Gulf investment banks: Cashing in on the Gulf is proving to be hard work.
When the financial crisis struck in 2007, one response by investment banks was to dispatch some of their top talent to the Middle East. The opportunity seemed obvious. Sovereign wealth funds from Abu Dhabi, Kuwait and Qatar were injecting billions of dollars into struggling Western institutions. Goldman Sachs was forecasting the oil price could hit $200 a barrel within two years. There were surely big fees to be made in advising on how to invest the increasing flow of petrodollars around the world.
But the Gulf honey pot remains something of a desert mirage. Headcount for Western investment banks in the Gulf grew on average 30-40% over the course of 2007 and 2008, according to one banker’s estimate. Some institutions expanded even faster. Now things are going the other way.
Nomura, formerly Lehman Brothers, and Merrill Lynch have lost their “Global Heads of Sovereign Wealth Funds” after the bankers left or were re-assigned elsewhere. Morgan Stanley has scrunched three of its most senior positions in Dubai into two. And Barclays is understood not to be appointing a replacement to Roger Jenkins, its former chairman of investment banking and investment management for the Middle East.
The reality is that banks have found it hard to get rich from the Gulf. In the early days, revenue grew roughly in line with headcount albeit from a small base. But competition has been fierce. The family-led client base in the region is unaccustomed to paying for advice. Most so-called "event" mandates are won purely on price.
If investment banks are pulling back, they aren't pulling out. The long-term opportunity in the Gulf remains promising. GDP will grow 4% in real terms in the region next year, according to the World Bank. But institutions are learning the hard way that turning that economic expansion into banking fees is going to be as much of a slog as anywhere else in the world.