U.S. banks are stepping up their activities in the oil-rich Persian Gulf, attracted by the region's rising demand for big-ticket construction loans.
A number of leading banks, including Chase Manhattan Corp., J.P. Morgan & Co., and BankAmerica Corp., are providing project loans to build petrochemical plants, aluminum plants, and airports in Saudi Arabia and other Arab nations on the Gulf.
This focus on capital-intensive lending comes on top of more traditional banking services such as trade finance, asset management, and correspondent banking.
"The paradigm of industrial development has changed in the Middle East, " said Alan H. Lowe, a J.P. Morgan vice president for corporate finance and investment banking in the region. "They're shifting to capital-intensive developments and have become big borrowers."
U.S. bank expansion in the Gulf region comes amid concerns about the stability of the region in the event of a U.S. invasion of Iraq. Though the possibility of military action against Iraq appears to have subsided for the moment, bankers acknowledged that considerable uncertainty remains.
However, they predicted that any disruption in economic activity will remain confined to Iraq and will probably not spill over into the adjoining Persian Gulf states. "The war that went on in Bosnia, for example, did not have a detrimental impact on business in Italy," said Jouni J. Korhonen, BankAmerica's manager for the Middle East and North Africa.
The surge in borrowing by the oil-rich nations of the Persian Gulf constitutes a clear break with the past.
Until recently, most infrastructure projects, such as airports, roads, and telecommunications, were funded mainly by oil revenues. Cultural factors also curtailed loans.
"There's been a general aversion to borrowing because it was not considered a good thing to do, given Islamic law," said one banker who declined to be identified. Middle Easterners, he added, also did not feel comfortable disclosing the kind of financial information U.S. banks routinely require before they extend credit.
But a fall in oil prices in recent years, combined with tighter state budgets and limited credit available from local banks, is forcing borrowers in Gulf States countries into international credit markets.
"It was easy to subsidize everything when the populations were small," said Richard Jackson, managing director in charge of Middle East operations at Bankers Trust New York Corp. "But you can't continue to subsidize everything when 50% of the population is under 25."
U.S. money-center banks are very much at the forefront of banking in the Middle East, and much of the business they handle is with the oil-producing nations of the Persian Gulf and Saudi Arabia. But the growth in borrowing has also attracted new players.
Bank of New York Corp., which just opened an office in Abu Dhabi in December, plans to develop securities processing, custody, depositary receipts, securities lending, and investment management.
NationsBank Corp. has also entered the market, supplying a $140 million bridge loan to Kuwait Airways to help finance the purchase of aircraft last year. Republic New York Corp., which focuses on private banking and gold trading, upgraded its office in Beirut to a regional headquarters last year.
By any standards, the sheer scale of many deals being put together in the Middle East is enormous.
Chase Manhattan last year acted as financial adviser on a $2.5 billion in financing for Oman LNG LLC. BankAmerica, Chase, and J.P. Morgan & Co. helped syndicate a $2.3 billion, 10-year loan to extend a petrochemical complex in Yanbu, Saudi Arabia.
U.S. banks were also instrumental in arranging a $4.3 billion loan to Saudi National Airlines to finance the purchase of 61 Boeing aircraft in December, and a $2 billion financing for a light natural gas project in Qatar.
Bankers predict that power and aluminum plants, both of which depend on cheap local energy, will be among the big projects to come. Saud Arabia alone, for example, could invest up to $100 billion in power plants over the next 20 to 25 years, bankers predicted.
"Clearly, that's not something that the government is going to pay for," Mr. Korhonen noted.
Traditional banking activities such as asset management, trade finance, private banking, funds transfers, and correspondent banking still remain important in the Gulf region.
About $1 trillion has already been invested outside the region by oil- producing countries such as Kuwait, Bahrain, Oman, and Saudi Arabia. Abu Dhabi, one of the United Arab Emirate states, alone generates $30 million to $50 million every day that needs to be invested, and Kuwait generates about the same.
"Investments are running nonstop," Mr. Jackson said. "They want to protect future generations from either a drop in the price of oil, or for the day when the oil runs out."
Alongside traditional banking and a growing market for loans, deregulation is adding opportunities in the Gulf states and in other Arab nations such as Egypt, Lebanon, Jordan, Morocco, and Pakistan.
BankAmerica, for example, last month obtained its first privatization mandate in Pakistan, and hopes to expand its capital markets operations in that country. (See related story on page 11.)
Meanwhile, Citicorp, which holds a 30% stake in Saudi American Bank and runs an extensive consumer and corporate banking network across the region, will launch a consumer bank in Egypt later this year.
Citicorp will be the second U.S. bank to enter the Egyptian retail market after American Express Bank Ltd., which has four branches in Egypt as well as a 42% stake in Egyptian American Bank.
"Egypt will be a huge business," predicts Timothy M. Kelley, division executive at Citicorp for consumer banking in Central and Eastern Europe, the Middle East, and Africa
"These are not moribund economies," he added. "They have young, educated populations and an emerging middle class with a increased demand for consumer finance."
Bankers emphasized that steady deregulation, political stability, and growing links to international markets are taking the Middle East into an entirely new era in banking.
In fact, they add that an even bigger business-capital markets, including bonds and equities-still lies ahead.
"Borrowers are going to want longer maturities," predicted Mr. Lowe of J.P. Morgan. "The business will move from syndicated loans to capital markets."
