ABU DHABI: Banking on investment UAE
13 Apr 2007

Changes to investment banking regulations coincide with an explosion in Abu Dhabi-based projects that should provide bankers with a robust income stream. Victoria Robson reports

Securities legislation being drafted in the UAE is set to transform the investment banking sector in the federation. Under new proposals, responsibility for licensing and regulating investment banks will be transferred from the central bank to the Emirates Securities & Commodities Authority (ESCA).

Its responsibilities will include regulating investment advisers, regulating funds, underwriting, as well as custody and asset management. In addition to granting the capital markets regulator more powers, the legislation modernises the rules governing investment banking activities, often accused of being patchy and opaque.

In addition, ESCA will oversee initial public offerings (IPOs) after a cabinet decision made in January to transfer responsibility from the Economy & Planning Ministry.

The move is expected to involve a rationalisation of the investment banking sector at a time of unprecedented demand for corporate advisory services, including mergers and acquisitions, capital markets services, and private equity origination and transactions.

Growth of the sector was kick-started in 2004 with the establishment of the Dubai International Financial Centre (DIFC). The DIFC has wooed international investment banks and financial service providers to Dubai, with Swiss universal bank Banque de Commerce et de Placements the latest to join in March.

But as Dubai develops its offshore centre, Abu Dhabi, which has been quietly expanding its domestic investment banking sector, is anticipating an influx of international and local institutions to cater to its massive investment programme.

“ There is a vision to establish Abu Dhabi as a globally recognised city in chosen areas, such as culture, petrochemicals and the airlines,” says a UAE-based investment banker. “The government is making a major push. [UAE President and ruler of Abu Dhabi] Shaikh Khalifa [bin Zayed al-Nahyan] and [Abu Dhabi crown prince] Shaikh Mohammed [bin Zayed al-Nahyan] are moving in step. One is the chairman, the other is the chief executive officer.”

Estimates for projects planned or under way in the oil-rich emirate range up to $200,000 million. They include an aluminium smelter at the planned Khalifa Port & Industrial Zone at Taweelah and the Abu Dhabi Industrial City project at Mussafah. The government is developing island tourist resorts as well as cultural attractions, not least a $1,300 million branch of the Louvre and a Guggenheim museum.

“ The amount of money in the banking system is not enough to finance these projects,” says Michael Tomalin, chief executive officer (CEO) of National Bank of Abu Dhabi (NBAD). “They will rely on foreign banks being far more active. Increasingly we are going to see mega-projects with foreign bank participation. They bring their balance sheet. There will be much greater use of capital markets, but not necessarily in the UAE.”
The quasi-governmental Abu Dhabi National Energy Company (Taqa) is one example. It will approach the international capital markets for the second time later this year when it initiates plans to raise $9,000 million through bond issues, some of which will be sharia-compliant. The company launched its first euro medium-term note programme in 2006. Taqa is voraciously buying power generation and upstream assets and the new bonds will help finance its $7,000 million spending programme for this year alone.

Moody’s Investors Service and Standard & Poor’s have assigned Taqa long-term senior unsecured issue ratings of Aa3 and A+ respectively, reflecting the international perception that Abu Dhabi government-related companies are a sound credit risk.

The transaction size is phenomenal and local banks will struggle to cope. “Local balance sheets will be cut out,” says Tomalin. “They will have to build their own investment banking capability. That is the only way they can keep up.”

The latest international arrival in the capital is Royal Bank of Scotland, which has set up its regional office in Abu Dhabi. It joins Bank of Tokyo-Mitsubishi, Calyon and Barclays, which all have a presence in the emirate and are leading the trend away from bankers just jetting in for big deals. US investment banks Morgan Stanley, Goldman Sachs and Merrill Lynch, still new to the Gulf, have preferred to set up in Dubai where competition for a slice of the market is fierce.

In comparison, Abu Dhabi is largely untouched by international banks and is ripe with opportunity. The investment arena is dominated by the government’s Abu Dhabi Investment Authority (ADIA), which is estimated to have anything between $400,000 million and $900,000 million of assets under management outside the emirate.

But it is the Abu Dhabi Investment Council (ADIC) established in June 2006 as a local and strategic counterpart to ADIA that is driving investment in the emirate. “The council could make a big difference to how Abu Dhabi looks and feels in five years,” says another Abu Dhabi-based banker. Of the two, ADIC is expected to be the key beneficiary of increased oil revenue flows used to acquire equity stakes in local and regional ventures. Among its investments, ADIC holds more than two thirds of the shares in NBAD, the UAE’s largest bank.

As the government and private companies raise larger amounts of capital to invest, there is room for more domestic financial services institutions. “There has always been competition for investor dollars,” says Shariq Azhar, director-general at Injaz Mena Investment Company. “The pie is growing much larger. In the investment banking arena, there are not a lot of players. The market has the capacity to support many. The number of players can double in size easily. If you have a limited number of players, products are limited by their imagination.”

Injaz Mena received its licence in 2005 along with five other institutions in the first investment firm licensing round in two decades. The arrival of these smaller investment companies coincided with the crest of the stock market boom, an IPO frenzy and a change in leadership following the death of UAE President and ruler of Abu Dhabi Shaikh Zayed bin Sultan al-Nahyan.

Injaz Mena’s peers include Abu Dhabi Investment House (ADIH), Gulf Capital and Noor Capital. They compete for business with brokerage houses and non-bank institutions that conduct unlicensed asset management and private bank funds. Typically, their shareholders include prominent members of the ruling family and the company invests for its proprietary book in primarily private equity deals and real estate, while offering corporate finance advice to its wealthy client base.

“ There is room for these smaller institutions in the mega-deals but it is quite difficult for investment bank boutiques to underwrite them. They are more confined to taking an advisory role for individual and family offices,” says Tomalin.

For smaller institutional investors, the development of a mutual fund market in the region is key. “The [investment banking] market remains very young and is still fragmented,” says ADIH head of investments Ali Mahmoud. “There is room for a lot more companies, especially once the pension fund market in the GCC grows to Western standards.”

In addition to local players, regional investment houses are moving in, notably the placement offices of Bahraini institutions and Saudi Arabian investors. “Bahrain is an old financial centre with a core of competent people, but it lacks capital,” says Azhar. “They go to where the capital is. Saudi investors come to Abu Dhabi seeking strategic partners to help grow their business across the region.”

Among key legal changes that encourage investment is the revision of property ownership rules introduced in August 2005. The new laws allow foreigners to have a claim on their property through a 99-year renewable lease. To launch companies, the Abu Dhabi Chamber of Commerce & Industry is also streamlining its company registration system. “It promises to be more transparent, more efficient and more welcoming,” says Jason Peers, CEO of Abu Dhabi-based Jasper Capital.

Unlike Dubai, which seeks to be a financial services centre for the region, Abu Dhabi is looking for financial institutions to lend and advise on its schemes that will ultimately aid the diversification away from oil income and assist in the development of the private sector. The rationalisation of investment banking activities is a major step towards this. MEED (Middle East Economic Digest)

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