The most anticipated offering: the kingdom's largest -- and only unlisted -- bank, National Commercial Bank. No plans for an IPO have been unveiled. But with all the investment bankers swarming around the Gulf, an announcement can't be far off.
Somewhere amid the clutter of cardboard boxes in David Ludlow's temporary office in Dubai is a teach-yourself-Arabic book that the senior banker vows to study as soon as he can find it. In April 2005, Citigroup assigned the former British diplomat (and Russian speaker) to head its Middle Eastern investment banking operation as part of a stepped-up commitment to the Persian Gulf. After he commuted back and forth from London for several months, Ludlow, 42, and his wife and two-year-old son moved to Dubai this year. "I didn't need any convincing," says Ludlow, a managing director, of his decision to give up his post as head of Citi's Eastern European investment banking business to help the bank tap into a bonanza of investment banking profits in the Middle East. "It was too good an opportunity to miss, given the level of potential from a business perspective." Citi is no newcomer to the Gulf, where it has been active for nearly 50 years and today operates in several countries. But it is stepping up its activity in the region to take advantage of an economic boom and a sea change in the way Gulf governments and businesses spend -- and invest -- money. Last October, in a typical high-profile deal, Citi acted as the sole global coordinator of the $778 million initial public offering of 21.9 percent of Lebanese telecommunications company Investcom on the London Stock Exchange. Citi also assisted Investcom in listing its shares on the Dubai International Financial Exchange. The prospect of many more IPOs like that one and lots more investment banking business has induced Citi and other foreign investment banks to expand or set up afresh in the Gulf. U.K. research firm Dealogic estimates that initial public offerings by companies in the region generated $94 million in revenue for banks last year, compared with $49 million a year earlier. Gulf IPOs raised $5.7 billion in 2005, more than double the $2.7 billion in 2004, reports Lama Abou Ghali, a senior capital markets analyst at Zawya.com, a regional business portal based in Dubai. More than half of the area's companies are state-owned, hinting at a steady supply of privatization prospects. By one estimate, as many as 20 substantial IPOs are in the works right now. The boom in investment banking business has been spurred by that other regional boom: soaring oil prices, which broke through the $70-a-barrel barrier in mid-April. The six countries of the Gulf Cooperation Council -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- are expected to generate $319 billion in oil revenues this year, up from an average $100 billion annually in the decade before 2003, according to the Washington-based Institute of International Finance. The IIF estimates that aggregate gross domestic product for the six rose by roughly one quarter in 2005. The oil bonanza has stimulated a stock market surge. As of April 13 the combined capitalization of GCC stock markets had tripled, to $1.05 trillion, since 2003. This year's sharp but probably necessary correction -- Saudi Arabian stocks were down more than one third, on average, as of mid-April -- should not be taken as a sign that the region is about to slip into recession, bankers say. Pay heed instead, they advise, to the relentlessly rising price of oil, which shows no evidence of abating. Flush though they may be, the GCC states are mindful of their prodigal spending in past booms and are determined to use their riches to diversify their economies and build up their private sectors. In the oil boom of 20 years ago, "a lot of the Gulf money went into passive investments like asset management companies, bank deposits and government securities," notes Shirish Apte, head of Citi's corporate and investment banking business in Central and Eastern Europe, the Middle East and Africa. "Today a lot of the money is going into active investments, such as private equity, mergers and acquisitions, direct investments and infrastructure projects." Adds Citi Middle East investment banking chief Ludlow: "We have a lot of things in the pipeline that I don't think we would have had if we hadn't put the focus on this region. We are feeling that this is a move that was vindicated." Other bankers who have descended on the Gulf share that sentiment. "Up to two years ago, all the bulge-bracket banks covered the region out of London because there were simply not that many transactions," notes Omar al-Salehi, who runs UBS's investment banking operation in the Middle East and North Africa. "During the past two years, it has been a booming business. All