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Private banking grows in Arab world as investor appetite increases

Future is relationship driven, with banks offering services, advice
Financial institutions must themselves go to clients, be present on the ground

Higher oil prices and output, relative stability, and strong reconstruction-related economic activity in neighboring countries to Iraq have all led to robust corporate earnings across a variety of sectors - including construction, services, and tourism - and an unparalleled increase in the capitalization of Arab stock markets.

The ongoing mini booms in several countries have bankers courting the region's super wealthy. In 2003 Saudi Arabia's stock market, the largest in the Arab world, surged 76 percent and is up 29 percent so far in 2004. Economic expansion in the region is not only spurring private banking and wealth management services at local and regional banks, but also attracting foreign entities that want to cash in on untapped wealth in the Arab world.

The number of high net worth individuals (HNWIs), individuals with more than $1 million in investable assets, in the Middle East has increased in the past year by 2.4 percent, according to a recent Merrill Lynch-Cap Gemini annual world wealth report. The same report estimates an average annual growth rate of 2.8 percent up to 2008.

But there is a reason why foreign banks, particularly the Swiss, fare better than their American and Arab counterparts. It comes down to greater resources and more flexibility, says a prominent Arab banker.

"We cannot compete with the Swiss banks. Wealth management is a very complex area. You need good research; access to stock markets and a good back office," he said. Even the National Bank of Kuwait, often referred to as the Goldman Sachs of the Arab world, and which has an operation in Switzerland, is small in comparison to its Swiss counterparts managing some $7-8 billion in assets of HNWIs.

Banking with European and Swiss banks has risen particularly quickly since the Sept. 11, 2001 attacks. Arab investors became wary about increased scrutiny of their offshore accounts and jittery about sharing information about themselves with US banks. This is one reason private bankers point to as to why their services matter more than ever.

The widespread freezing of Arab assets by US authorities in the wake of Sept. 11 led to a repatriation of Arab capital from American banks. While it may be hard to determine the outflow of Arab money, industry insiders say a good portion of the $1.5 trillion in assets held abroad in American banks has found its way to Bahrain, Saudi Arabia and Beirut.

Money being invested locally and regionally, coupled with economic expansion, has benefited the private banking and wealth management sectors.

"There is new wealth that has been created by stock markets and the real estate boom," says Ibrahim Dabdoub, chief executive of National Bank of Kuwait. "There is a lot of liquidity in Saudi Arabia, Kuwait and Qatar. There is new wealth - by some estimates as much as $1.5 trillion."

The Boston Consulting Group, a management consultancy, estimates that affluent individuals in the Asia Pacific and Middle East regions are sitting on about $10.2 trillion of assets.

Swiss banks, with a long-standing tradition for safeguarding the identities of their clients, have realigned themselves, aggressively seeking to attract HNWIs either by setting up new offices in the region or adding to their existing presence.

"With the maturing American and European markets, all the Swiss banks and their competitors are looking for growth opportunities and have to go overseas. Wealth is being created and that's why they are going to the Middle East region," says a senior banker overseeing the region for Julias Baer, a private Swiss bank.

At the end of June, some 300 high-profile individuals, including chief executives, princes and princesses, descended on Beirut, once the banking hub in the Arab world, for a lavish dinner celebrating the arrival of Clariden, a private banking subsidiary of Credit Suisse.

"People in the Arab world need private banking more than ever now," says Kamel Mukharesh, chairman of Clariden in the Middle East.

"But they need the Swiss formula," he adds. "In times of turmoil the Swiss formula is much more responsive to the needs of today's Arab wealthy family."

The old style of private banking is gone, according to Mukharesh. Unlike the traditional Swiss private banks, which wait for clients to come knocking on their door, Clariden is coming to the market to extract business by being on the ground.

The senior banker at Julias Baer agrees. "If someone comes here with the old style of private-banking model, they will not succeed financially," he says, citing the downsizing of American brokerage firms like Prudential, Salomon Smith Barney and Merrill Lynch.

"These US houses were very focused by sector on the private client, through a brokerage and transaction oriented approach. That is not the future. The future is largely relationship driven. Its really providing a one-stop answer for the client, where the client doesn't just get his private banking needs but getting all kinds of advice from a financial advisor," he says.

"Old banks are boxed in certain jurisdictions ... and don't necessarily answer the needs of Arab families," says Mukharesh

Clariden has around $26 billion in assets under management and intends to target what it defines as the ultra-high net-worth individuals, people with assets in excess of $5 million-$10 million. The bank believes there are a number of prospective investors that are not being serviced and Clariden intends to focus on areas that a Swiss private bank cannot reach. Mukharesh says they are a younger generation of professionals and new leaders of family companies.

The bank's strategy is to go after the newly created wealth brought on by the real estate and construction boom, and to target wealthy women. In Saudi Arabia women account for some 50 percent of cash deposits and own a fair portion of the businesses in the kingdom.

"There are (Saudi) women sitting on $100 million to $500 million and they are clueless, not because they are not smart, but because no one really sat down with them and told them what to do," says Mukharesh, himself a Saudi Arabian.

While Saudi Arabia may be the fastest growing market for private bankers because of its sheer size and vast oil reserves, there are also other markets that have been untapped and underserved. Mukharesh points to Yemen, known more for the qat its citizens chew on daily than for generating wealth.

"There are old fortunes in Yemen. A lot of people that have accumulated wealth over the years - there is a lot of money sitting in current accounts that shouldn't be there," he says.

The goals are ambitious, but this Saudi banker known for raising billions of dollars intends to use the full weight of his Swiss resources to make Clariden one of the top five banks covering the Middle East, increasing his Arab client base which accounts for 2-5 percent of his clients to 15-20 percent. Whether the rest of the banks catch on in time is the question.

With the region looking more attractive, competition is likely to intensify, as leading local players look for new avenues to replace traditionally profitable markets that have begun to saturate.

Beirut,07 12 2004
The Daily Star
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