MENAT insulated from banking volatility but questions loom over AT1 issuance, FIG consolidation

Report 23 March

MENAT insulated from banking volatility but questions loom over AT1 issuance, FIG consolidation

While the long-term implications of the recent global banking sector crisis are expected to be muted in the MENAT region, market participants say issuers' conviction is low, prompting a dramatic slowdown in primary activity for the time being. 

For the second week, market participants in the MENAT region were confronted with no new primary activity. That, they say, was driven by anticipation of the US Federal Reserve meeting on 21-22 March, as well as the volatile backdrop induced by bank failures. On Wednesday (22 March), the Fed hiked rates by a quarter point in a widely anticipated move. 

One Dubai-based portfolio manager noted that the Republic of Turkey's deal on 9 March was the last live deal on screens. 

A Dubai-based banker indicated there remained deals in the pipeline, with issuers "waiting to go" at the first sign of market conditions improving. Turkey itself is holding a non-deal roadshow in connection with its Sustainable Finance Framework.

But given the furore around the fate of Credit Suisse's Additional Tier 1 bondholders, who face total wipe-out as part of the distressed Swiss lender’s takeover by rival UBS, market participants say that bank issuers in the GCC have lost temporary access to the market.

One London-based investor anticipates it will be a while before he is faced with any new issues. "Regulatory discussions are in place now and the US bank deposit run is not over yet," he said. 

A second Dubai-based banker said the AT1 market is "shut for the coming weeks" for regional banks. 

However, a third Dubai-based banker noted that it had been the case for a while, adding that the last AT1 deal from the region had come from Mashreqbank last July. A fourth banker added that the National Bank of Oman had sold a small AT1 bond in November to local Omani investors.

The third banker also anticipated that smaller banks in the region may not call back their upcoming bonds given the inability to reissue. "They cannot reissue, so better to not call back and keep the capital," he said.

Ahli United Bank, Al Baraka Group and Al Ahli Bank of Kuwait have call dates coming up in the next few months, but the first two have already missed the initial call dates, investors previously said.

Earlier in the week, regional bank bonds showed more resilience to the Credit Suisse news than those in developed markets.

Though some bank bonds have been marked down slightly lower, there has been minimal movement in recent days because the market was awaiting the Fed's decision, according to a London-based investor. 

"I think there will be a good bid for GCC bonds over the next few weeks," he added. "A flight to quality. But no action this week because of the Fed."


While chaos in the banking sector has affected US- and Europe-based market participants in particular, those in the GCC are comforted by the relative insulation. 

The fourth Dubai-based banker noted the advantages enjoyed by regional banks compared to those in developed markets, with the likelihood of a contagion being extremely low. 

"State support to any GCC bank," which the banker noted was itself an unlikely scenario, "will not entail a public outcry as there are no taxpayers."

While some banks in the region have full write-down features on their bonds, at the discretion of the regulator, the banker believed that they were unlikely to use them. “You can take comfort from the fact that state support to shore up a bank will not create any noise, but imposing losses on holders will,” he said.

The banker added that a high percentage of investors in these credits are based in the GCC, with regulators aware that imposing a loss on AT1 holders will create more noise than a bank bail-out.

Bank consolidation

Despite its banking sector being well capitalised and robust, there have been renewed calls by some for further consolidation in the United Arab Emirates (UAE) following the recent market jitters, market participants told Debtwire.

“In our view, consolidation makes sense in the UAE given the significant number of banks in the system,” added Dr Mohamed Damak, Senior Director, S&P Global Ratings.

For a country of approximately ten million people, the UAE is home to around 50 banks, which makes for a compelling case for banking-sector consolidation, a Debtwire report pointed out in 2021.

Any progress towards further consolidation in the UAE banking sector is likely to be progressive however, with no significant mergers expected in the next 12 to 24 months, Damak added.

Despite the fact that the UAE Central Bank would likely provide support in the case of a run on any of the country's banks, some investors are steering clear of the smaller regional second-tier banks, in light of the recent banking chaos, according to one buysider.

However, not everyone was convinced that consolidation in the banking sector would bring benefits.

“Consolidation in the banking sector is not always a positive trend,” said Dr Ryan Lemand, CEO of Neovision Wealth Management in Abu Dhabi.

Consolidation can lead to systemically large banking institutions and a more industrialised approach to servicing clients, Lemand said.

“We as asset managers are not calling for consolidation in the banking sector, and we prefer to have banks of various sizes, which improves the diversification factor in the portfolios we manage for our clients,” he said.

“Small caps, mid caps and large-cap banks should be present in the banking bucket in any large portfolio, and taking away the size factor by having only systemically large consolidated banking institutions takes away this diversification factor,” he added.

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