the banks have been extremely busy." Kian Abouhossein, a London-based banking analyst at J.P. Morgan Chase & Co., estimates that investment banking revenues will grow this year at a "mid-double-digits" clip in emerging markets -- including those in the Middle East -- but at only a "low single-digits" pace in developed countries. Alexander Lis, managing director and head of the Middle East and Africa practice at New York­based financial services consulting firm Mercer Oliver Wyman, concurs: "You will continue to see significantly higher growth in the Gulf region than in North America or Europe." Bankers say family-owned businesses should become a prolific source of new business. Many need counsel as much as they do fresh capital. "We see growth in corporate advisory because many high-net-worth individuals and families are considering the restructuring of family businesses," says Michael Philipp, the London-based CEO of Credit Suisse Europe, Middle East and Africa. "This will lead to IPOs, mergers and growth of the corporate bond business over time." BNP Paribas, Credit Suisse Group, Deutsche Bank, HSBC Holdings, J.P. Morgan Chase and Morgan Stanley have all joined Citi in establishing or expanding operations in the Gulf, in some cases by teaming up with local firms. There appear to be plenty of opportunities to go around. "Structured finance for industrial, power-related and infrastructure projects will have a big potential in the Gulf in coming years," says Jean-Christophe Durand, BNP Paribas's regional director. "The governments have enough liquidity. In the past they had money but did not spend with long-term vision. Now they are using it more wisely." Some estimate annual project finance outlays for the Gulf states at as much as $200 billion. Durand's Gulf investment banking staff numbers 50. HSBC is putting more focus on international offerings and expanding in underexploited Gulf markets, like Kuwait, says Karim Souaid, the bank's Lebanon-born head of equities and merger advisory business in five of the GCC countries. In Saudi Arabia the bank conducts its investment banking business through HSBC Saudi Arabia, a new joint venture with Saudi British Bank. HSBC plans to boost the complement of 30 investment bankers at its Dubai regional headquarters by 15 to 20 percent. The bank generates 4 percent of its revenue from the Middle East, and investment banking accounts for a quarter of that. To be sure, not all global banks are convinced that the Gulf can sustain a thriving investment banking industry. Some bankers and analysts fret that the heightened competition for mandates is already leading to lower fees, despite a surge in demand for investment banking services. "As more international banks focus on opportunities in the region and establish a new presence there, they will have to be more competitive and underprice business to dislodge traditional international players and local ones, resulting in fee and margin compression," observes Gaby Abdelnour, chairman of J.P. Morgan for Central and Eastern Europe, the Middle East and North Africa. The player roster in the Gulf is undeniably growing a bit crowded. The "newcomers" -- a loose term that the banks so labeled might dispute -- encompass such foreign institutions as Credit Suisse, Deutsche Bank and Morgan Stanley. The older hands among foreign banks include BNP Paribas, Citi, HSBC and Barclays Capital. A third contingent consists of relatively small indigenous banks that often pair with the foreign banks on distribution, research, loan syndication and other services but may aspire to become Gulf-wide investment banks in their own right. In some cases, they are well on their way, posing a challenge even to the global banks that are ensconced in the region as deal makers. Among the more notable domestic investment banks are Riyadh-based Samba Financial Group (once partly owned by Citi) and Abu Dhabi­based National Investor and First Gulf Bank. The local banks possess a crucial asset: long-standing client relationships throughout the region. "As the Gulf opens up," says Credit Suisse's Philipp, "we expect to see cross-border consolidation among these players, which will then emerge as true regional competitors." As a portent of this trend, National Investor obtained a license in January to join Dubai's new international financial center, in part to wrest IPO mandates. HSBC's Souaid is not too concerned about the would-be foreign rivals setting up shop locally, emphasizing that Gulf deal making depends on long-standing and wide-reaching ties. "It's not only investing in Dubai," he notes. "It's investing in the relationship that starts in Saudi Arabia and runs through the entirety of the GCC, the Levant and North Africa." Of course, foreign banks setting up shop in a notorious hot