Islamic Investment Banks In Gulf Eye Slimmed-Down Future

Management changes at some of the Gulf’s best-known Islamic investment banks point to a fresh start for a sector which is emerging from the global financial crisis with less leverage and more realistic ambitions.

While retail-focused Islamic banks generally managed to weather the crisis, many investment banks that relied on large, leveraged projects had a tougher time.

Bahraini firms such as Arcapita and Gulf Finance House (GFH) embodied the region’s investment banking ambitions, using debt to fund acquisitions to great effect; the two booked a combined $1.3 billion in profits in 2007 and 2008.

But the credit crunch showed Islamic financial structures were no protection against sliding asset prices, and the two suffered combined losses of $1.73 billion between 2009 and 2010, forcing them to restructure their businesses.

The financial crisis “changed the game” away from bumper projects and the preference now is for slimmer balance sheets, according to GFH founder Essam Janahi, who last week stepped down as chairman after 14 years with the firm.

“After cleaning house there is an easier way,” said Janahi, who remains the second-largest shareholder in GFH with 5.73 per cent, down from a high of 25 per cent.

“First look at your balance sheet, your rating – if you have liquidity and the confidence of people they will invest with you.”

GFH has now reduced its liabilities to $223 million, from over $2 billion at the peak of the crisis, and is rolling out a more conservative strategy. Future investments will shy away from aggressive rates of return and favour smaller deals to better manage risk, Janahi said.

“A smaller-sized transaction like a $50 million ticket item is easier to place,” added Janahi, who now plans to focus on projects of his own. “My moving out doesn’t hurt GFH; the management team is there and they have the experience.”

Janahi has been replaced as chairman of GFH by Ahmed Al-Mutawa, previously the deputy chairman.

BIG FIGHT

Founded in 1997, Arcapita sponsored a range of transactions worth $28 billion. Unable to refinance a $1.1 billion Islamic loan that matured in 2012, Arcapita filed for bankruptcy protection in a New York court in March last year, emerging from Chapter 11 last month with a five-year plan to sell legacy assets to pay creditors.

Last week, the reorganised firm appointed a new seven-man board of directors that includes a representative from Bahrain’s central bank and a former chief executive of Bank Alkhair, a Bahraini Islamic lender.

Arcapita’s former management team will now operate a new firm, AIM Group Ltd, which will manage the disposal of former Arcapita assets while seeking new deals in the logistics, education and healthcare sectors.

“We fought a big fight – some of it was public and some of it not. But the ultimate solution was the best way to maximise value and it was a balanced way of doing it,” said Atif Abdulmalik, Arcapita’s founder and former chief executive.

AIM now plans to invest through funds and pre-placements, rather than underwriting deals with the company’s capital, with target yields in the region of eight per cent, he added.

Acquisitions could be financed by debt but on a different scale, with debt-to-equity ratios at the company level no higher than 1-to-1, as opposed to 3.5-to-1 before the crisis, he said.

STREAMLINED

Even some Islamic investment banks which rode out the global crisis fairly comfortably have streamlined their operations and say they will not spurn relatively small deals.

Qatar’s QInvest said on Wednesday that it would focus on three core business lines – investment banking, asset management and investing its own capital – while working more closely with top shareholder Qatar Islamic Bank.

New chief executive Tamim Al-Kawari, who took over last year, said he had streamlined operations and reduced QInvest’s number of business lines; areas such as wealth management and brokerage services have been discontinued.

QInvest’s investment banking head Michael Katounas, who arrived in April, said the bank was open to medium-sized deals.

“If you are waiting for the next $10-15 billion deal from the region, you will be waiting for a long time. On the mid-sized deal space, you have enough opportunities there to keep you busy.”