HSBC Holdings Plc, the biggest bond underwriter in the Persian Gulf since 2007, and Barclays Plc said fees in the region are plummeting because of increased competition from international and local lenders.
The decline in fees is “unsustainable” and revenue in some markets outside the Gulf Cooperation Council can be as much as 10 times higher, said Georges Elhedery, head of global markets for the Middle East and North Africa at HSBC. Fees are between 50 percent and 75 percent of what they used to be, said John Vitalo, Barclays’s regional chief executive officer.
“More banks are coming to this market with limited investment, but this isn’t sustainable,” Elhedery said in an interview in Dubai on May 1. “Fees have dropped a lot.”
Competition is intensifying as regional bond sales reached first-quarter record levels. The share of fees for U.S. and Western European banks in the Middle East fell to 43 percent last year from 65 percent in 2005, according to Freeman & Co., a New York-based consulting company. The shift coincides with a 25 percent rise in fees for Middle Eastern banks, the data show.
HSBC’s Elhedery said that financiers who cover the region from abroad, known as suitcase bankers, are contributing to the fall in revenue as they can afford to accept lower compensation because of reduced overheads.
“More bankers are flying in from London and elsewhere,” he said. “To pay for their flight they think 5 cents or 3 cents on an issuance is enough. 3 cents pays for the flight.” HSBC has a team of 12 debt capital market bankers in Dubai that cover issuance and trading, Elhedery said.
Global banks, including UBS AG, Morgan Stanley and Credit Suisse Group AG, have relocated investment bankers away from Dubai because of financial and regulatory pressures at home and concern about business levels in the emirate after the financial crisis. Credit Suisse moved its regional investment banking headquarters to Doha and Morgan Stanley relocated part of its Middle East equities business to Saudi Arabia.
“Bond mandates are very much linked to banking business overall,” said Abdul Kadir Hussain, Dubai-based chief executive officer at Mashreq Capital DIFC Ltd. “That’s why you have big commercial banks taking quite a bit of share because they have the balance sheets needed to have a broader relationship than just the bond mandate.”
Bond sales from MENA, which includes Saudi Arabia, the United Arab Emirates and Qatar, reached $15 billion in the first quarter as issuers took advantage of falling yields, data compiled by Bloomberg show.
The number of banks advising on MENA debt sales rose to 52 in 2012 from 42 a year earlier as issuance surged 54 percent to a record $49 billion, the data show. HSBC, Deutsche Bank AG and Standard Chartered Plc are currently the top three bond underwriters in MENA and have been since 2011, the data show.
“There are many banks that are willing to come to this game but whose investment needs are very limited,” said HSBC’s Elhedery. “When you reach a situation where you’re asking them to commit more they have to make a decision - either they need more fees or walk away from the business.”
“We’re fighting for fees on just about every deal,” Vitalo said in a May 2 interview in Dubai. “They’ve come down a lot. It’s not just shaving them by 5 or 10 percent of what they used to be. They’ve come down to about 50-75 percent of what they used to be.”
Barclays is currently ranked fourteenth for bond underwriting in MENA, down from twelfth a year earlier, according to data compiled by Bloomberg. The bank’s debt capital markets team covering the region splits its time between London and Dubai, Vitalo said.
Local lenders based in Qatar, Abu Dhabi and Dubai “are typically undercutting fees and offer fees that are lower than the international norms,” he said. “International banks are hence forced to lower their fees to stay competitive.”
Seven of the region’s top 20 bond arrangers last year were banks based in MENA, up from 5 a year earlier, the data show. National Bank of Abu Dhabi PJSC, the United Arab Emirates’ biggest lender, climbed 17 places last year to become the region’s fourth largest adviser last year on $2.9 billion worth of deals, up from $563 million a year earlier.
The declines are making some banks look elsewhere for earnings. Royal Bank of Scotland Group Plc, Britain’s biggest government-owned lender, is targeting increased returns from derivatives sales as earnings from arranging debt sales and lending falls, Jacco Keijzer, the bank’s head of debt capital markets in the region, said in an interview in Dubai last month.
Earnings for each bank from a transaction is “in single digits by now,” so that each bank is paid less than 10 basis points or 0.1 percentage point of the money raised, he said.
Still, HSBC says it’s benefitting from the fact that many clients are returning to the market for sales.
“Issuers are asking us to go back on deals two or three times,” said Elhedery. “So they’re paying through time what they can’t pay us through a single shot fee because the fee structure is compressed.”