spot like the Gulf have concerns other than well-connected competitors. "What worries me most are the political risks in the Middle East," says Souaid. Nonetheless, for now there is no shortage of business opportunities. In a search for fresh profit streams, some foreign investment banks are rethinking their strategies for GCC countries, focusing more on governments seeking advice on privatizations and on investments to reduce their reliance on volatile oil earnings; they're also cultivating family-owned companies that need advice on raising funds, reorganizing or expanding abroad. And the banks are offering investment banking services to their Arab private banking clients. Moreover, foreign investment bankers are catering to demands for Koran-based shari'a financing, which forbids the paying of interest. In the largest such capital markets deal to date, Deutsche participated in the shari'a-compliant financing of $3.5 billion of the $6.8 billion that Dubai Ports World paid in March for British port operator Peninsular & Oriental Steam Navigation Co. In equity capital markets business, HSBC and Citigroup rank No. 1 and No. 5, respectively, in the GCC, according to Dealogic. Still, by Western standards, the volume remains light: HSBC was the book runner on two stock deals last year that raised a combined $619 million; Citi managed one, worth $148 million. Regional banks occupy the in-between slots: Samba was No. 2; National Investor, No. 3; and First Gulf Bank, No. 4. Mostly because of equity deals, Citi, Deutsche and HSBC all doubled their investment banking revenue in the Middle East in 2005. HSBC's deal-advisory mandates included running the $561 million initial public offering of UAE-based Dana Gas on the Abu Dhabi Stock Exchange, the largest IPO initiated and placed within the Gulf last year. The offering proved almost too popular. From throughout the region thousands of would-be subscribers poured into the UAE, where most of the bank branches eligible to take Dana stock applications were located. Many investors had to stand in long lines in the sun, and some clashed with security officials and broke doors and furniture. The issue was oversubscribed by a factor of 140, suggesting how much pent-up demand exists in the Gulf for IPO shares. In mergers Citi was the top adviser on announced transactions involving GCC companies, up from No. 5 in 2004, Dealogic reports. The bank handled six deals worth $17 billion in all; four were for more than $1 billion. M&A volume for the entire Gulf market in 2005 hit $39.8 billion, representing 173 transactions, compared with $11.3 billion and 87 deals in 2004. Citi's top mandate: advising Riyadh-based construction company Saudi Oger on its $6.6 billion purchase of 55 percent of Türk Telekom. Citi wasn't the only foreign bank to win an eye-opening mandate. UBS advised Kuwait's MTC Group on its $2.8 billion offer for 85 percent of the Netherlands' Celtel International. BNP Paribas counseled UAE-based telecom Etisalat on its $2.6 billion bid for 26 percent of Pakistan Telecommunications Co. And in the biggest and most controversial deal, Deutsche assisted Dubai Ports in its $6.8 billion bid for P&O. (That transaction, of course, caused an uproar in the U.S. when politicians realized that P&O, which runs port facilities in New York and four other U.S. cities, had been acquired by an Arab-owned enterprise, ostensibly raising security issues. Bowing to pressure, the government of Dubai, owner of Dubai Ports, agreed to sell P&O's North American operations to a U.S. acquirer within six months.) Bonds have been much less of a gusher for foreign investment banks than stocks or mergers. Volume last year was a modest $11.1 billion from just 19 transactions, though that was up from $5.4 billion on 14 deals in 2004, according to Dealogic. HSBC kept its No. 1 spot as book runner on Gulf bond deals last year, followed by Lehman Brothers and Goldman, Sachs & Co. The Gulf is becoming a more hospitable place for foreign banks. The GCC plans to establish a common currency, pegged to the dollar, by 2010, and Saudi Arabia joined the World Trade Organization in December. Both developments added impetus to regulatory reforms, which have helped attract foreign firms. "The regulatory framework in almost all of the GCC countries has evolved, and the one that has evolved the most is in Saudi Arabia," says Walid Shihabi, head of research at Dubai-based investment bank Shuaa Capital. "The more conducive the framework is, the more activity you will see." Saudi Arabia has introduced a Capital Market Authority, granted licenses to foreign banks to operate and open branches in the kingdom and raised the limit on the proportion of equity that foreign partners can hold in banking joint ventures from 40 percent to 60 percent. Bahrain, Dubai