Credit Suisse losses make Gulf investors wary of bank deals
MIDDLE Eastern investors are becoming more cautious of making fresh investments in global banks, after emerging as some of the hardest hit by the Credit Suisse Group crisis.
Sovereign wealth funds and other investors in the region have been spooked by the market turmoil that wiped US$1 billion from Saudi National Bank’s stake in the Swiss lender. Bankers and lawyers with knowledge of the matter said such funds are likely to be more wary about deals involving foreign financial firms.
The crisis is accelerating a pivot towards other sectors, such as healthcare and technology, the bankers said, asking not to be identified as the matters are not public.
The most recent losses on Credit Suisse are a stark reminder of a series of investments made by Gulf investors during the 2008 global financial crisis, many of which ended in financial loss or legal battles. Flush with cash after oil’s recent surge, Middle Eastern investors had resumed exploring deals for foreign lenders. Any change in that strategy would be a blow to the global financial sector, potentially depriving Western institutions of much needed petrodollars.
Ayham Kamel, head of the Middle East and North Africa at political risk consultant Eurasia Group, said: “There have been some legacy issues in the Gulf around investments from the 2008 financial crisis; and the Saudi National Bank experience with Credit Suisse will make them more nervous around the risks during this sensitive time.”
He added: “The Credit Suisse situation might also present some questions for Gulf sovereigns around their ability to drive restructuring plans in some institutions.”
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Credit Suisse’s long-term backer, the Qatar Investment Authority (QIA), is reviewing its bank holdings and assessing its overall portfolio, amid the heightened global economic risks, said a senior official at the fund, who asked not to be named as the information is sensitive.
The QIA has no immediate plans to reduce its banking assets, and sees the current market turmoil as an opportunity to negotiate better terms and structure better investments, the official said. The value of the fund’s holding in Credit Suisse crashed last week – with this happening just after it had upped its stake in recent months.
Another of Credit Suisse’s biggest shareholders is Saudi conglomerate Olayan Group, which has a roughly 3 per cent stake in the lender.
In a step beyond taking minority stakes in Wall Street firms, some of the Middle East’s largest lenders have recently been exploring how to use their oil windfall to play a bigger role in the global financial sector through acquisitions.
Bloomberg reported in February that First Abu Dhabi Bank (FAB) was considering a potential all-cash offer for Standard Chartered in the range of US$30 billion to US$35 billion. People familiar with the matter said it is still too early to say whether the bank’s appetite for such a possible deal would be impacted by the recent turmoil. A representative for FAB declined to comment.
Before the Credit Suisse debacle, Saudi Arabia had been working on an ambitious plan to give Saudi National Bank, the kingdom’s largest lender, a global footprint through major overseas acquisitions. Its investment in the Swiss bank late last year was meant to strengthen the country’s financial sector and boost its status as a global investment powerhouse.
Instead, its chairman Ammar Al Khudairy on Mar 15 helped to trigger the biggest one-day dive in Credit Suisse’s shares since the global financial crisis. This came in a reply he gave in an interview with Bloomberg TV, in which he said: “Absolutely not”, when asked whether Saudi National Bank would be open to further investments in Credit Suisse if there was another call for additional liquidity.
Citigroup analyst Rahul Bajaj said: “While this doesn’t rule out Saudi National Bank pursuing other transactions, now that Credit Suisse has been acquired, we would hope that given the experience with Credit Suisse, there would be greater caution with any future transaction.”
Regional investors are concerned about the reputational damage from any soured deals, as well as any potential financial losses linked to their investments, said bankers who spoke on condition of anonymity. Part of their caution stems from big investments in previous years, some of which have since turned bad.
Deep-pocketed Middle Eastern investors have been backing global banks, such as Credit Suisse, for many years, but they have not reaped the outsized gains other investors have. For instance, Mitsubishi UFJ’s US$9 billion investment in Morgan Stanley during the global financial crisis has minted it more than US$25 billion in profit; and Warren Buffett more than trebled the US$5 billion he put into Bank of America in 2012.
Boutique adviser and data firm Global SWF said that during the global financial crisis, sovereign funds in Abu Dhabi, Qatar and Kuwait ploughed about US$69 billion into firms such as Barclays, Merrill Lynch and Citigroup.
“Since then, the relationships have been complicated,” said Javier Capape, director of sovereign wealth research at IE University. He pointed to some of the legal disputes and court battles that have emerged.
Both Citigroup and Barclays tapped Abu Dhabi-based funds during that crisis, which resulted in acrimonious court cases. The Abu Dhabi Investment Authority (ADIA) agreed to buy the equivalent of 4.9 per cent of Citigroup in 2007, worth about US$7.5 billion, before share issuances eroded the value of its holdings. ADIA later filed for arbitration to recoup the losses, but lost.
Deutsche Bank Group’s shares have more than halved in value since an initial investment by a Qatari royal in 2014. Barclays, meanwhile, was probed over fees paid to some Qatari investment vehicles during fundraising amid the financial crisis.
Not all investments have turned out badly. QIA’s relationship with Credit Suisse lasted 15 years. Its equity stake fell from almost four billion Swiss francs (S$5.8 billion) when it was first disclosed in October 2008 to about 225 million Swiss francs now, even as the investor more than doubled its share count through rights issues and convertible notes. But as part of the 2008 rescue, QIA also got more than US$4 billion of bonds that paid an average of a 10 per cent coupon for a decade before they were repaid, meaning it made money overall on the investment.
Still, if the QIA had instead ploughed US$8 billion into the S&P 500 or the Stoxx 600, it would have tens of billions more. The fund also holds about a 5 per cent stake in Barclays, after helping to prop up the British bank in 2008. Barclays’ share price is still below where it ended in October 2008.
The Kuwait Investment Authority sold its stake in Citigroup in 2009 for US$4.1 billion, after helping the bank boost capital during the global financial crisis. The fund converted preferred securities of Citigroup that it purchased the previous year for US$3 billion into common shares and sold them, making a profit of more than US$1 billion.
In 2013, Abu Dhabi’s Sheikh Mansour bin Zayed Al Nahyan sold his stake in Barclays, cashing in on a multi-billion dollar investment he made at the height of the crisis.
Despite the potential for losses, sovereign funds may not view investments in financial terms alone, and some regional investors may remain interested in banks. Global ambitions by other funds may still override any immediate financial and reputational concerns, said IE University’s Capape.
“Indeed, sovereign funds are growing cautious in their approach toward global banking,” he said. “Yet, new funds with big ambitions – as was the case of QIA during the crisis and the case of the PIF (Saudi Arabia’s Public Investment Fund) today – may still fall into the trap of trying to save damaged banks on the basis that this will bring global recognition to the Gulf states.” BLOOMBERG
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