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European, US i-banks aim to cash in on GCC's 'excellent growth outlook'

State and private sector restructuring in the Gulf Cooperation Council will boost international banks' deal-making fees, although foreign lenders are set to face stiffer competition from larger local lenders, according to market insiders and experts.

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The GCC is growing in importance to investment banks as government entities seek to sell assets to help fund their economic diversification plans — such as Saudi Arabia's Vision 2030 — and boost state finances following the coronavirus pandemic. Saudi Arabia and the United Arab Emirates accounted for two-thirds of M&A activity in the wider Middle East and North Africa, or MENA, region in the first half of 2021, according to Refinitiv, a data provider. Energy and power was the largest sector for M&A activity in the region, followed by financials and government.

"The growth outlook looks excellent because as we transition to a post-hydrocarbon economy, there's a massive need to restructure in both the public and private sectors," said Tarek Fadlallah, CEO of Nomura Asset Management Middle East. "That presents commercial possibilities."

JPMorgan Chase & Co., which was one of several international banks to act as arrangers, underwriters or bookrunners on Saudi Arabian Oil Co., or Aramco's, recent $12.4 billion oil pipeline deal, will earn more than $100 million from the sale-and-lease-back agreement, Bloomberg News reported.

"Regional investment banking activity has recently been focused on things like selling oil pipelines and infrastructure. These are significant deals, and the fees can be fairly substantial," said Fadlallah.

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Regional and local banks often participate in these mega deals because of their close relationships with the government entities involved and so will act as an adviser, but the execution is almost always done by international banks.

"Local banks don't have the ability to do these cross-border, large-scale transactions," said Fadlallah.

"Infrastructure deals tend to be done with private equity firms and large investors in the U.S. and Europe and they tend to have good relationships with international banks who then also possess the capacity to execute. That execution capacity is often missing from local banks."

Many international banks have been present in the GCC since the discovery of oil in the early and mid-20th century.

"Over the years, that relationship has strengthened, especially as governments sought to create additional sources of financing," said Dr Ullas Rao, assistant professor of finance at Heriot-Watt University Dubai.

"Regional banks tend to focus on specific sectors where their specialized knowledge gives them an advantage over their international rivals."

During the pandemic, negotiations and meetings have been held remotely, while due diligence has become more protracted. Consequently, deals typically take longer to complete, bankers said.

In MENA, half-year investment banking fees were $591 million, down 4% on the prior-year period, according to Refinitiv.

"The market has been largely dominated by government and government-related entities' activities, and very limited volume from the private sector, but we are starting to see pickup in the private names which should translate to a better distribution by end of H2," said Rami El-Rifai, managing director and head of syndicated loans and leveraged finance at HSBC Middle East.

Fees from M&A slid 30% year over year to $191.4 million, according to Refinitiv.

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"In the longer term, the M&A and equity market fee pool is increasing because governments are having to do a lot of restructuring of their assets," said Nomura's Fadlallah, citing the recent merger of Saudi state-controlled lenders National Commercial Bank and Samba Financial Group, which created an entity that can operate at scale.

After a slow start to 2021, equity capital markets underwriting fees, which had slumped to a 10-year low in the first quarter, have surged, with half-year revenue more than doubling to a three-year peak of $46.4 million.

Bond underwriting fees rose 14% year over year to $198.5 million, the highest total since Refinitiv's records began. Syndicated loan fees grew 4% to $154.9 million.

"Sovereigns are taking advantage of historically low interest rates to raise debt and secure loans at competitive rates that will provide a substantial cushion to weather future economic downturns," said Rao.

"Now oil prices are quite high again, there's less need for them to borrow in the short term. Among regional corporations, there's more appetite for debt capital and to take advantage of low interest rates. Many were underleveraged historically, so there's an opportunity to get a very competitive cost of capital."

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Although there are opportunities for foreign lenders in the GCC, fees are typically lower for investment banks in the region when compared to other geographies.

JPMorgan was the region's top fee earner in the first half of 2021, raking in $71.6 million, followed by HSBC Holdings PLC's $50 million, Refinitiv estimates. First Abu Dhabi Bank P.JSC was the leading regional bank, netting $31.1 million in fees to be fifth overall.

"If you look at every aspect of the investment banking business, it seems to be doing better and although financial sector fees are always subject to downward pressure, the quantum of deals being done at the moment is fairly significant," said Fadlallah. "Fees are a delicate issue, but investment banks have managed that conversation quite well and there is always scope to enhance revenues."

In April, Saudi Stock Exchange (Tadawul) Co. restructured and rebranded ahead of launching an IPO. The same month, the company — owners of the kingdom's bourse, the Middle East's largest — appointed JPMorgan and Citigroup Inc. to advise on its share sale.

"Saudi Arabia will remain a hugely important market for investment bankers, with the kingdom enjoying an IPO boom," said Rao.

Aramco listed on the Tadawul in late 2019. Bank of America Corp., Credit Suisse Group AG, Morgan Stanley, The Goldman Sachs Group Inc., Citi, HSBC and JPMorgan all acted as joint coordinators for the listing but received fees of only $3.5 million each.