and Qatar, meanwhile, are competing to become the Middle East's financial hub. Although Bahrain has long been the heart of the Gulf's banking community, it has been outpaced lately by the new Dubai International Financial Center. The DIFC has its own independent regulator and courts; stock, bond and derivatives markets; and a zero tax rate on income and profits. It also permits 100 percent foreign ownership of financial institutions (Institutional Investor, December 2005/January 2006). The Dubai center has already attracted Credit Suisse, Deutsche and Morgan Stanley. Citi is planning to move there by year-end. Deutsche -- which traces its Middle East deal making to the financing of the Berlin-to-Baghdad Railway in the late 19th century -- will have stationed about 40 bankers at the DIFC and a further 12 in Riyadh by June, says Jeffrey Culpepper, who heads the firm's corporate and investment banking business in the Middle East and North Africa. "As Europe tapers off, the Gulf has picked up," says Culpepper, who worked for the Vatican's foreign office before turning to investment banking. "So literally, we're shifting resources to go where the business opportunity is growing." Credit Suisse is pursuing a similar strategy -- no surprise, perhaps, given that Philipp, the architect of the Swiss bank's Gulf business plan, is a former Deutsche executive who helped that bank expand into global investment banking and was responsible for its Middle East business. The U.S.-born Philipp, 53, who joined Credit Suisse in February 2005, says the firm intends to double the number of its investment bankers focused on the Middle East, to 30. Ten are newly installed at the DIFC, ten will be based in other Gulf countries, and ten will remain in London. Credit Suisse has entered into a joint venture, Saudi Swiss Securities, as a minority partner with a group of Gulf investment firms and private investors; it will initially employ 20 to 25 people, all local hires. "We believe that Credit Suisse has a strong advantage because the private bank has been active in the region for more than 30 years," says Philipp. "We can offer our clients investment banking advisory services as they consider options for their family businesses, on the basis of a long-standing relationship. That differentiates us from other investment banks just moving into the region." Morgan Stanley's ambitious plans for the area are being spearheaded by Georges Makhoul, who built up the firm's telecom investment banking business in Japan before moving to London to run European consumer banking. The Lebanon-born Makhoul took over as head of all the firm's business in the Middle East and North Africa last October. About 25 employees -- half assigned to investment banking and half to private banking, asset management and stock and bond sales -- occupy the firm's new office in Dubai's DIFC. "We had a change in strategy," Makhoul says. "We felt that it was critical for our business in the region to have a local presence, with locally based talent and leadership." Citigroup's Middle East push may initially entail some damage control. The bank's standing in the Gulf has suffered in recent years. In late 2002, Citi shifted $30 billion of assets -- mostly loans -- out of Bahrain, its customary regional booking center, amid mounting concern over the war in Iraq. Although those assets were returned several months later, Citi's rivals capitalized on the incident to undermine its credibility among Arabs. Then in 2004, Citi unloaded its 20 percent stake in Saudi Arabia's Samba Financial Group (the former Saudi American Bank) to the Saudi government's Public Investment Fund. The sale -- on which Citi booked a $760 million gain -- was fully in keeping with the U.S. bank's strategy of divesting minority stakes in banks worldwide. Nonetheless, it ended Citi's nearly half-century presence in the kingdom, if only temporarily. Now Citi is pursuing options to reenter Saudi Arabia. No less a personage than chairman and CEO Charles Prince visited the kingdom in April and met with Saudi Finance Minister Ibrahim bin-Abdulaziz bin-Abdullah al-Assaf; the governor of the Saudi Arabian Monetary Agency, Hamad al-Sayari; and the chairman of the Capital Market Agency, Jammaz bin-Abdullah al-Suhaimi. Citi has begun applying for either an investment banking or a general banking license. Meanwhile, back in Dubai, Citi's Ludlow is relocating or hiring as many as six investment bankers. J.P. Morgan Chase, whose main Gulf office is in Bahrain, also has a branch in Riyadh and is exploring whether to move bankers to Dubai and Qatar. In all, it has 35 bankers in the Middle East and plans to add at least ten more. "Our strength in the region is advice and fixed income," notes regional chief Abdelnour. He says the goal is to