What Shuaa’s new strategy plan says about the state of investment banking in the Middle East
After a period of restructuring, Shuaa Capital – once the eponymous investment bank representing the growth prospects of the Middle East – is positioning itself for the new financial services landscape in the region. What does this tell us?
Ever the one for corporate clichés, Shuaa has rolled out what it calls its “strategic, operational and financial roadmap”, or in plain English what it intends to do over the next two years. Its ‘rightsizing’ programme implemented over the last year has seen 121 employees depart (or around 38% of headcount) and in the last quarter it slumped to a AED15.9m ($4.3m) loss.
SMEs, HNWI and DCM
Things are changing. Central to the bank’s plan is the launch of a new ‘credit’ department. This will essentially be targeting the SME sector across its range of services – asset management, investment banking and capital markets.
From an investment banking point of view, the bank will therefore focus on debt advisory work – debt capital markets have provided the bulk of investment banking deal flow this year.
However, it also signals a shift away from traditional investment banking functions and the bank will instead focus on lending through its commercial finance business and developing credit asset management products.
As the chart below shows, Shuaa wants to increase its revenues from its credit division from 13% of the total in 2010 to 65% next year. And over 50% of its balance sheet will be dedicated to these lending functions.
This is indicative of the problems facing investment banks in the region – a lack of appetite among local corporates and governments in the region to pay large fees for advisory work. The Big Four accountancy firms have been winning more business in their corporate finance divisions, and banks have been developing their wealth management and corporate banking functions in order to leverage relationships with family offices and high-net-worth individuals for potential investment banking advisory work.
Shuaa says its investment bank will still focus on institutional clients, but this seems secondary to the target of “high net worth individuals, SME businesses, family offices and conglomerates”.
Big pay packets are long gone
If you think the cost-income ratio in large international investment banks is bad, take a closer look at Shuaa. In 2011, it was an astounding 247%, this year it’s estimated to be 137% but the plan is to reduce the cost income ratio to 75% in 2013.
Assuming it’s done with redundancies, this means pay packets are going to be targeted. In the first half of this year, average pay per head was AED304.4k ($82.8k), suggesting that for the full year (if bonuses are clamped down on) 2012 compensation will be AED608.8k ($166k) per person.
At the same time, Shuaa has ambitions to increase its return on equity from -19.9% in 2011 to 7.5% in 2013. Clearly, containing costs remains a priority.
