World Economy

Foreign Lenders Stealing the Show in (P)GCC

Foreign Lenders Stealing the Show in (P)GCCForeign Lenders Stealing the Show in (P)GCC

Foreign banks are regaining lost ground in the Persian Gulf Arab states’ financial sector, stealing a march on local lenders as they grapple with job cuts and a liquidity squeeze caused by the plunging oil price.

Japanese, French and US banks are looking to pick up business in the region as the oil price slump pushes domestic players to curb the flow of cheap loans which, until recently, had secured them a dominant position in the market, Reuters reported.

The shift marks a change in fortune for Persian Gulf Arab banks, which in the years following the global financial crisis had poached staff and aggressively filled gaps left by international lenders as they retreated to tackle problems at home.

“The recent changes in liquidity and pricing have probably leveled the playing field more equally between the local and international banks,” said Simon Eedle, group regional head of the Middle East at Natixis, noting the market was much changed from six months ago.

Leading the charge of foreign lenders are Japan’s megabanks: Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group.

Flush with the proceeds of their government’s “Abenomics” quantitative easing program, all three are hiring staff and increasing business lines as they look to deploy funds.

“We believe that current market conditions will create a number of business opportunities for us if we use our strengths effectively,” remarked Hidefumi Takeuchi, regional head of the Middle East, North Africa and Central Asia at Mizuho Financial Group.

Japan’s export credit agencies – Japan Bank for International Cooperation and Nippon Export and Investment Insurance – have helped support the lenders’ in-roads, with Japanese contractors securing big wins in Persian Gulf Arab infrastructure projects and bringing with them cash from their home financial institutions.

That puts Japanese lenders in prime position for advisory roles on these huge deals. The adviser on the $5.2 billion Liwa plastics project in Oman is SMFG.

 Non-Equity Funding

Local banks dominated Persian Gulf Arab loan markets in recent years due to the low cost of funds from government oil deposits which provide around 10 to 35% of banks’ non-equity funding in the six-nation Persian Gulf Arab states (Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain, and Oman), according to rating agency Moody’s.

While this drove loan interest rates to uneconomical levels for foreign lenders, the oil price fall has severely impacted the amount of liquidity local banks could lend and the rate at which they do.

Highlighting this problem is the UAE’s three-month Emirates Interbank Offered Rate, at a record low as recently as February but trading at a 31-month high last week.

The squeeze is already starting to be felt: First Gulf Bank, the UAE’s third-largest bank by assets and one of the most expansive names during the boom, laid off around 100 staff last month.

Local banks are also going from being lenders to borrowers, with unprecedented activity in the financial institutions loan market as the year closes and banks seek to lock in funding before US interest rates increase.