boost equity's share of J.P. Morgan's overall Gulf investment banking business. As newcomers scramble for footholds, HSBC benefits from being a comparative veteran in the Gulf, with strong relationships with a number of regional governments. The bank has advised on some seven privatizations in the region since 2003 and is offering guidance on three more at the moment, says the bank's Souaid. The seven include Jordan's sale of a stake in Arab Potash Co. and Oman's divestiture of its holding in the country's telecom monopoly, Oman Telecommunications Co., or Omantel. "On the regional level we're ahead of other banks," says Souaid. "It's always the international outflow of capital in which they have more focus and more people." Barclays has been focusing on debt and risk management in the GCC since 2004. Last year it climbed to No. 4 in managing regional debt deals, from well below the top ten in 2004, according to Dealogic. The bank employs ten investment bankers at its Barclays Capital unit in Dubai and "will look to increase hiring selectively," says Nicholas Hegarty, a former ABN Amro banker who joined Barclays two years ago as the managing director in charge of Middle Eastern and North African investment banking. Clients have rewarded pioneers like Citi and HSBC, but they also welcome the arrivistes. "It's clearly a strong advantage if banks have a strong presence and commitment to Dubai and they understand the region and the way we operate," says Sylvain Denis, head of direct investments at Dubai International Capital, a private equity firm owned by the government. "Hence we've done most of our big deals with HSBC so far." Still, he says, "no one wants to be dependent on one bank." Among the notable acquisitions on which HSBC has assisted Dubai International Capital are the purchases of the U.K.'s Tussauds Group, owner of the famous waxwork museums, for $1.5 billion, and of U.K. engineering company Doncasters Group, for $1.2 billion. GCC governments recognize that they must use their oil-and-gas riches to make their economies less dependent on hydrocarbons for the day the wells run dry. The UAE is at the forefront of this effort, having invested extensively in tourism and financial services. The World Bank calculates that the Emirates' nonoil exports averaged 52 percent of their total exports in the 1990s and early 2000s, in contrast to 30 percent in the 1970s and '80s. Middle East Economic Digest estimates that the value of ongoing infrastructure projects in the GCC, plus Iran and Iraq, will grow by 50 percent, to $1 trillion, by the end of this year. Saudi Arabia, given its prodigious wealth, population of 26 million and new openness to foreign banks, holds the greatest potential for investment banking business of any GCC country, bankers say. The 79 companies on the Tadawul Saudi Stock Market are collectively capitalized at $760 billion, ranking the market tenth globally, ahead of those of Australia, China and Spain. The value of shares traded rose by 133 percent last year, to $1.1 trillion; the comparable increases for the New York Stock Exchange and the London Stock Exchange were 22 percent and 10 percent, respectively. Foreign banks rushing to expand in Saudi Arabia invariably seek out local partners. In April 2005, Deutsche agreed to establish a joint venture with an investment company owned by Prince Alwaleed bin-Talal Abdulaziz al-Saud, chairman of Kingdom Holding Co. One of the world's richest men (estimated fortune: $25 billion), Prince Alwaleed bin-Talal happens to be the second-biggest shareholder in Citigroup. The new venture, Deutsche Al Alizia Financial Services, which also involves several other investors, will provide equities brokerage and other investment banking services in the kingdom. Credit Suisse plans to beef up its local joint venture, Saudi Swiss Securities. Citigroup and J.P. Morgan Chase, which for now do business in Saudi Arabia through their Bahrain offices, are assessing options for setting up locally. HSBC has been active in the kingdom through Saudi British Bank, in which it holds a 40 percent stake. But it recently obtained a license to form a separate investment bank in which its stake is 60 percent and Saudi British's, 40 percent. HSBC Saudi Arabia will be run by HSBC, says the venture's managing director, Timothy Gray, who adds that HSBC plans to increase its 200-strong Saudi investment banking team by 25 percent this year. Gray notes that opportunities for investment banks in Saudi Arabia encompass equity capital markets, a nascent Eurobond and domestic Saudi bond market, project financing (particularly in petrochemicals, power and water) and shari'a financing. He expects the number of Saudi IPOs to at least double this year from the five in 2005, which had a combined value of about $2 billion.