MIDEAST DEBT -Cash-flush Gulf banks grab top spots in region's loan market
* Gulf banks reducing loan fees, easing terms
* Eager to deploy cash supplies amid high oil prices
* Weakened foreign banks find it harder to compete
* Syndicated lending falls as banks do more bilateral deals
* Cheap loans reduce borrowers' interest in issuing bonds
By Archana Narayanan
DUBAI, July 21 (Reuters) - Cash-rich Gulf banks are grabbing a growing share of the region's loan market as they cut fees and ease terms, elbowing aside some of the foreign banks which used to dominate lending.
The shift reflects the weakened state of European and U.S. banks in the wake of the global financial crisis; they face cost-cutting and regulatory pressures in their home markets, preventing them from going after business in the Gulf so aggressively.
But it also reflects a change in the operating environment for Gulf banks. Aided by high oil prices and rapid economic growth in the region, they have been able to rebuild their balance sheets since the crisis and in many cases cut back provisions for bad loans, leaving them flush with cash.
They are now scrambling to deploy that cash by lending it out - even at ultra-easy terms which they would not have considered just a year ago.
"It is indeed a good time for quality borrowers in the middle to smaller end of the market to approach local banks," said Pinak Maitra, group chief financial officer at Kuwait Projects Co, a big investment holding company.
"Local banks are more eager to lend today than at any time in the last five years. They are offering finer terms, have greater appetite for longer tenors than in the past."
The shift can be seen in Thomson Reuters league tables for Gulf loan syndications. As recently as 2011, the list of the top 25 arrangers of syndicated loans in the region included 20 foreign banks.
In the first half of this year, there were only eight banks from outside the region. HSBC, which headed the list in the first half of 2013, has moved down to third position and been replaced at the top by Saudi Arabia's Samba. Standard Chartered dropped to 21st place from fourth.
Abu Dhabi's First Gulf Bank, which has vaulted to second place from 23th, said its rise was the result of a much more active approach to the market.
"FGB's change in strategy from July last year focused around increasing product offerings and hence providing more tailored solutions to meet its core clients' requirements," said Steve Perry, head of debt origination and syndications.
"FGB is now more front-and-centre with clients rather than supporting through participations."
The increased desire of Gulf banks to lend can be seen in the fact that even as total lending in the region has increased over the past year, the amount of syndicated lending has actually dropped, because banks are doing more big bilateral deals rather than sharing out loans with other banks.
In Saudi Arabia, for example, bank lending to the private sector climbed 12.0 percent from a year earlier to the equivalent of $319 billion in May, according to central bank data. In the United Arab Emirates, gross lending rose 8.3 percent to $357 billion.
But new syndicated lending in the Middle East fell 45 percent from a year earlier to $17.5 billion in the first six months of 2014, Thomson Reuters LPC data shows.
The trend can also be seen in the more attractive terms which banks are offering to borrowers. The average tenor of Gulf syndicated loans so far this year is 6.27 years, according to Thomson Reuters LPC, up from 5.77 years at the same point last year.
Borse Dubai, the emirate's holding company for its stock exchanges, was able to take out a $500 million, three-year loan from Dubai Islamic Bank last month at 90 basis points over the London interbank offered rate, according to a source familiar with the deal.
That was a spectacularly cheap rate, especially for a company that appeared close to default five years ago.
Some Gulf banks are willing to cut their fees substantially to win loan business; total Middle Eastern syndicated loan fees shrank to $101.2 million in the first half of 2014 from $216.3 million a year earlier, Thomson Reuters data showed. That was a 53 percent drop, steeper than the fall in lending volume.
The result is that European banks, some of which are now returning to the Gulf as lenders after retreating from emerging-market business two years ago, are finding the environment less lucrative.
"There is no doubt that increased regulation and capital requirements have increased the cost of lending for most international banks, making some opportunities economically unattractive for them," said Simon Meldrum, director for regional loan syndication at Royal Bank of Scotland.
One effect of the Gulf banks' enthusiastic lending has been to reduce corporate bond issuance in the region; companies have little incentive to go through the complex procedures for a bond issue if they can easily take out a loan from their local bank.
Companies in the United States have traditionally raised about 80 percent of their debt through bonds and 20 percent via loans; in Europe, the ratio has been about 30 percent bonds and 70 percent loans.
In the Gulf, the balance is believed to be even more skewed towards loans because of the relatively undeveloped nature of the region's bond market, and Gulf banks' lending spree appears to have skewed it further over the past year.
"Banks are able to tailor deals to fit with the business needs of the borrower much more than the bond market. This is a real competitive tool that the banks can use. Equally important, borrowers have greater flexibility to prepay in the loan market compared to the bond market," KIPCO's Maitra said.
Middle Eastern bond issuance shrank 16 percent from a year earlier to the equivalent of $22 billion in the first half of 2014, according to data from Thomson Reuters and Freeman Consulting.
Last month Dubai's DP World, one of the world's largest port operators, signed a jumbo $3 billion, five-year loan deal refinancing its debt at cheaper terms. In other times, it might have used a bond issue.
How long will the trend continue? One potential constraint on Gulf banks' lending is their loan/deposit ratios. But these still look far from rising to levels that would curb their lending.
The ratio of Saudi banks' combined private sector and government lending to total deposits was 0.86 in May, for example, below 0.89 in 2009. The ratio of UAE banks' loans to deposits was 0.98 in April, down from 1.07 at end-2011.
Another factor is regulation. To limit risks in the banking system, Saudi regulators have won a reputation in the last couple of years for pressing banks to set aside ample provisions for bad loans. Last year, the UAE imposed caps on bank lending to state-linked companies and local governments.
New Basel III banking standards, to be introduced around the world in the next few years, will oblige banks to set aside more money as capital.
Ultimately, these factors are likely to limit the amount of money which Gulf banks are able to lend, and so encourage companies to issue more bonds. The process is likely to be slow, however; many Gulf banks are comfortably above the Basel III capital standards, and UAE banks have five years to comply with the new state exposure rules.
Meldrum at RBS said it was important not to read too much into the latest syndicated loan league tables, which could change quickly. But he added that local institutions were clearly set to play a bigger role in the Gulf loan market.
"Regional banks are now well capitalised and this liquidity means they can lend more. Also, they now wish to seek to capture a greater share of (the) client/transaction wallet by leading deals rather than just participating," he said. (Editing by Andrew Torchia)