Diversity portfolios call

GCC investment banks should redefine their strategies by diversifying their portfolios in these challenging times, according to a leading financial consulting firm.

A T Kearney said there is an opportunity for GCC investment banks to revisit their current business models and redesign their long-term strategies, as the GCC's market for investment banking offers significant long-term potential.

From 2005 to 2007, the GCC investment banking market was strong, averaging 17 per cent annual growth in all segments but brokerage.

After peaking at $5.5 billion in 2007, banking revenues shrank to $4.2 billion in 2009, as the financial services industry around the globe suffered from some of the worst trading conditions in history.

Demand for investment banking services declined as liquidity dried up and deal making ground almost to a halt.

GCC investment banks, however, were hit not just by temporarily declining demand for investment banking services. Because they typically do not diversify their business portfolios, choosing instead to focus on private-equity and principal investments, these banks suffered substantial losses in the value of their investments. Without a diversified revenue stream, these losses were even more pronounced.

"GCC investment banks should redefine their individual playing fields. In particular, three areas deserve the bulk of the attention: growth potential, capital needs and differentiation potential," said Dr Alexander von Pock, principal, Financial Institutions Group, A T Kearney Middle East.

The investment-banking market segments vary significantly in their potential for growth. Private equity, for instance, is already well-established in the region, leaving little room for further penetration, according to A T Kearney.

Other segments, however, notably asset management and capital markets, are still emerging and show great promise. Demand indicators remain strong, including a substantial need for financing the massive infrastructure projects planned or underway in the region, and capital markets will likely play a larger role as the local economies continues to mature.

"Despite all the financial gloom and doom, we see strong glimmers of hope for GCC investment banks. While in other parts of the world the financial crisis put leading investment banks out of business and forced others to relinquish their independence, top investment banks in the GCC that seek to overcome their challenges and make the most out of untapped market opportunities will emerge stronger in the years to come," said Cyril Garbois, principal, Financial Institutions Group, A T Kearney Middle East.

A T Kearney believes that despite a large number of players in the region, there is ample room for growth in most segments, as indicated by low penetration compared with more developed markets.