Mar 23, 2023
Credit Suisse Losses Turn Gulf Investors Cautious on Bank Deals
(Bloomberg) -- Middle Eastern investors are becoming more cautious of making fresh investments in global banks after emerging as some of the hardest hit by the Credit Suisse Group AG crisis.
Sovereign wealth funds and other investors in the region have been spooked by the market turmoil that wiped $1 billion from Saudi National Bank’s stake in the Swiss lender and are likely to be more wary on deals involving foreign financial firms, bankers and lawyers with knowledge of the matter said. The crisis is accelerating a pivot toward other sectors such as healthcare and technology, bankers said, asking not to be identified discussing matters that aren’t public.
The most recent losses on Credit Suisse are a stark reminder of a series of investments made by Gulf investors during the 2008 financial crisis - many of which ended in financial loss or legal battles. Flush with cash after oil’s recent surge, Middle Eastern investors had resumed exploring deals for foreign lenders. Any change in that strategy would be a blow to the global financial sector, potentially depriving Western institutions of much needed petrodollars.
“There have been some legacy issues in the Gulf around investments from the 2008 financial crisis and the Saudi National Bank experience with Credit Suisse will make them more nervous around the risks during this sensitive time,” said Ayham Kamel, head of Middle East and North Africa at political risk consultant Eurasia Group. “The Credit Suisse situation might also present some questions for Gulf sovereigns around ability to drive restructuring plans in some institutions.”
Credit Suisse’s long-term backer, the Qatar Investment Authority, is reviewing its bank holdings and assessing its overall portfolio amid the heightened global economic risks, according to a senior official at the fund, who asked not to be identified due to the sensitivity of the matter. The QIA has no immediate plans to reduce its banking assets and sees the current market turmoil as an opportunity to negotiate better terms and structure better investments, the official said. The QIA saw the value of its holding in Credit Suisse crash last week after upping its stake in recent months.
The Swiss bank also counts Saudi conglomerate Olayan Group among one of its biggest shareholders with a roughly 3% stake.
In a step beyond taking minority stakes in Wall Street firms, some of the Middle East’s largest lenders have recently been exploring how to use their oil windfall to play a bigger role in the global financial sector through acquisitions.
First Abu Dhabi Bank PJSC had been considering a potential all-cash offer for Standard Chartered Plc in the range of $30 billion to $35 billion, Bloomberg reported in February. It’s still too early to say whether appetite for such a possible deal would be impacted by the recent turmoil, people familiar with the matter said. A representative for FAB declined to comment.
Before the Credit Suisse debacle, Saudi Arabia had been working on an ambitious plan to give Saudi National Bank, the kingdom’s largest lender, a global footprint through major overseas acquisitions. Its investment in the Swiss bank late last year was meant to strengthen the country’s financial sector and boost its status as a global investment powerhouse.
Instead, its Chairman Ammar Al Khudairy helped trigger the biggest one-day dive in Credit Suisse’s shares since the financial crisis on March 15 when he told Bloomberg TV “absolutely not” when asked whether the lender would be open to further investments in the bank if there was another call for additional liquidity.
“While this doesn’t rule out Saudi National Bank pursuing other transactions now that Credit Suisse has been acquired, we would hope that given the experience with Credit Suisse, there would be greater caution with any future transaction,” Citigroup analyst Rahul Bajaj wrote in a note.
Regional investors are concerned about the reputational damage from any soured deals, as well as any potential financial losses linked to their investments, bankers said, asking not to be identified because the matter is private. Part of their caution stems from big investments in previous years, some of which have since turned bad.
Deep-pocketed Middle Eastern investors have been backing global banks such as Credit Suisse for many years, but haven’t seen the outsized gains that other investors have reaped. Mitsubishi UFJ’s $9 billion investment in Morgan Stanley during the depths of the financial crisis has minted it more than $25 billion in profit. And Warren Buffett more than tripled the $5 billion he put into Bank of America Corp. to shore up confidence in it in 2012.
During the financial crisis, sovereign funds in Abu Dhabi, Qatar and Kuwait plowed about $69 billion into firms such as Barclays Plc, Merrill Lynch and Citigroup Inc., according to boutique adviser and data firm Global SWF.
“Since then, the relationships have been complicated,” said Javier Capapé, director of sovereign wealth research at IE University, pointing to some of the legal disputes and court battles that emerged.
Both Citigroup and Barclays tapped Abu Dhabi-based funds during that crisis, which resulted in acrimonious court cases. The Abu Dhabi Investment Authority agreed to buy the equivalent of 4.9% of Citigroup in 2007, worth about $7.5 billion, before share issuances eroded the value of its holdings. ADIA later filed for arbitration to recoup the losses, but lost.
Deutsche Bank Group AG’s shares have more than halved in value since an initial investment by a Qatari royal in 2014. Barclays, meanwhile, was probed over fees paid to some Qatari investment vehicles during fund raising amid the financial crisis.
Not all investments have turned out badly. QIA’s relationship with Credit Suisse lasted 15 years and it saw its equity stake go from worth almost 4 billion francs ($4.36 billion) when it was first disclosed in October 2008 to about 225 million francs now, even as the investor more than doubled its share count through rights issues and convertible notes. But as part of the 2008 rescue, QIA also got more than $4 billion of bonds that paid an average of a 10% coupon for a decade before they were repaid, meaning it made money overall on the investment.
Still, if the QIA had instead plowed $8 billion into the S&P 500 or the Stoxx 600, it would have tens of billions more. The fund also holds about a 5% stake in Barclays after helping to prop up the British bank in 2008. Barclays share price is still below where it ended in October 2008.
The Kuwait Investment Authority sold its stake in Citigroup in 2009 for $4.1 billion, after helping the bank boost capital during the financial crisis. The fund converted preferred securities of Citigroup that it purchased the previous year for $3 billion into common shares and sold them, making a profit of more than $1 billion.
In 2013, Abu Dhabi’s Sheikh Mansour bin Zayed Al Nahyan sold his stake in Barclays, cashing in on a multi-billion dollar investment he made at the height of the crisis.
Despite the potential for losses, sovereign funds may not view investments in financial terms alone and some regional investors may remain interested in banks. Global ambitions by other funds may still override any immediate financial and reputational concerns, according to Capapé.
“Indeed, sovereign funds are growing cautious in their approach toward global banking,” he said. “Yet, new funds with big ambitions as was the case of QIA during the crisis and the case of the PIF today, may still fall into the trap of trying to save damaged banks on the basis that this will bring global recognition to Gulf states.”
--With assistance from Ambereen Choudhury and Fiona MacDonald.
(Updates with Olayan details in sixth paragraph.)
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