large U.S. investment banks are traditionally reluctant to lend without the promise of fee-paying business – something that is scarce in the GCC right now, with capital markets only partially developed, mergers and acquisitions activity weak and stock markets stagnant. That is underlined by the absence of any U.S institution apart from Citigroup in the top 25 places on this year’s bookrunners table.
Much therefore may depend on the ability of local banks in the Gulf to satisfy the region’s borrowing needs.
“They have been crowded out by the Europeans in recent times but their withdrawal means they will be able to play again,” the U.S. banker said.
In the past, local banks’ higher cost of dollar funding made many deals uneconomic for them; as loan pricings now become more expensive, the banks are likely to play a bigger role, a London-based banker said. Also, local banks may come under political pressure from their governments to support their economies.
But the extent to which this is possible is in doubt, said the regional loan banker. “We will be able to provide some additional capacity but there will be a big, gaping hole if the Europeans retreat for any significant period.”
Borrowers in the Gulf will have to revise their expectations in line with the new marketplace, he added.
“We will have to get used to either reduced supply or reduced deal sizes, with anyone borrowing having to pay up regardless of who they are.”